|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        
|                                
|                                
|2006 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 Shareholders will be held at The Inn on the Lake, 770 South Main Street, Canandaigua, NY, 14424, March 14, 2007, at 1:00 p.m.                                                       
|                  |                                                                                                                                                                                                           
|                  | Form 10-K:                                                                                                                                                                                                
|                  |                                                                                                                                                                                                           
|                  | A copy of the Corporation's Form 10-K Annual Report is available without charge to shareholders 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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|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 this 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 2006 Consolidated Financial Statements and Notes thereto.  These sections help to provide context for the information you see here.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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



|                                  |   |           |   | %      |    |           |   |         |   |         |   |         |  
|--------------------------------- | - | --------- | - | ------ | -- | --------- | - | ------- | - | ------- | - | ------- | -
|                                  |   | 2006      |   | Change |    | 2005      |   | 2004    |   | 2003    |   | 2002    |  
|                                  |   |           |   |        |    |           |   |         |   |         |   |         |  
|Income Statement Information:     |   |           |   |        |    |           |   |         |   |         |   |         |  
|Net interest income               | $ | 39,700    |   | 1.91   | %  | 38,957    |   | 36,210  |   | 33,481  |   | 29,850  |  
|Provision for loan losses         |   | 1,831     |   | (12.27 | )% | 2,087     |   | 1,680   |   | 1,250   |   | 2,306   |  
|Other income                      |   | 13,842    |   | 10.98  | %  | 12,473    |   | 12,303  |   | 12,997  |   | 11,880  |  
|Operating expenses                |   | 35,561    |   | 5.02   | %  | 33,860    |   | 32,321  |   | 30,917  |   | 29,478  |  
|Income taxes                      |   | 4,244     |   | (0.33  | )% | 4,258     |   | 3,913   |   | 3,970   |   | 2,764   |  
|Net income                        |   | 11,906    |   | 6.07   | %  | 11,225    |   | 10,599  |   | 10,341  |   | 7,182   |  
|                                  |   |           |   |        |    |           |   |         |   |         |   |         |  
|Balance Sheet Data:               |   |           |   |        |    |           |   |         |   |         |   |         |  
|Total investments(1)              | $ | 282,824   |   | 15.30  | %  | 219,273   |   | 203,860 |   | 188,189 |   | 165,443 |  
|Total loans, net                  |   | 844,656   |   | 9.57   | %  | 770,853   |   | 669,873 |   | 595,915 |   | 580,663 |  
|Total assets                      |   | 1,205,895 |   | 12.51  | %  | 1,071,832 |   | 974,757 |   | 907,775 |   | 825,703 |  
|Total deposits                    |   | 1,059,348 |   | 9.54   | %  | 967,124   |   | 877,141 |   | 818,158 |   | 744,399 |  
|Total borrowings(2)               |   | 52,226    |   | 147.43 | %  | 21,107    |   | 21,102  |   | 21,094  |   | 20,457  |  
|Total stockholders' equity        |   | 83,559    |   | 9.17   | %  | 76,539    |   | 70,173  |   | 61,569  |   | 53,417  |  
|Average assets                    |   | 1,123,515 |   | 10.46  | %  | 1,017,116 |   | 938,421 |   | 851,091 |   | 766,326 |  
|Average stockholders' equity      |   | 77,839    |   | 7.74   | %  | 72,248    |   | 63,810  |   | 55,429  |   | 49,266  |  
|                                  |   |           |   |        |    |           |   |         |   |         |   |         |  
|Assets Under Administration(3)    |   |           |   |        |    |           |   |         |   |         |   |         |  
|Book value (cost basis)           | $ | 900,709   |   | 19.63  | %  | 752,939   |   | 683,033 |   | 645,307 |   | 651,288 |  
|Market value                      |   | 1,078,669 |   | 23.86  | %  | 870,856   |   | 812,953 |   | 745,858 |   | 667,747 |  
|                                  |   |           |   |        |    |           |   |         |   |         |   |         |  
|Per Share Data(4):                |   |           |   |        |    |           |   |         |   |         |   |         |  
|Net income, basic                 | $ | 24.89     |   | 6.41   | %  | 23.39     |   | 22.14   |   | 21.67   |   | 15.07   |  
|Net income, diluted               | $ | 24.30     |   | 6.86   | %  | 22.74     |   | 21.09   |   | 21.10   |   | 14.91   |  
|Cash dividends                    | $ | 7.00      |   | 15.70  | %  | 6.05      |   | 5.30    |   | 4.75    |   | 4.10    |  
|Book value                        | $ | 175.32    |   | 9.93   | %  | 159.48    |   | 145.83  |   | 129.02  |   | 111.94  |  
|Weighted average shares - diluted |   | 489,886   |   | (0.76  | )% | 493,629   |   | 502,592 |   | 490,016 |   | 481,675 |  
|                                  |   |           |   |        |    |           |   |         |   |         |   |         |  
|Other ratios:                     |   |           |   |        |    |           |   |         |   |         |   |         |  
|Return on average assets          |   | 1.06      | % | (3.95  | )% | 1.10      | % | 1.13    | % | 1.22    | % | 0.94    | %
|Return on average equity          |   | 15.30     | % | (1.52  | )% | 15.54     | % | 16.61   | % | 18.66   | % | 14.58   | %
|Return on beginning equity        |   | 15.56     | % | (2.73  | )% | 16.00     | % | 17.21   | % | 19.36   | % | 14.92   | %
|Dividend payout                   |   | 28.81     | % | 8.29   | %  | 26.61     | % | 25.13   | % | 22.51   | % | 27.50   | %
|Average equity to average assets  |   | 6.93      | % | (2.44  | )% | 7.10      | % | 6.80    | % | 6.51    | % | 6.43    | %
|Net interest margin               |   | 3.97      | % | (8.74  | )% | 4.35      | % | 4.43    | % | 4.56    | % | 4.45    | %
|Efficiency(5)                     |   | 66.33     | % | 0.75   | %  | 65.84     | % | 66.62   | % | 66.52   | % | 70.64   | %
|                                  |   |           |   |        |    |           |   |         |   |         |   |         |  
|Employees (year end):             |   |           |   |        |    |           |   |         |   |         |   |         |  
|Actual                            |   | 378       |   | 5.00   | %  | 360       |   | 353     |   | 355     |   | 332     |  
|Full-time equivalent              |   | 324       |   | 4.18   | %  | 311       |   | 302     |   | 304     |   | 290     |  

|(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.
|(4)Per share amounts reflect the three-for-one stock split in 2002.                                                
|(5)Operating expenses, exclusive of intangible amortization, divided by total revenues.                            
|                                                                                                                   
|3                                                                                                                  

|Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|The Management Discussion and Analysis (MD&A) is intended to provide, in one section, historical and prospective material 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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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 the 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, 
          regulations, and rules 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;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- Changes in demographics on the Company's market area;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- 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 2006 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, 2006, we reported net income of $11.9 million compared to $11.2 million for the year ended December 31, 2005, and $10.6 million for the year ended December 31, 2004.  Diluted earnings per share for each of these years were $24.30, $22.74, and $21.09, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|For 2006, we anticipated asset yields to continue rising as the increasing interest rate environment would allow us to price our new assets higher and replace or reprice lower-yielding assets at higher rates.  Offsetting these increases; however, would be higher rates paid on deposits and borrowings.  We anticipated 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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.  However, contrary to our predictions, interest margin also fell, principally due to the flat yield curve (short-term rates and long-term rates similar) and often inverted yield curve (short-term rates higher than long-term rates) during the year.  For 2006, tax-equivalent net interest income grew $0.7 million or 1.8%.  Contributing to this increase was a $110.5 million increase in average earning assets or 11.6%, and a $94.5 million (11.9%) increase in average interest-bearing liabilities. During the year, the tax-equivalent yield on earning assets grew 61 basis points to 6.57%, while the cost of interest-bearing liabilities grew 119 basis points to 3.11%. The combination of these reductions led to a 58 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 38 basis points to 3.97%.  The two following tables analyze the components of net interest income.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|For 2007, we again anticipate asset yields will rise with our pricing new assets higher than existing assets and replacing or repricing lower-yielding assets at higher rates.  Again offsetting these increases will be higher rates paid on deposits.  We should experience some reduction in interest costs by retiring $20.6 million of junior subordinated debentures.  In combination with these rate changes and continued balance sheet growth, we should achieve a modest increase in net interest income, but a continued reduction in both net interest spread and net interest margin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



|We believe the Federal Reserve Board's Federal Open Market committee (FOMC) will adjust rates during the year, with the net result being a target federal funds rate (the rate banks pay each other for overnight funds) in the 4.00% to 4.25% by the end of 2007; about one percentage point lower than at the end of 2006.  In the Interest Rate Risk Management section below, we discuss what tools we use to manage interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|In 2005, tax-equivalent net interest income grew $2.9 million or 7.5%, due to a 9.4% increase in average earning assets, and offset by a 7.1% increase in average interest-bearing liabilities.  In that year, both spread and margin declined due to a larger increase in interest-bearing liabilities' costs versus earning assets' yields.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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, 2006, 2005, and 2004.  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 $2,471,000 in 2006, $2,481,000 in 2005, and $2,351,000 in 2004.  A marginal federal income tax rate of 35% was applied in each year. Interest on loans includes a deduction for net deferred loan costs of $1,519,000 in 2006, $1,569,000 in 2005, and $1,335,000 in 2004 (dollars in thousands).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|                              |   |           |   | 2006     |  |         |   |   |           |   | 2005     |  |         |   |   |         |   | 2004     |  |         |  
|----------------------------- | - | --------- | - | -------- |  | ------- | - | - | --------- | - | -------- |  | ------- | - | - | ------- | - | -------- |  | ------- | -
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   | Average   |   |          |  | Average |   |   | Average   |   |          |  | Average |   |   | Average |   |          |  | Average |  
|                              |   | Balance   |   | Interest |  | Rate    |   |   | Balance   |   | Interest |  | Rate    |   |   | Balance |   | Interest |  | Rate    |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Assets                        |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-earning assets:      |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-bearing deposits     |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|with  others                  | $ | 2,304     | $ | 89       |  | 3.86    | % | $ | 4,959     | $ | 145      |  | 2.92    | % | $ | 3,383   | $ | 55       |  | 1.63    | %
|Federal funds sold            |   | 22,867    |   | 1,153    |  | 5.04    |   |   | 13,709    |   | 403      |  | 2.94    |   |   | 35,236  |   | 489      |  | 1.39    |  
|Securities:                   |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Taxable                       |   | 82,015    |   | 3,834    |  | 4.67    |   |   | 66,038    |   | 2,974    |  | 4.50    |   |   | 62,013  |   | 2,647    |  | 4.27    |  
|Tax-exempt                    |   | 151,561   |   | 7,718    |  | 5.09    |   |   | 150,429   |   | 7,490    |  | 4.98    |   |   | 139,804 |   | 6,952    |  | 4.97    |  
|Loans, net                    |   | 803,664   |   | 56,986   |  | 7.09    |   |   | 716,754   |   | 45,700   |  | 6.38    |   |   | 629,735 |   | 37,428   |  | 5.94    |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Total interest-earning        |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|assets                        |   | 1,062,411 |   | 69,780   |  | 6.57    |   |   | 951,889   |   | 56,712   |  | 5.96    |   |   | 870,171 |   | 47,571   |  | 5.47    |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Non-interest-earning          |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|assets                        |   | 61,104    |   |          |  |         |   |   | 65,227    |   |          |  |         |   |   | 68,250  |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Total assets                  | $ | 1,123,515 |   |          |  |         |   | $ | 1,017,116 |   |          |  |         |   | $ | 938,421 |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Liabilities and               |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Stockholders' Equity          |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-bearing liabilities: |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-bearing demand       | $ | 103,611   |   | 164      |  | .16     | % | $ | 101,943   |   | 160      |  | .16     | % | $ | 93,778  |   | 116      |  | .12     | %
|Savings and money             |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|market                        |   | 365,996   |   | 7,772    |  | 2.12    |   |   | 415,327   |   | 6,427    |  | 1.55    |   |   | 435,978 |   | 3,887    |  | .89     |  
|Time deposits                 |   | 380,266   |   | 16,447   |  | 4.33    |   |   | 249,695   |   | 6,995    |  | 2.80    |   |   | 190,176 |   | 3,883    |  | 2.04    |  
|Borrowings                    |   | 38,159    |   | 3,226    |  | 8.45    |   |   | 26,523    |   | 1,692    |  | 6.38    |   |   | 21,094  |   | 1,124    |  | 5.33    |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Total interest-bearing        |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|liabilities                   |   | 888,032   |   | 27,609   |  | 3.11    |   |   | 793,488   |   | 15,274   |  | 1.92    |   |   | 741,026 |   | 9,010    |  | 1.22    |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Non-interest-bearing          |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|liabilities                   |   | 157,644   |   |          |  |         |   |   | 151,380   |   |          |  |         |   |   | 133,585 |   |          |  |         |  
|Stockholders' equity          |   | 77,839    |   |          |  |         |   |   | 72,248    |   |          |  |         |   |   | 63,810  |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Total liabilities and         |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|stockholders' equity          | $ | 1,123,515 |   |          |  |         |   | $ | 1,017,116 |   |          |  |         |   | $ | 938,421 |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Interest rate spread          |   |           |   |          |  | 3.46    | % |   |           |   |          |  | 4.04    | % |   |         |   |          |  | 4.25    | %
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|Net interest margin           |   |           | $ | 42,171   |  | 3.97    | % |   |           | $ | 41,438   |  | 4.35    | % |   |         | $ | 38,561   |  | 4.43    | %
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |           |   |          |  |         |   |   |         |   |          |  |         |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 the sources from which 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                      |   | 2006 compared to 2005 |   | 2005 compared to 2004 |  
|------------------------------------- | - | --------------------- | - | --------------------- | -
|                                      |   | Increase/(decrease)   |   | Increase/(decrease)   |  
|                                      |   | Due to change in      |   | Due to change in      |  
|                                      |   | Volume                |   | Rate                  |  
|                                      |   |                       |   |                       |  
|Interest-earning assets:              |   |                       |   |                       |  
|Interest-bearing deposits with others | $ | (93                   | ) | 37                    |  
|Federal funds sold                    |   | 362                   |   | 388                   |  
|Securities, taxable                   |   | 743                   |   | 117                   |  
|Securities, tax-exempt                |   | 57                    |   | 171                   |  
|Loans, net                            |   | 5,864                 |   | 5,422                 |  
|                                      |   |                       |   |                       |  
|Total                                 |   | 6,933                 |   | 6,135                 |  
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  
|Interest-bearing liabilities:         |   |                       |   |                       |  
|Interest-bearing demand               |   | 3                     |   | 1                     |  
|Savings and money market              |   | (832                  | ) | 2,177                 |  
|Time deposits                         |   | 4,633                 |   | 4,819                 |  
|Borrowings                            |   | 881                   |   | 653                   |  
|                                      |   |                       |   |                       |  
|Total                                 |   | 4,685                 |   | 7,650                 |  
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  
|Net change                            | $ | 2,248                 |   | (1,515                | )
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 on deposit accounts, (b) trust and investment services, and (c) mortgage banking.  For the year ended December 31, 2006, other income increased $1.4 million or 11.0% from 2005, and for the year ended December 31, 2005, other income decreased $0.2 million or 1.4% from 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Service charges on deposit accounts increased 21.3% in 2006 from 2005, attributable to both increased transaction volume, and more significantly an increase in charges for certain transaction services.  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.  Looking to 2007, we anticipate this income category to grow at a rate more closely matching the rate of deposit account growth - volume driven.  We do not expect significant changes in our current transaction fee structure.                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Trust and investment services income increased $0.3 million or 7.1% in 2006 from 2005 ($0.5 million and 14.5% in 2005 over 2004).  This income is principally derived from a combination of (1) the average market value of assets under administration, and (2) the mix of those underlying accounts.  Income for 2006 grew at a slower rate when compared to 2005, principally due to sizeable estate income earned in 2005.  This income is derived upon the settlement of a decedent's estate, the timing and amount of which is unpredictable.  For the same reason, 2005's income grew at a faster rate than 2004's income.                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|In 2005, we initiated a five-year program to substantially increase our assets under management.  This plan includes 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 producing measurable results, as was shown not only in the revenue growth discussed above, but also in the assets we hold and manage for customers.  As part of this program we purchased $66.6 million in trust relationships from another bank in our territory.  We expect these relationships to contribute approximately $0.5 million in additional income annually. (Please also see Note 2 to the Consolidated Financial Statements.)  The book value of total assets under administration amounted to $900.7 million at year-end 2006, which represented a $147.8 million or 19.6% increase over 2005's year-end balance.                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|For 2007, we expect the increase to be similar to 2005's increase ($70.0 million), a year in which we did not have an acquisition.  However, it may be higher depending upon the success of our efforts to establish a trust presence in the State of Florida.  We announced in the third quarter our intention to form a wholly owned subsidiary of the Company in the State of Florida and open a trust and investment services office there.  To counteract the adverse tax structure in New York State and allow customers to take advantage of potentially significant tax savings from establishing trusts in jurisdictions with laws favorable to the tax positions of wealthy clients, financial advisors are encouraging their wealthy clients to establish or change New York situs trust agreements: (1) to appoint non-New York State domiciliary trustees; or (2) to establish new trust                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|6                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|agreements with a non-New York situs and a non-New York State domiciliary trustee.  In many instances financial advisors are recommending that clients establish personal residency in another more tax-favorable jurisdiction.  The potential tax advantages are derived from: (1) the ability to have income retained in a trust and capital gains realized in the trust be exempt from taxation in New York as a result of the provisions of the New York State Tax law; (2) the ability to avoid the New York State Estate Tax which was de-coupled from the Federal Estate Tax following the passage of the Economic Growth And Tax Relief Reconciliation Act of 2001;  and, (3) the abolition or significant expansion of the Rule Against Perpetuities by many states, other than New York, which permits the establishment of "dynasty trusts."  We have a number of customers who reside in Florida for substantial parts of the year, and these customers will be benefited by our plans.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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 in the past few years, associated with both the end of the nation's refinance boom in 2003 and our placing more residential loans in our portfolio. Selling loans 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 expect a modest decline in this revenue for 2007.  We expect a lower volume of loan originations during 2007 offset by a slightly lower percentage of loans sold to the Bank.                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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 the high demand for these loans 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.                                                                                                                                                                                                                                                                                                                                                                            

|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 $95 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 in 2007 is expected to be closer to 2006's results.  For the years ended December 31, 2006, 2005, and 2004, CNB Mortgage originated the following types of loans (dollars in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                 |   | 2006    |  | 2005    |  | 2004   
|-------------------------------- | - | ------- |  | ------- |  | -------
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|Purchase money mortgages         | $ | 93,272  |  | 86,628  |  | 75,918 
|Refinance mortgages              |   | 27,851  |  | 31,897  |  | 48,527 
|                                 |   |         |  |         |  |        
|Total mortgage originations      | $ | 121,123 |  | 118,525 |  | 124,445
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|Of which:                        |   |         |  |         |  |        
|Sold to third parties            | $ | 76,717  |  | 96,065  |  | 112,251
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|Sold to Bank                     | $ | 44,406  |  | 22,460  |  | 12,194 
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|Percentage of total sold to Bank |   | 36.7%   |  | 18.9%   |  | 9.8%   
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        
|                                 |   |         |  |         |  |        



|Also declining in 2006 was 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 fell in 2006, due to fewer sales to Freddie Mac, are expected to continue decreasing in 2007 for the same reason. (Residential loans sold to Freddie Mac and commercial loan participations are not included in the consolidated balance sheet.) We generally earn servicing fees equal to 25 basis points (1/4 of 1.00%) of the loan balances outstanding.  Also included in this line is the amortization of mortgage servicing rights.  We discuss these in greater detail in Note 6 to the Consolidated Financial Statements.  At each of the three years ended December 31, 2006, 2005, and 2004, we were servicing the following types of loans (dollars in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                     |   | 2006    |  | 2005    |  | 2004   
|---------------------------------------------------- | - | ------- |  | ------- |  | -------
|                                                     |   |         |  |         |  |        
|                                                     |   |         |  |         |  |        
|Residential mortgages (sold to Freddie Mac)          | $ | 297,652 |  | 313,694 |  | 312,957
|Commercial loans and mortgages (participations sold) |   | 77,887  |  | 74,901  |  | 59,929 
|                                                     |   |         |  |         |  |        
|Total loans serviced for others                      | $ | 375,539 |  | 388,595 |  | 372,886
|                                                     |   |         |  |         |  |        
|                                                     |   |         |  |         |  |        
|                                                     |   |         |  |         |  |        



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|All other sources of other income increased $0.3 million in 2006 from 2005 and decreased $0.3 million in 2005 from 2004.  The increase in 2006 was primarily due to higher earnings from non-marketable investments offset by lower letter of credit fees.  The decrease in 2005 from 2004 was mainly associated with lower earnings from non-marketable investments and a one-time legal recovery in 2004.  We expect 2007's income to be similar to 2006's income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Operating Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|In 2006, operating expenses increased $1.7 million or 5.0% over 2005, and in 2005 increased $1.5 million or 4.8% over 2004.  Increases in these years came in all major expense categories and were attributed to continued growth in our operations and expansion in Monroe County. For 2007, we expect operating expenses to increase, but at a slower rate than in 2006 due to our internal focus on stabilizing expense growth.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|All of the increase in salaries and employee benefits in 2006 was attributable to wage increases and, in 2005 about half was attributable to wage increases and the other half attributable to benefit expenses, primarily for retirement plans.  Total benefit costs in 2006 held steady versus 2005 with health and employee pension plan costs increasing, offset by reduced executive retirement plan costs due to a lower stock price in 2006.  Total staff increased about 5.0% year over year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|In both 2006 and 2005, 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 growth in customer accounts and our total assets.  In September 2006, we opened our newest banking office in Geneva, New York, to serve trust and investment customers.  Through our market analysis, we determined this location lacked dedicated trust and investment services offered by a full-service, commercial community bank.  Our office will serve existing customers, customers associated with the trust relationships acquisition, and new customers in the surrounding area. This office is smaller than our full-service offices and has fewer staff, so it is not expected to be as costly to operate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Marketing (advertising and promotion) and public relations (contributions and entertainment) expenses grew in 2006 and 2005 associated with Trust services, discussed above.  Through cost controls, we expect these expenses to fall in 2007.  The remainder of operating expenses grew in each year mostly associated with our growth, and we expect the same for 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Our effective income tax rate was approximately 26.5% to 27.5% in each of the past three years.  These effective rates differ substantially from our marginal rate of about 39%, mainly due to our significant non-taxable interest income from state and municipal obligations. A full detail of these amounts can be found in Note 10 to the 2006 financial statements. We anticipate our 2007 effective tax rate will be in the 26% to 30% range and is mostly dependent upon the fiscal policy of New York State, as discussed in the following paragraph.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Governor Spitzer proposed in his fiscal 2008 budget, a number of changes to the taxation of bank in New York State, which, if fully implemented would increase the Company's income tax expense by $0.5 million.  The most significant is the proposed change in the tax treatment for certain mortgage investments.  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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|FINANCIAL CONDITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|As of December 31, 2006, total assets of the Company were $1,205.9 million, up from $1,071.8 million at year-end 2005. This increase was roughly divided between liquid investments (securities and federal funds sold) on the one hand, and loans on the other.  These asset increases were funded by both deposit inflows and subordinated debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|Cash and due from banks increased $0.4 million to $35.6 million, due to higher balances on hand at year end, associated with customer account growth and account activity.  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.  While endeavoring to maintain a sufficient supply of cash for our customers' needs, we also strive to minimize the amount of physical cash on hand, since this is a non-interest earning asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|The total of interest-bearing accounts with other financial institutions and federal funds sold rose at year-end 2006 from 2005. 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 2006, we averaged about $25.1 million, compared to $18.7 million in 2005.  In 2006, we exceeded our target, because, while local demand for loans and securities was high, the interest rates at which these could be originated were below our targets.  So in the face of rising interest rates, we chose to keep our liquidity in high-yielding, short-term instruments rather than long-term instruments at the same rates. The same trend may continue in 2007 if the yield curve remains flat or inverted.                                                                                                                                                                                                                                                                         
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|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 2007, for facility renovations, equipment replacements and software and hardware purchases.  All of these investments are funded from current operating cash flow.  Additionally, we are actively seeking physical sites in our market to open new banking offices as well as in Florida to open a trust and investment office.  To the extent these offices open in 2007, premises and equipment investments will be higher than the past few years, yet the overall investment recorded on our balance sheet may be lower following our sale-leaseback transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|We disclosed in the third quarter that in October 2006, the Board of Directors of the Bank authorized management to execute a sale-leaseback transaction for six banking offices currently owned by the Bank.  We expect the transaction to close in the first quarter of 2007. Upon the sale of these offices, the Bank expects to receive $4.0 to $6.0 million in cash, net of taxes, which we will reinvest in local loans and investments. These offices, with a depreciated cost of approximately $4.3 million, will be leased back by the Bank on a long-term basis.  Any gain on sale will be deferred and amortized over the lease term.  Any gain for income tax purposes will be recognized immediately.  Such a sale-leaseback transaction allows the Bank                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|8                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|to convert buildings, which are non-earning assets, into earning assets such as loans and investments, which support the growth and vitality of the Bank's community.  Concurrently, it allows a real estate investor to earn a market rate of return on its investment in the buildings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|A more detailed discussion of the Company's principal interest-earning assets (securities and loans), and interest-bearing liabilities (deposits and borrowings), follows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|Securities Portfolio                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|We maintain our portfolio of (investment) securities mostly in U.S. Treasury, U.S. Agency, 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, 2006, 2005 and 2004 in Note 3 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|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.
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|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, and are collateralized with eligible securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|During 2006, securities increased approximately $33.4 million, while in 2005 they increased approximately $16.0 million. The growth in each year came as a result of our investing funds from deposit growth and borrowings not used for originating loans or maintaining fed funds.  Most of the securities 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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|Because changes in the interest rate environment impact the market value (price or fair value) of securities and because market interest rates often differ from the rates at which securities were purchased, the underlying price of securities will change from time to time.  The price of a security will move inversely to interest rates.  So generally if market rates are higher than that of the security, the fair value of the security will be lower than our cost.  On the other hand, if market rates are lower than those of the security, the fair value of the security will be higher than our cost.  The increase in market 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 both year-end 2006 and 2005.  We expected this decline, and it is likely to continue in 2007, given the yields and maturities of our securities and seen in the following table.  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, 2006. 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.  US Agencies are obligations of U.S. government sponsored agencies (dollars in thousands).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|9                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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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. Agencies       | $ | 10,963  |  | 4.69  | % | $ | 45,277  |  | 4.44  | % | $ | 17,592  |  | 5.07  | % | $ | -      |  | -     | %
|State and municipal |   | 1,160   |  | 2.84  |   |   | 18,352  |  | 3.55  |   |   | 15,979  |  | 3.67  |   |   | -      |  | -     |  
|Other               |   | 303     |  | 5.10  |   |   | -       |  | -     |   |   | 1,001   |  | 6.75  |   |   | 2,471  |  | 5.17  |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|Total               | $ | 12,426  |  | 4.53  | % | $ | 63,629  |  | 4.18  | % | $ | 34,572  |  | 4.47  | % | $ | 2,471  |  | 5.17  | %
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  

|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|------------------- | - | ------- |  | ----- | - | - | ------- |  | ----- | - | - | ------- |  | ----- | - | - | ------ |  | ----- | -
|                    |   |         |  |       |   |   | 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       | $ | 6,954   |  | 1.98  | % | $ | 4,995   |  | 4.75  | % | $ | -       |  | -     | % | $ | -      |  | -     | %
|U.S. Agencies       |   | 4,992   |  | 4.16  |   |   | -       |  | -     |   |   | -       |  | -     |   |   | 17     |  | 8.00  |  
|State and municipal |   | 22,452  |  | 3.96  |   |   | 67,012  |  | 3.91  |   |   | 30,570  |  | 3.88  |   |   | 663    |  | 4.60  |  
|Other               |   | 100     |  | 5.35  |   |   | -       |  | -     |   |   | -       |  | -     |   |   | 274    |  | 5.60  |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|Total               | $ | 34,498  |  | 3.59  | % | $ | 72,007  |  | 3.96  | % | $ | 30,570  |  | 3.88  | % | $ | 954    |  | 4.95  | %
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  

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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). Certain of the Bank's executives 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 $4,000,000.  Loans over that amount generally must be approved by the Board or a designated committee of the Board.                              
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|Loans are generally originated in our primary market area (Rochester Metropolitan Statistical Area (MSA)), but as a national bank, we can make loans to customers anywhere in the country.  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, 2006, this limit was approximately $15.8 million, and the Bank's largest committed borrowing relationship under these regulations was $12.1 million.
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|Commercial, Financial, and Agricultural 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 80% of appraised value of the property.                                                                                                                                                                                 
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|Residential Mortgages: We originate adjustable rate and fixed-rate, one-to-four family residential real estate loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|10                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|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, fixed-rate 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.  From time to time, we may also purchase residential mortgage loans which are originated and serviced by third parties.                                                                                                                                                                                          
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|In originating residential mortgage 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 [junior] lien position on one-to-four family residential real estate).  These loans carry a higher risk than first mortgage residential loans as they are in a second position relating to collateral 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, and personal loans (collateralized and uncollateralized). Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ten years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed or a customer's deposit account.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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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 year end for the past five year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|Composition of Loan Portfolio
|-----------------------------
|As of December 31,           
|(Dollars in thousands)       

|                                        |   | 2006    |   |  | 2005    |   |  | 2004    |   |  | 2003    |   |  | 2002    |  
|--------------------------------------- | - | ------- | - |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Commercial, financial, and agricultural | $ | 188,518 |   |  | 167,750 |   |  | 151,343 |   |  | 120,920 |   |  | 109,317 |  
|Commercial mortgage                     |   | 323,478 |   |  | 311,652 |   |  | 279,731 |   |  | 273,512 |   |  | 264,132 |  
|Residential mortgage- first lien        |   | 106,749 |   |  | 65,238  |   |  | 47,479  |   |  | 44,487  |   |  | 51,291  |  
|Residential mortgage - junior lien      |   | 67,871  |   |  | 59,758  |   |  | 56,492  |   |  | 47,488  |   |  | 39,041  |  
|Consumer                                |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Automobile - indirect                   |   | 136,040 |   |  | 142,141 |   |  | 111,506 |   |  | 90,336  |   |  | 87,775  |  
|Other                                   |   | 23,075  |   |  | 24,077  |   |  | 22,401  |   |  | 20,887  |   |  | 22,371  |  
|Other                                   |   | 3,653   |   |  | 3,681   |   |  | 5,051   |   |  | 2,438   |   |  | 10,926  |  
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|                                        |   | 849,384 |   |  | 774,297 |   |  | 674,003 |   |  | 600,068 |   |  | 584,853 |  
|Plus: Net deferred loan costs           |   | 4,313   |   |  | 4,542   |   |  | 3,085   |   |  | 2,178   |   |  | 1,972   |  
|Less: Allowance for loan losses         |   | (9,041  | ) |  | (7,986  | ) |  | (7,215  | ) |  | (6,331  | ) |  | (6,162  | )
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Loans, net                              | $ | 844,656 |   |  | 770,853 |   |  | 669,873 |   |  | 595,915 |   |  | 580,663 |  
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Gross loans increased $75.1 million in 2006 with growth in all categories except consumer loans.  Loan demand remained strong in our market, particularly in the commercial and residential areas, where rates received on these assets met or exceeded our internal targets.  First lien residential mortgages grew at a faster rate than in most recent years, associated with the rise in mortgage interest rates and the introduction of our ten-year, fixed-rate callable product.  As rates rise, customers are attracted to our portfolio products, and we retain more originations in portfolio as they carry more attractive interest rates. We scaled back the origination of consumer loans, particularly indirect automobile loans, as competition from manufacturers and other financial institutions set rates at uneconomical levels.  We will continue to originate these loans during periods when rates received are attractive relative to other loan products.                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Overall, we are projecting the net balance of loans will increase just under 8% in 2007, with a continued focus on greater net growth in the non-commercial portfolios (loans to individuals).  Since our expansion beginning in the late 1990s, the loan portfolio mix had moved from 50% commercial, 50% individual to 64% / 36% , and stood at 60% / 40% at year-end 2006.  We believe a 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|11                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Loan Quality                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|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 their 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, the community and our customers and their employees, but it can result in a higher ratio of non-performing assets relative to our peers.  At December 31, 2006, we are not aware of any potential material problem loans not already reported in the table below.  Given the nature of our business, it is reasonable to assume there will be problem loans in the future.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Interest can be earned on a cash basis for these loans in non-accrual status, and it amounted to $63,000 in 2006, $53,000 in 2005, and $52,000 in 2004.  Had all non-accrual loans been current in accordance with their original terms, we would have recognized additional interest income approximating $536,000, $752,000, and $700,000 during 2006, 2005, and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|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.  At December 31, 2006, we had one commercial and one residential property in other real estate owned both of which are under contract to sell in 2007 at their current carrying value. During 2006, we acquired and sold one residential property at book value.   As with non-performing loans, we can anticipate additions and dispositions of other real estate in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The following table summarizes non-performing assets as of December 31 for each of the last five years (dollars in thousands).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





|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).
|-----------------------------------------------------------------------------------------------------------------------------------



|                                        |   | 2006   |   |  | 2005   |   |  | 2004   |   |  | 2003   |   |  | 2002   |  
|--------------------------------------- | - | ------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Balance at beginning of year            | $ | 7,986  |   |  | 7,215  |   |  | 6,331  |   |  | 6,162  |   |  | 5,480  |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Provision charged to operations         |   | 1,831  |   |  | 2,087  |   |  | 1,680  |   |  | 1,250  |   |  | 2,306  |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Charge-offs:                            |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Commercial, financial and  agricultural |   | (188   | ) |  | (351   | ) |  | (612   | ) |  | (903   | ) |  | (886   | )
|Real estate-commercial                  |   | (353   | ) |  | (327   | ) |  | -      |   |  | -      |   |  | -      |  
|Real estate-residential                 |   | (34    | ) |  | (8     | ) |  | -      |   |  | (6     | ) |  | -      |  
|Consumer and other                      |   | (1,081 | ) |  | (1,289 | ) |  | (842   | ) |  | (714   | ) |  | (1,189 | )
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   | (1,656 | ) |  | (1,975 | ) |  | (1,454 | ) |  | (1,623 | ) |  | (2,075 | )
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Recoveries:                             |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Commercial, financial and agricultural  |   | 231    |   |  | 115    |   |  | 165    |   |  | 172    |   |  | 51     |  
|Real estate-commercial                  |   | -      |   |  | -      |   |  | -      |   |  | -      |   |  | -      |  
|Real estate-residential                 |   | 6      |   |  | 1      |   |  | 2      |   |  | -      |   |  | 5      |  
|Consumer and other                      |   | 643    |   |  | 543    |   |  | 491    |   |  | 370    |   |  | 395    |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   | 880    |   |  | 659    |   |  | 658    |   |  | 542    |   |  | 451    |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Net charge-offs:                        |   | (776   | ) |  | (1,316 | ) |  | (796   | ) |  | (1,081 | ) |  | (1,624 | )
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Balance at end of year                  | $ | 9,041  |   |  | 7,986  |   |  | 7,215  |   |  | 6,331  |   |  | 6,162  |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Net charge-offs to average loans        |   | 0.10   | % |  | 0.18   | % |  | 0.13   | % |  | 0.19   | % |  | 0.30   | %
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Allowance to total loans                |   | 1.06   | % |  | 1.03   | % |  | 1.07   | % |  | 1.06   | % |  | 1.05   | %
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  



|The allowance for loan losses was $9.0 million at December 31, 2006, up from $8.0 million at December 31, 2005. Net charge-offs to average loans decreased for the year and were lower than our most recent historical range, principally due to higher recoveries.  Net charge-offs associated with consumer loans spiked somewhat in 2005, which were impacted by changes in the federal bankruptcy law near year-end 2005.  At that time, there was an increase 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.  For 2007, we expect a return to our historical level of net charge-offs in the 15 to 20 basis point range.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|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).                                                                                                                                                                      



|              |   | 2006  |  |       |   | 2005 |   |       |  | 2004  |   |  |   | 2003  |  |       |   | 2002 |  
|------------- | - | ----- |  | ----- | - | ---- | - | ----- |  | ----- | - |  | - | ----- |  | ----- | - | ---- | -
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|              |   | $(1)  |  | % (2) |   |      |   | $(1)  |  | % (2) |   |  |   | $(1)  |  | % (2) |   |      |  
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|Commercial(3) | $ | 4,245 |  | 60.3  | % |      | $ | 4,103 |  | 61.9  | % |  | $ | 4,399 |  | 64.0  | % |      | $
|Residential   |   | 950   |  | 20.6  |   |      |   | 563   |  | 16.1  |   |  |   | 412   |  | 15.4  |   |      |  
|Consumer      |   | 3,846 |  | 19.1  |   |      |   | 3,320 |  | 22.0  |   |  |   | 2,404 |  | 20.6  |   |      |  
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|              | $ | 9,041 |  | 100.0 | % |      | $ | 7,986 |  | 100.0 | % |  | $ | 7,215 |  | 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.
|                                                                            
|13                                                                          



|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 in 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 these loans and an increase in the amount of delinquent payments.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|We consider the allowance for loan losses to be at a level adequate to cover probable losses in the loan portfolio. The allowance for loan losses stood at 127.2% of non-performing loans at year-end 2006 and 104.0% at year-end 2005. We saw improvement in loan quality in 2006, as measured by a reduction in non-performing loans.  We also experienced slower portfolio growth relative to 2005; therefore, the provision for loan loss decreased to $1.8 million in 2006 versus $2.1 million in 2005.                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|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).                                                                                                          
|                                                                                                                                                                                                                                                     



|                            |   | 2006      |  |      |   | 2005 |   |         |  | 2004 |  
|--------------------------- | - | --------- |  | ---- | - | ---- | - | ------- |  | ---- | -
|                            |   |           |  |      |   |      |   |         |  |      |  
|                            |   | Amount    |  | Rate |   |      |   | Amount  |  | Rate |  
|                            |   |           |  |      |   |      |   |         |  |      |  
|Non-interest-bearing demand | $ | 150,227   |  | --   | % |      | $ | 144,663 |  | --   | %
|Interest-bearing demand     |   | 103,611   |  | .16  |   |      |   | 101,943 |  | .16  |  
|Savings and money market    |   | 365,996   |  | 2.12 |   |      |   | 415,327 |  | 1.55 |  
|Time                        |   | 380,266   |  | 4.33 |   |      |   | 249,695 |  | 2.80 |  
|                            |   |           |  |      |   |      |   |         |  |      |  
|                            | $ | 1,000,100 |  | 2.44 | % |      | $ | 911,628 |  | 1.49 | %
|                            |   |           |  |      |   |      |   |         |  |      |  
|                            |   |           |  |      |   |      |   |         |  |      |  
|                            |   |           |  |      |   |      |   |         |  |      |  



|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, 2006 (dollars in thousands).
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3 months or less    | $ | 199,700
|------------------- | - | -------
|4 through 6 months  |   | 11,048 
|7 through 12 months |   | 23,826 
|Over 12 months      |   | 11,587 
|                    |   |        
|                    | $ | 246,161
|                    |   |        
|                    |   |        
|                    |   |        



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total deposits at December 31, 2006, were $1,059.3 million and were up $92.2 million (9.5%) from December 31, 2005, due mainly to the success of our OptionsTM and ChoiceTM checking products for consumers, businesses and municipalities. The growth exceeded our 6% target with checking accounts and time deposits being the principal drivers of growth during the year, while savings and money market accounts fell.  Continued rising interest rates caused consumers, businesses and municipalities to follow the trend we saw in 2005 and move their excess cash from lower yielding savings and money market accounts to higher yielding time deposits, locking in these higher rates.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Overall, deposit growth was distributed fairly evenly between Ontario County and Monroe County; however, municipal deposit growth was higher in Ontario County, while retail and business deposit growth was higher in Monroe County.  Retail deposits in our Ontario County offices grew approximately 5.8% during the year, while they grew 10.2% in our Monroe County offices.  For 2007, we anticipate an overall 6.6% deposit growth rate.                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|There were no short-term borrowings outstanding at either year-end 2006 or 2005.  Depending upon our liquidity needs, we might use short-term borrowings in 2007 from time to time, as we have in the past. 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.                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|In 2006, we issued $30.9 million of junior subordinated debentures.  The terms of the debt and use of its proceeds are more fully described in Note 9 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|14                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



|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) exceeds 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 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Secondarily, we occasionally 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, 2006, we had $14.4 million outstanding of these "brokered deposits" and $20.2 million at December 31, 2005.  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, 2006, we generated $22.5 million in net cash and equivalents versus using $21.2 million in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net cash provided by operating activities was $15.4 million in 2006 and $17.0 million in 2005.  Both the largest source and use of operating cash in each year were mortgage banking-related activities.  However, activity in 2006 continued to fall from previous years.  We expect 2007's operating activities to approximate 2006's level.                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Cash used by investing activities in 2006 fell from 2005, while 2005's activity was significantly higher than 2004's activity.  Net purchases of securities increased in 2006 from 2005, while net loan originations followed the opposite trend. The shift in 2006 was a result of our close management of the origination of assets and at what rates and maturities we originated them.  Given the slope of the yield curve in 2006, interest rate trends, and our anticipated retirement of $20.6 million of subordinated debentures in 2007, we allocated more balance sheet growth to securities from loans.  We expect cash used by these activities to be lower in 2007 than cash used in 2006.                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Cash provided by financing activities was $118.0 million in 2006 versus $85.6 million in 2005.  Deposit increases were the main contributor in both years, reflecting the Company's growth in customers and market share, and the major source was time deposits. We also issued $30.9 million of junior subordinated debentures.                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|For 2007, cash required for anticipated growth is expected to come from consumer and business deposits, which in turn will come mainly 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 to the Consolidated Financial Statements.  We have included $20.6 million of junior subordinated debentures in the "One Year or Less" category as we intend to retire this debt in 2007, notwithstanding its maturity date of June 2032. Contingent funding commitments associated with extensions of credit to customers are set out in Note 16 to the Consolidated Financial Statements (dollars in thousands).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



|Payment due by period      
|---------------------------
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|All long-term debt         
|Operating leases           
|Trillium Lakefront Partners
|                           
|Total                      
|                           
|                           
|                           
|                           
|15                         



|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 president and senior officers in various disciplines including Treasury, Finance, Commercial Lending, Retail Lending and Sales.  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|ALCO's principal focus is net interest income at risk. 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.  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, 2006.

|                    |  |                           
|------------------- |  | --------------------------
|Changes in Interest |  | Estimated                 
|Rates               |  | Percentage Change in      
|(basis points)      |  | Future Net Interest Income
|                    |  |                           
|+200                |  | 1                         
|+100                |  | (3                        
|No change           |  | -                         
|-100                |  | 3                         
|-200                |  | (2                        
|                    |  |                           

|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, 2006, a small upward shock would cause a modest reduction in net interest income, due to our gap position (discussed below); however, a larger shock would be slightly beneficial as asset yields would rise by more than liability costs.  A small downward shock would result in an increase in net interest income, because rates paid on liabilities would fall more than yields earned on assets; however, a larger downward shock would result in larger fall in asset yields, as liability costs would reach a floor near zero percent.   We recognize 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 2007, we expect market interest rates to rise up to 25 basis points from their year-end values on the short end of the treasury yield curve, but fall 50 or more basis points later in the year.  We also believe middle and long term rates will rise about 50 basis points, bringing a positive slope to the yield curve. Fed funds will fall about one percentage point.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|A third method used to identify and manage our interest rate risk profile is the static gap analysis. Interest sensitivity gap                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|16                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|("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, 2006, while the table thereafter provides additional detail of the interest sensitivity of certain commercial loans. 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 (principal payments in excess of contractual amounts) 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 is not an absolute reflection of 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 $443.9 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 $3.1 million more of interest-earning assets are repricing than interest-bearing liabilities.  For the entire one-year range, we are repricing $440.8 million more interest-bearing liabilities than assets and at 51.1% is within our gap ratio targets of 30% to 125%. We are also asset sensitive at $318.5 million for the one-to-three year range, $178.1 million for the three-to-five year range, and $131.8 million over five years. For the entire portfolio range, we are asset sensitive at $187.7 million versus asset sensitive of $175.9 million last year, mostly reflecting the growth in non-interest-bearing demand accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|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, 2006            
|(Dollars in thousands)       

|                                          |   | Maturity/Repricing Period |   
|----------------------------------------- | - | ------------------------- | --
|                                          |   |                           |   
|                                          |   | Within 3                  |   
|                                          |   | Months                    |   
|                                          |   |                           |   
|Interest-earning assets:                  |   |                           |   
|Interest-bearing deposits                 |   |                           |   
|and federal funds sold                    | $ | 36,411                    |   
|Securities                                |   | 8,400                     |   
|Loans                                     |   | 265,030                   |   
|                                          |   |                           |   
|Total interest-earnings assets            |   | 309,841                   |   
|                                          |   |                           |   
|                                          |   |                           |   
|Interest-bearing liabilities:             |   |                           |   
|NOW accounts                              |   | 110,507                   |   
|Savings and money market                  |   | 363,795                   |   
|Time deposits                             |   | 227,877                   |   
|Borrowings                                |   | 51,556                    |   
|                                          |   |                           |   
|Total interest-bearing liabilities        |   | 753,735                   |   
|                                          |   |                           |   
|                                          |   |                           |   
|Interest rate sensitivity gap             | $ | (443,894                  | ) 
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|Cumulative gap                            | $ | (443,894                  | ) 
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|Cumulative gap ratio(1)                   |   | 41.1                      | % 
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|Cumulative gap as percent of total assets |   | (36.8                     | )%
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   

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

|17
|--

|                                       |   |         |  |   | After   |  |   |         |  |   |        
|-------------------------------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | -------
|                                       |   |         |  |   | One     |  |   |         |  |   |        
|                                       |   | One     |  |   | through |  |   | After   |  |   |        
|                                       |   | Year or |  |   | Five    |  |   | Five    |  |   |        
|                                       |   | Less    |  |   | Years   |  |   | Years   |  |   | Total  
|                                       |   |         |  |   |         |  |   |         |  |   |        
|Commercial, financial and agricultural | $ | 17,335  |  | $ | 61,867  |  | $ | 109,316 |  | $ | 188,518
|loans maturing after one year:         |   |         |  |   |         |  |   |         |  |   |        
|with a predetermined interest rate     |   |         |  |   | 33,833  |  |   | 14,570  |  |   | 48,403 
|with a floating or adjustable rate     |   |         |  |   | 28,034  |  |   | 94,746  |  |   | 122,780
|                                       |   |         |  |   |         |  |   |         |  |   |        

|Capital and Dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|The Company and Bank are each subject to certain regulatory capital requirements.  We believe that as of December 31, 2006, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|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 balancing asset growth and 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 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|We expect capital to increase in 2007.  Considering our strong results in 2006, we raised our semi-annual dividend in January 2007, to $3.90 compared to $3.30 in the first half of 2006.  We also paid a semi-annual cash dividend of $3.70 per share in August 2006.  Together these totaled $3.4 million or $7.00 per outstanding common share in 2006 versus $2.9 million or $6.05 per outstanding common share in 2005. 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 and the Financial Highlights.  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|Off Balance Sheet Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|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 to the Consolidated Financial Statements. At December 31, 2006, there were no material commitments to extend credit which represent unusual risks outside of our normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|New Accounting Standard to be Implemented in Our 2007 Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|The Financial Accounting Standards Board (FASB) issued Statement No.155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140 (SFAS No.155) in February 2006. This Statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." In particular, this Statement (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (e) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
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|This Statement revises financial reporting by eliminating the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement also improves financial reporting by allowing a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. Providing a fair value measurement election also results in more financial instruments being measured at what the FASB regards as the most relevant attribute for financial instruments, fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|This Statement will be effective for us beginning in 2007; however, we believe it will have little impact on our financial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|18                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|position or results of operations, since we do not generally invest in financial instruments subject to this Statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|In March 2006, FASB issued Statement No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140 (SFAS No.156). This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement (a) generally requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract, (b) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, (c) permits an entity to choose either the "amortization method" or  "fair value measurement method" as subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities, and (d) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.                                                                                                                                                                                                                                                                              
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|Under this Statement, an entity can elect subsequent fair value measurement of its servicing assets and servicing liabilities by class, thus simplifying its accounting and providing for income statement recognition of the potential offsetting changes in fair value of the servicing assets, servicing liabilities, and related derivative instruments. An entity that elects to subsequently measure servicing assets and servicing liabilities at fair value is expected to recognize declines in fair value of the servicing assets and servicing liabilities more consistently than by reporting other-than-temporary impairments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|SFAS No.156 is effective for us beginning in 2007.  This statement will impact our accounting for mortgage servicing rights.  It will impact initial measurement of the servicing rights, which are currently valued using an allocated fair value approach.  We believe the transition to full fair value will have an impact of less than 5% ($25,000 per annum) from our current measurement methodology.  There will be no change in subsequent measurement, wherein we use the "amortization method."                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|In September 2006, the FASB issued Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R). We do not provide defined benefits plans to our employees. All of our benefit plans are defined contribution plans.  Accordingly, this statement will have no impact on our Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN No.48), in June 2006. FIN 48 is intended to clarify the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|The evaluation of a tax position in accordance with this interpretation is a two-step process: (1) The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. (2) A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one of the following: Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met or previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|This interpretation is effective for the Company beginning in 2007 and we believe it will have no impact on our financial condition or results of operations upon adoption, but could impact income tax expense in subsequent periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|New Accounting Standard to be Implemented in Our Financial Statements in Later Years                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|FASB issued Statement No. 157, Fair Value Measurements, in September 2006. This Statement provides guidance for using fair value to measure assets and liabilities and requires expanded disclosures about the extent to which companies measure assets and liabilities at fair value, and the effect of fair value measurements on earnings.  This standard applies whenever other standards require or permit assets or liabilities to be measured at fair value.  The standard does not expand the use of fair value in any new circumstances.                                                                                                                                                                                                                                           
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|Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity's own data. Under the standard, fair value measurements would be
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|separately disclosed by level within the fair value hierarchy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|The statement is effective for us beginning in 2008.  Because this is a disclosure-based statement, it will have no impact on our financial position or results of operations; however we may be required to provide additional disclosures in our financial statements relative to fair-value measurements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|Summary Quarterly Financial Data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|In the tables below, we present summary quarterly financial results for each of the quarters in the years ended December 31, 2006, and 2005.  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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|2006 Quarters:             |   | 1st    |   |   | 2nd    |   |   | 3rd    |   |   | 4th    |  
|-------------------------- | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | -
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|Net interest income        | $ | 9,746  |   | $ | 9,815  |   | $ | 10,013 |   | $ | 10,126 |  
|Provision for loan losses  |   | (496   | ) |   | (355   | ) |   | (615   | ) |   | (365   | )
|Non-interest income        |   | 3,366  |   |   | 3,262  |   |   | 3,457  |   |   | 3,757  |  
|Operating expenses         |   | (8,818 | ) |   | (9,010 | ) |   | (8,776 | ) |   | (8,957 | )
|Income taxes               |   | (1,045 | ) |   | (1,020 | ) |   | (1,122 | ) |   | (1,057 | )
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|Net income                 | $ | 2,753  |   | $ | 2,692  |   | $ | 2,957  |   | $ | 3,504  |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|Basic earnings per share   | $ | 5.74   |   | $ | 5.62   |   | $ | 6.19   |   | $ | 7.18   |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
|Diluted earnings per share | $ | 5.59   |   | $ | 5.49   |   | $ | 6.05   |   | $ | 7.34   |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
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|                           |   |        |   |   |        |   |   |        |   |   |        |  
|-------------------------- | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | -
|2005 Quarters:             |   |        |   |   |        |   |   |        |   |   |        |  
|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   |  
|                           |   |        |   |   |        |   |   |        |   |   |        |  
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|Net income for the fourth quarter of 2006 was positively impacted by higher non-interest income, principally from comparatively higher mortgage origination income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|During the fourth quarter 2005, we recorded a fairly substantial provision for loan losses, 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.
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|Our Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|At January 31, 2007, 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 our Form 10-K.                                                                                                                                                                                                                         
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|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 quarterly high, low and weighted average sale prices may not be indicative of the actual market value of the Company's stock. The following table sets forth a summary of information, known by us, about the Company's common stock traded in open-market transactions during each period.  Also included are the book value at quarter end, and semi-annual dividends paid per share since the first quarter of 2004.
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|            |  | #      |  |   | Quarterly   |  |   | Quarterly   |  |   | Quarterly   |  |   |        |  |   |         
|----------- |  | ------ |  | - | ----------- |  | - | ----------- |  | - | ----------- |  | - | ------ |  | - | --------
|            |  | Shares |  |   | High        |  |   | Low         |  |   | Average     |  |   | Book   |  |   | Dividend
|            |  | Sold   |  |   | Sales Price |  |   | Sales Price |  |   | Sales Price |  |   | Value  |  |   | Paid    
|            |  |        |  |   |             |  |   |             |  |   |             |  |   |        |  |   |         
|2006        |  |        |  |   |             |  |   |             |  |   |             |  |   |        |  |   |         
|4th Quarter |  | 944    |  | $ | 350.00      |  | $ | 321.00      |  | $ | 338.95      |  | $ | 175.32 |  |   |         
|3rd Quarter |  | 597    |  | $ | 353.00      |  | $ | 322.75      |  | $ | 335.28      |  | $ | 168.11 |  | $ | 3.70    
|2nd Quarter |  | 500    |  | $ | 377.10      |  | $ | 322.75      |  | $ | 352.43      |  | $ | 163.99 |  |   |         
|1st Quarter |  | 1,272  |  | $ | 405.00      |  | $ | 331.75      |  | $ | 351.89      |  | $ | 160.02 |  | $ | 3.30    
|            |  |        |  |   |             |  |   |             |  |   |             |  |   |        |  |   |         
|2005        |  |        |  |   |             |  |   |             |  |   |             |  |   |        |  |   |         
|4th Quarter |  | 1,300  |  | $ | 400.00      |  | $ | 342.75      |  | $ | 361.07      |  | $ | 159.48 |  |   |         
|3rd Quarter |  | 682    |  | $ | 401.00      |  | $ | 360.00      |  | $ | 373.20      |  | $ | 154.86 |  | $ | 3.20    
|2nd Quarter |  | 802    |  | $ | 410.50      |  | $ | 351.25      |  | $ | 371.88      |  | $ | 153.75 |  |   |         
|1st Quarter |  | 500    |  | $ | 420.00      |  | $ | 365.00      |  | $ | 382.67      |  | $ | 146.57 |  | $ | 2.85    
|            |  |        |  |   |             |  |   |             |  |   |             |  |   |        |  |   |         
|2004        |  |        |  |   |             |  |   |             |  |   |             |  |   |        |  |   |         
|4th Quarter |  | 1,505  |  | $ | 421.00      |  | $ | 311.00      |  | $ | 376.70      |  | $ | 145.83 |  |   |         
|3rd Quarter |  | 600    |  | $ | 401.96      |  | $ | 380.00      |  | $ | 384.25      |  | $ | 140.19 |  | $ | 2.70    
|2nd Quarter |  | 400    |  | $ | 410.00      |  | $ | 350.00      |  | $ | 361.46      |  | $ | 134.38 |  |   |         
|1st Quarter |  | 1,371  |  | $ | 391.65      |  | $ | 310.00      |  | $ | 328.61      |  | $ | 131.64 |  | $ | 2.60    
|            |  |        |  |   |             |  |   |             |  |   |             |  |   |        |  |   |         

|The following table sets forth, for monthly period indicated in 2006, 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 most recent open-market transaction know to us immediately preceding the purchase.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                |  | Total         |  | Average   |  |                       
| | -------------- |  | ------------- |  | --------- |  | ----------------------
| |                |  | Shares        |  | Price Per |  |                       
| | Date           |  | Purchased (#) |  | Share ($) |  | Purpose               
| | March 2006     |  | 2,071         |  | $ 351.89  |  | Treasury              
| | April 2006     |  | 765           |  | $ 351.89  |  | Treasury              
| | May 2006       |  | 174           |  | $ 351.89  |  | Treasury              
| | June 2006      |  | 7             |  | $ 352.43  |  | Arthur S. Hamlin Award
| | June 2006      |  | 2,024         |  | $ 352.43  |  | Treasury              
| | August 2006    |  | 323           |  | $ 352.43  |  | Treasury              
| | September 2006 |  | 1,052         |  | $ 335.28  |  | Treasury              
| | November 2006  |  | 215           |  | $ 336.13  |  | Treasury              
| | December 2006  |  | 1,025         |  | $ 338.50  |  | Treasury              

|  
|--
|21



|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, 2006.  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, 2006, 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 the Company complied, in all material respects, with such designated laws and regulations relating to safety and soundness during the year ended December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|February 8, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                      |                                                     
|------------------------------------- | ----------------------------------------------------
|/s/ George W. Hamlin, IV              | /s/ Lawrence A. Heilbronner                         
|George W. Hamlin, IV                  | Lawrence A. Heilbronner                             
|President and Chief Executive Officer | Executive Vice President and Chief Financial Officer
|                                      |                                                     
|22                                   
|                                     

|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, 2006, 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, 2006, 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, 2006, 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, 2006 and 2005, 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, 2006, and our report dated February 8, 2007expressed an unqualified opinion on those consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|/s/ KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Rochester, New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|February 8, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|23                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, 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, 2006, 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, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial Standards No. 123R, Share-Based Payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|/s/ KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Rochester, New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|February 8, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|24                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                    
|---------------------------------------------------------------------
|                                                                     
|Consolidated Balance Sheets                                          
|                                                                     
|December 31, 2006, and 2005 (dollars in thousands, except share data)
|                                                                     

|Assets                                                        |  |  |   | 2006      |   |  | 2005      |  
|------------------------------------------------------------- |  |  | - | --------- | - |  | --------- | -
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Cash and due from banks                                       |  |  | $ | 35,592    |   |  | 35,177    |  
|Interest-bearing deposits with other financial institutions   |  |  |   | 1,560     |   |  | 5,718     |  
|Federal funds sold                                            |  |  |   | 36,188    |   |  | 9,949     |  
|Securities:                                                   |  |  |   |           |   |  |           |  
|- Available for sale, at fair value                           |  |  |   | 113,098   |   |  | 95,360    |  
|- Held to maturity (fair value approximated                   |  |  |   |           |   |  |           |  
|$137,692 in 2006 and $122,227 in 2005)                        |  |  |   | 138,029   |   |  | 122,330   |  
|Loans - net of allowance of $9,041 in 2006 and $7,986 in 2005 |  |  |   | 844,656   |   |  | 770,853   |  
|Premises and equipment - net                                  |  |  |   | 14,325    |   |  | 14,902    |  
|Accrued interest receivable                                   |  |  |   | 6,658     |   |  | 5,357     |  
|Federal Home Loan Bank stock and Federal Reserve Bank stock   |  |  |   | 1,697     |   |  | 1,583     |  
|Other assets                                                  |  |  |   | 14,092    |   |  | 10,603    |  
|                                                              |  |  |   |           |   |  |           |  
|Total Assets                                                  |  |  | $ | 1,205,895 |   |  | 1,071,832 |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Liabilities and Stockholders' Equity                          |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Deposits:                                                     |  |  |   |           |   |  |           |  
|Demand                                                        |  |  |   |           |   |  |           |  
|Non-interest-bearing                                          |  |  | $ | 159,500   |   |  | 154,881   |  
|Interest-bearing                                              |  |  |   | 110,507   |   |  | 106,125   |  
|Savings and money market                                      |  |  |   | 363,795   |   |  | 359,925   |  
|Time deposits                                                 |  |  |   | 425,546   |   |  | 346,193   |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Total deposits                                                |  |  |   | 1,059,348 |   |  | 967,124   |  
|Borrowings                                                    |  |  |   | 824       |   |  | 885       |  
|Junior subordinated debentures                                |  |  |   | 51,402    |   |  | 20,222    |  
|Accrued interest payable and other liabilities                |  |  |   | 10,762    |   |  | 7,062     |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Total Liabilities                                             |  |  |   | 1,122,336 |   |  | 995,293   |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Commitments and contingencies (Notes 15 and 16)               |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Stockholders' Equity:                                         |  |  |   |           |   |  |           |  
|Common stock, $20 par value; 2,000,000 shares authorized,     |  |  |   |           |   |  |           |  
|486,624 shares issued in 2006 and 2005                        |  |  |   | 9,732     |   |  | 9,732     |  
|Additional paid-in capital                                    |  |  |   | 8,107     |   |  | 7,856     |  
|Retained earnings                                             |  |  |   | 70,184    |   |  | 62,117    |  
|Treasury stock, at cost (10,024 shares in 2006                |  |  |   |           |   |  |           |  
|and 6,690 shares in 2005)                                     |  |  |   | (3,541    | ) |  | (2,179    | )
|Accumulated other comprehensive loss                          |  |  |   | (923      | ) |  | (987      | )
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Total Stockholders' Equity                                    |  |  |   | 83,559    |   |  | 76,539    |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|Total Liabilities and Stockholders' Equity                    |  |  | $ | 1,205,895 |   |  | 1,071,832 |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  
|                                                              |  |  |   |           |   |  |           |  

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

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
|-------------------------------------------------
|                                                 
|Consolidated Statements of Income                
|                                                 
|Years ended December 31, 2006, 2005, and 2004    
|(dollars in thousands, except per share data)    
|                                                 

|                                                    |  |   | 2006   |   |  | 2005   |  |  | 2004   | 
|--------------------------------------------------- |  | - | ------ | - |  | ------ |  |  | ------ | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Interest income:                                    |  |   |        |   |  |        |  |  |        | 
|Loans, including fees                               |  | $ | 56,986 |   |  | 45,700 |  |  | 37,428 | 
|Securities                                          |  |   | 9,081  |   |  | 7,983  |  |  | 7,248  | 
|Federal funds sold                                  |  |   | 1,153  |   |  | 403    |  |  | 489    | 
|Other                                               |  |   | 89     |   |  | 145    |  |  | 55     | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Total interest income                               |  |   | 67,309 |   |  | 54,231 |  |  | 45,220 | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Interest expense:                                   |  |   |        |   |  |        |  |  |        | 
|Deposits                                            |  |   | 24,383 |   |  | 13,582 |  |  | 7,886  | 
|Borrowings                                          |  |   | 28     |   |  | 219    |  |  | 31     | 
|Junior subordinated debentures                      |  |   | 3,198  |   |  | 1,473  |  |  | 1,093  | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Total interest expense                              |  |   | 27,609 |   |  | 15,274 |  |  | 9,010  | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Net interest income                                 |  |   | 39,700 |   |  | 38,957 |  |  | 36,210 | 
|Provision for loan losses                           |  |   | 1,831  |   |  | 2,087  |  |  | 1,680  | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Net interest income after provision for loan losses |  |   | 37,869 |   |  | 36,870 |  |  | 34,530 | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Other income:                                       |  |   |        |   |  |        |  |  |        | 
|Service charges on deposit accounts                 |  |   | 6,803  |   |  | 5,610  |  |  | 5,393  | 
|Trust and investment services income                |  |   | 4,537  |   |  | 4,235  |  |  | 3,698  | 
|Net gain on sale of mortgage loans                  |  |   | 601    |   |  | 962    |  |  | 1,247  | 
|Mortgage servicing income, net                      |  |   | 631    |   |  | 667    |  |  | 631    | 
|Loan-related fees                                   |  |   | 303    |   |  | 401    |  |  | 320    | 
|Gain (loss) on call of securities                   |  |   | (6     | ) |  | 46     |  |  | 37     | 
|Other operating income                              |  |   | 973    |   |  | 552    |  |  | 977    | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Total other income                                  |  |   | 13,842 |   |  | 12,473 |  |  | 12,303 | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Operating expenses:                                 |  |   |        |   |  |        |  |  |        | 
|Salaries and employee benefits                      |  |   | 19,458 |   |  | 18,387 |  |  | 17,629 | 
|Occupancy                                           |  |   | 6,626  |   |  | 6,450  |  |  | 6,369  | 
|Marketing and public relations                      |  |   | 1,834  |   |  | 1,665  |  |  | 1,406  | 
|Supplies, printing and postage                      |  |   | 1,314  |   |  | 1,200  |  |  | 1,252  | 
|FDIC insurance                                      |  |   | 123    |   |  | 121    |  |  | 121    | 
|Other operating expenses                            |  |   | 6,206  |   |  | 6,037  |  |  | 5,544  | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Total operating expenses                            |  |   | 35,561 |   |  | 33,860 |  |  | 32,321 | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Income before income taxes                          |  |   | 16,150 |   |  | 15,483 |  |  | 14,512 | 
|Income taxes                                        |  |   | 4,244  |   |  | 4,258  |  |  | 3,913  | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Net income                                          |  | $ | 11,906 |   |  | 11,225 |  |  | 10,599 | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Basic earnings per share                            |  | $ | 24.89  |   |  | 23.39  |  |  | 22.14  | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|Diluted earnings per share                          |  | $ | 24.30  |   |  | 22.74  |  |  | 21.09  | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 
|                                                    |  |   |        |   |  |        |  |  |        | 

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

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
|-------------------------------------------------
|                                                 
|Consolidated Statements of Stockholders' Equity  
|                                                 
|Years ended December 31, 2006, 2005, and 2004    
|(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, 2003     |  | 477,209     |   | $ | 9,732  |  |  | 6,958      |  |  | 45,729   |   |  | (1,158   | ) |  | 308           |   |  | 61,569 |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Comprehensive income:            |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Change in unrealized gain 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 |  
|Comprehensive income:            |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Change in unrealized loss on     |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|securities available for sale,   |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|net of taxes of $ 39             |  |             |   |   | -      |  |  | -          |  |  | -        |   |  | -        |   |  | 64            |   |  | 64     |  
|Net income                       |  |             |   |   | -      |  |  | -          |  |  | 11,906   |   |  | -        |   |  | -             |   |  | 11,906 |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Total comprehensive income       |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  | 11,970 |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Recognition of stock option      |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|expense                          |  |             |   |   | -      |  |  | 92         |  |  | -        |   |  | -        |   |  | -             |   |  | 92     |  
|Cash dividend $7.00 per share    |  |             |   |   | -      |  |  | -          |  |  | (3,351   | ) |  | -        |   |  | -             |   |  | (3,351 | )
|Sale of shares of treasury stock |  | 7           |   |   | -      |  |  | -          |  |  | -        |   |  | 2        |   |  | -             |   |  | 2      |  
|Purchase of shares for           |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|treasury stock                   |  | (7,649      | ) |   | -      |  |  | -          |  |  | -        |   |  | (2,659   | ) |  | -             |   |  | (2,659 | )
|Exercise of stock options,       |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|including tax benefit of $349    |  | 4,308       |   |   | -      |  |  | 159        |  |  | (488     | ) |  | 1,295    |   |  | -             |   |  | 966    |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Balance at December 31, 2006     |  | 476,600     |   | $ | 9,732  |  |  | 8,107      |  |  | 70,184   |   |  | (3,541   | ) |  | (923          | ) |  | 83,559 |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                 |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  

|                                                            
|------------------------------------------------------------
|See accompanying notes to consolidated financial statements.
|                                                            
|27                                                          
|                                                            

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                    
|---------------------------------------------------------------------
|                                                                     
|Consolidated Statements of Cash Flows                                
|Years ended December 31, 2006, 2005 and 2004 (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                                            
|Loss (gain) on sale or write-down of other real estate               
|Deferred income tax (benefit) expense                                
|(Income) loss from equity-method investments                         
|Loss (gain) on sale or call of securities and other investments      
|Gain on sale of loans                                                
|Originations of loans held for sale                                  
|Proceeds from sales of loans held for sale                           
|Stock option expense                                                 
|Tax benefit from stock option exercise                               
|(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:                                
|Proceeds from calls of FHLB stock                                    
|Purchase of FHLB and FRB 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                              
|Acquisition of customer relationships                                
|Proceeds from sale of other real estate                              
|                                                                     
|                                                                     
|Net cash used in investing activities                                
|                                                                     
|                                                                     
|Cash flows from financing activities:                                
|Net increase (decrease) in demand, savings and money market deposits 
|Net increase (decrease) in time deposits                             
|Principal repayments on borrowings                                   
|Proceeds from issuance of junior subordinated debentures             
|Proceeds from sale of treasury stock                                 
|Payments to acquire treasury stock                                   
|Proceeds from exercise of stock options                              
|Excess tax benefit from stock option exercise                        
|Dividends paid                                                       
|                                                                     
|                                                                     
|Net cash provided by financing activities                            
|                                                                     
|                                                                     
|Net increase (decrease) 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 ORE, net of loans to facilitate sales                   
|Held to maturity securities purchased, not settled at year-end       
|                                                                     
|                                                                     
|                                                                     

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------
|                                                            
|28                                                          

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(1) Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Canandaigua National Corporation (the Company) provides a full range of financial services, including banking, trust, investment, and insurance services to individual, corporate, and municipal customers. The Company is subject to competition from other financial services and commercial companies in various regulated and unregulated industries. 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 to 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 to 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|29                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(1) Summary of Significant Accounting Policies(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|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 commercial 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, 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 risk of loss as discussed above.
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|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, including renewal options, when applicable, 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.                                                                                                                                                                                                                                                                                  
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|30                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(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 when loans are sold 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.                                                                                                            
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|Intangible Asset                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The Company recorded a customer relationship intangible in 2006 in connection with the Company's acquisition of trust and investment management accounts.  Amortization of this asset is reported in other operating expenses and is recorded on an accelerated basis over fifteen years.  The amortization period is monitored to determine if circumstances require the period to be revised. The Company periodically reviews its intangible asset for changes in circumstances that may indicate the carrying amount of the asset is impaired. The Company tests its intangible assets for impairment on an annual basis or more frequently if conditions indicate that an impairment loss has more likely than not been incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), ''Share-Based Payment'' (''SFAS 123R''), utilizing the modified prospective method whereby prior periods are not restated for comparability. SFAS 123R requires recognition of stock-based compensation expense in the statement of income over the vesting period based on the fair value of the award at the grant date. Previously, the Company used the intrinsic value method under Accounting Principles Board Opinion No. 25, ''Accounting for Stock Issued to Employees'' (''APB 25''), as amended by related interpretations of the FASB. Under APB 25, no compensation cost was recognized for stock options because the quoted market price of the stock at the grant date was equal to the amount per share the employee had to pay to acquire the stock after fulfilling the vesting period. SFAS 123R superseded APB 25 as well as Statement of Financial Accounting Standard 123 "Accounting for Stock-Based Compensation," which permitted pro forma footnote disclosures to report the difference between the fair value method and the intrinsic value method.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Had the Company determined compensation cost using the fair value method under FAS 123, net income for the years ended December 31, 2005, and 2004, would have been reduced to the pro forma amounts indicated below.  The per-share weighted average fair value of stock options was determined using the Black-Scholes-Merton option-pricing model.  No options were granted after 2004.  There were no deductions in any period for forfeitures, as none were anticipated. (Dollars in thousands, except per share amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|31                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
|                                                                           
|(1) Summary of Significant Accounting Policies(continued)                  
|                                                                           
|Stock-Based Compensation (continued)                                       

|                                                      |   |        |   |        |  
|----------------------------------------------------- | - | ------ | - | ------ | -
|                                                      |   | 2005   |   | 2004   |  
|                                                      |   |        |   |        |  
|                                                      |   |        |   |        |  
|Net income:                                           |   |        |   |        |  
|As reported                                           | $ | 11,225 |   | 10,599 |  
|Add:        Stock-based employee compensation expense |   |        |   |        |  
|included in net income, net of related income tax     |   |        |   |        |  
|effects                                               |   | 262    |   | 246    |  
|Deduct:   Stock-based employee compensation expense   |   |        |   |        |  
|determined under the fair-value based method,         |   |        |   |        |  
|net of related income tax effects                     |   | (345   | ) | (517   | )
|                                                      |   |        |   |        |  
|Pro forma                                             | $ | 11,142 |   | 10,328 |  
|                                                      |   |        |   |        |  
|                                                      |   |        |   |        |  
|                                                      |   |        |   |        |  



|Basic earnings per share:   |   |       |  |       | 
|--------------------------- | - | ----- |  | ----- | 
|As reported                 | $ | 23.39 |  | 22.14 | 
|Pro forma                   | $ | 23.21 |  | 21.57 | 
|                            |   |       |  |       | 
|Diluted earnings per share: |   |       |  |       | 
|As reported                 | $ | 22.74 |  | 21.09 | 
|Pro forma                   | $ | 22.57 |  | 20.55 | 

|SFAS 123R also changed the Company's accounting for Phantom Stock Awards (PSA) and Stock Appreciation Rights (SAR).  Under SFAS 123R, the liability for PSA's and SAR's is recorded in the balance sheet at fair value and re-measured each reporting period.  Fair value is measured using the Black-Scholes-Merton option pricing model.  The associated compensation expense reported in the statement of income represents the change in the re-measured liability. The impact of adopting SFAS 123R was not material to those awards.                                                                                                                                
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Prior to the adoption of SFAS 123R, the Company also re-measured the liability at fair value each reporting period, however, the fair value represented the amount by which the then current market value of the Company's stock exceeded the grant price.                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|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.
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|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 during the respective periods. Accumulated other comprehensive income (loss) on the consolidated statements of stockholders' equity is presented net of taxes.                                                                                                                                                                                                                                                                                                                             
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|32                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(1) Summary of Significant Accounting Policies(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Trust and Investment Services Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Assets held in fiduciary or agency capacity for customers 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 exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) Acquisition of Trust Relationships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|On September 29, 2006, the Company acquired from a bank and assumed the successor trustee role for approximately 120 personal trust and investment management accounts. The market value of the underlying assets was approximately $66.6 million and was added to existing assets under administration.  Annualized revenues from these assets are projected to be approximately $0.5 million.  In connection with the acquisition, the Company recorded, at cost, an intangible asset of approximately $1.4 million, which is subject to certain closing adjustments. The asset will be amortized on an accelerated basis over fifteen years to operating expense. Amortization expense is projected over the next five years as follows: 2007: $177,000; 2008: $166,000; 2009: $154,000; 2010 $142,000; and 2011: $130,000.
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|(3) Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Information about the securities portfolios follows (dollars in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                               |   |                  
|---------------------------------------------- | - | -----------------
|                                               |   | December 31, 2006
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|                                               |   | Amortized        
|                                               |   | Cost             
|                                               |   |                  
|                                               |   |                  
|Securities Available for Sale:                 |   |                  
|U.S. government sponsored agencies obligations | $ | 75,153           
|State and municipal obligations                |   | 35,765           
|Corporate and foreign obligations              |   | 3,622            
|Equity securities                              |   | 93               
|                                               |   |                  
|                                               |   |                  
|Total securities Available for Sale            | $ | 114,633          
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|Securities Held to Maturity:                   |   |                  
|U.S. Treasury                                  | $ | 11,949           
|U.S. government sponsored agencies obligations |   | 5,009            
|State and municipal obligations                |   | 120,697          
|Corporate and foreign obligations              |   | 374              
|                                               |   |                  
|                                               |   |                  
|Total securities Held to Maturity              | $ | 138,029          
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|33                                            

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
|                                                                           
|(3) Securities(continued)                                                  
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|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Securities Available for Sale:                                             
|U.S. Treasuries                                                            
|U.S. government sponsored agencies obligations                             
|State and municipal obligations                                            
|Corporate and foreign obligations                                          
|Equity securities                                                          
|                                                                           
|                                                                           
|Total securities Available for Sale                                        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Securities Held to Maturity:                                               
|U.S. Treasury                                                              
|U.S. government sponsored agencies obligations                             
|State and municipal obligations                                            
|Corporate and foreign obligations                                          
|                                                                           
|                                                                           
|Total securities Held to Maturity                                          
|                                                                           
|                                                                           
|                                                                           
|                                                                           

|                                               |   |                  
|---------------------------------------------- | - | -----------------
|                                               |   |                  
|                                               |   | December 31, 2004
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|                                               |   | Amortized        
|                                               |   | Cost             
|                                               |   |                  
|                                               |   |                  
|Securities Available for Sale:                 |   |                  
|U.S. government sponsored agencies obligations | $ | 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. government sponsored agencies obligations |   | 28               
|State and municipal obligations                |   | 111,767          
|Corporate and foreign obligations              |   | 894              
|                                               |   |                  
|                                               |   |                  
|Total securities Held to Maturity              | $ | 116,689          
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  
|                                               |   |                  

|The amortized cost and fair value of securities by years to maturity as of December 31, 2006, 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     | $ | 12,451             |  | 12,426          
|1 to 5      |   | 64,696             |  | 63,629          
|5 to 10     |   | 34,969             |  | 34,572          
|10 and over |   | 2,517              |  | 2,471           
|            |   |                    |  |                 
|            |   |                    |  |                 
|Total       | $ | 114,633            |  | 113,098         
|            |   |                    |  |                 
|            |   |                    |  |                 
|            |   |                    |  |                 



|34
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
|                                                                           
|(3) Securities(continued)                                                  

|At December 31, 2006, and 2005, securities at amortized cost of $214,635,000 and $181,752,000, respectively, were pledged to secure municipal deposits and for other purposes required or permitted by law.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                           
|There were no securities sales in any year presented.                                                                                                                                                      
|                                                                                                                                                                                                           
|Interest on securities segregated between taxable interest and tax-exempt interest for the years ended December 31, 2006, 2005, and 2004, follows (in thousands):                                          

|           |   | 2006  |  | 2005  |  | 2004 
|---------- | - | ----- |  | ----- |  | -----
|           |   |       |  |       |  |      
|Taxable    | $ | 3,834 |  | 2,974 |  | 2,647
|Tax-exempt |   | 5,247 |  | 5,009 |  | 4,601
|           |   |       |  |       |  |      
|           |   |       |  |       |  |      
|Total      | $ | 9,081 |  | 7,983 |  | 7,248
|           |   |       |  |       |  |      
|           |   |       |  |       |  |      
|           |   |       |  |       |  |      

|The following table presents information (in thousands) about securities with gross unrealized losses at December 31, 2006, 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. government sponsored agencies obligations | $ | 17,953              |  | 32            
|State and municipal obligations                |   | 2,900               |  | 113           
|Corporate and foreign obligations              |   | -                   |  | -             
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|Total temporarily impaired securities          | $ | 20,853              |  | 145           
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|Securities Held to Maturity                    |   |                     |  |               
|U.S. Treasury                                  | $ | 3,986               |  | 10            
|U.S. government sponsored agencies obligations |   | 4,990               |  | 2             
|State and municipal obligations                |   | 15,598              |  | 31            
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|Total temporarily impaired securities          | $ | 24,574              |  | 43            
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|                                               |   |                     |  |               

|The unrealized losses on the Company's investments were caused by market interest rate changes 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 par value. All investments rated by an independent rating agency carry an investment grade rating. 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, 2006.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|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. government sponsored agencies obligations | $ | 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           
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|                                               |   |                     |  |               
|                                               |   |                     |  |               

|35
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(3) Securities(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The aggregate cost of the Company's cost-method investments totaled $2.2 million and $2.0 million at December 31, 2006 and 2005, respectively, of which $1.7 million and $1.6 million, respectively, were in Federal Home Loan Bank stock and Federal Reserve Bank stock, required by law, and are not evaluated for impairment. The remaining $0.5 million and $0.4 million, respectively, 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.

|(4) Loans                                                                                
|-----------------------------------------------------------------------------------------
|                                                                                         
|The major classifications of loans at December 31, 2006, and 2005, follow (in thousands):

|                                        |   | 2006    |   |  | 2005    |  
|--------------------------------------- | - | ------- | - |  | ------- | -
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|Commercial, financial, and agricultural | $ | 188,518 |   |  | 167,750 |  
|Mortgages:                              |   |         |   |  |         |  
|Commercial                              |   | 323,478 |   |  | 311,652 |  
|Residential - first lien                |   | 106,749 |   |  | 65,238  |  
|Residential - junior lien               |   | 67,871  |   |  | 59,758  |  
|Consumer:                               |   |         |   |  |         |  
|Automobile - indirect                   |   | 136,040 |   |  | 142,141 |  
|Other                                   |   | 23,075  |   |  | 24,077  |  
|Other                                   |   | 187     |   |  | 277     |  
|Loans held for sale                     |   | 3,466   |   |  | 3,404   |  
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|Total loans                             |   | 849,384 |   |  | 774,297 |  
|Plus - Net deferred loan costs          |   | 4,313   |   |  | 4,542   |  
|Less - Allowance for loan losses        |   | (9,041  | ) |  | (7,986  | )
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|Loans - net                             | $ | 844,656 |   |  | 770,853 |  
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  

|                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Commercial loan participations sold to others amounted to $77,887,000 and $74,901,000 at December 31, 2006, and 2005, respectively.  Residential mortgage loans serviced for others, amounted to $297,652,000 and $313,694,000 at December 31, 2006, and 2005, 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, |  
|-------------------------------- | - | ------------------------ | -
|                                 |   |                          |  
|                                 |   |                          |  
|                                 |   | 2006                     |  
|                                 |   |                          |  
|                                 |   |                          |  
|Balance at the beginning of year | $ | 7,986                    |  
|Provision charged to operations  |   | 1,831                    |  
|Loans charged off                |   | (1,656                   | )
|Recoveries of loans charged off  |   | 880                      |  
|                                 |   |                          |  
|                                 |   |                          |  
|Balance at end of year           | $ | 9,041                    |  
|                                 |   |                          |  
|                                 |   |                          |  
|                                 |   |                          |  

|36
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                          
|-----------------------------------------------------------------------------------------------------------
|                                                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                
|                                                                                                           
|(4) Loans (continued)                                                                                      
|                                                                                                           
|A summary of information regarding nonaccruing loans and other nonperforming assets follows (in thousands):

|                                                         |   | 2006  |  | 2005  |  | 2004 
|-------------------------------------------------------- | - | ----- |  | ----- |  | -----
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      
|Accruing loans 90 days or more delinquent                | $ | 661   |  | 412   |  | 342  
|Nonaccruing loans                                        |   | 6,445 |  | 7,268 |  | 8,217
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      
|Total nonperforming loans                                |   | 7,106 |  | 7,680 |  | 8,559
|Other real estate owned                                  |   | 292   |  | 62    |  | -    
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      
|Total nonperforming assets                               | $ | 7,398 |  | 7,742 |  | 8,559
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      
|Reduction of interest income related to nonaccrual loans | $ | 536   |  | 752   |  | 700  
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      
|                                                         |   |       |  |       |  |      

|                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------
|At December 31, 2006, the Company had no firm commitments to lend additional funds to borrowers with loans in nonaccrual status.
|                                                                                                                                
|A summary of information regarding impaired loans follows (in thousands):                                                       

|                                                           |   | 2006  |  | 2005  |  | 2004 
|---------------------------------------------------------- | - | ----- |  | ----- |  | -----
|                                                           |   |       |  |       |  |      
|                                                           |   |       |  |       |  |      
|Recorded investment at December 31,                        | $ | 6,445 |  | 7,268 |  | 8,217
|Impaired loans with related allowance at December 31,      | $ | 194   |  | 555   |  | 2,047
|Amount of related allowance at December 31,                | $ | 194   |  | 225   |  | 226  
|Average investment for year ended December 31,             | $ | 6,713 |  | 9,503 |  | 8,873
|Interest income recognized on a cash basis during the year | $ | 63    |  | 53    |  | 52   
|                                                           |   |       |  |       |  |      

|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 $3,584,000 and $3,593,000 at December 31, 2006, and 2005, respectively. During 2006, new borrowings amounted to $257,000 (including borrowings of officers that were outstanding at the time of their election) and repayments and other reductions were $266,000.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(5) Premises and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|A summary of premises and equipment at December 31, 2006, and 2005, follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                               |   | 2006   |  | 2005  
|---------------------------------------------- | - | ------ |  | ------
|                                               |   |        |  |       
|Land and land improvements                     | $ | 1,437  |  | 1,418 
|Buildings and leasehold improvements           |   | 21,789 |  | 21,240
|Furniture, fixtures, equipment, and software   |   | 18,830 |  | 18,655
|                                               |   |        |  |       
|                                               |   |        |  |       
|                                               |   | 42,056 |  | 41,313
|Less accumulated depreciation and amortization |   | 27,731 |  | 26,411
|                                               |   |        |  |       
|                                               |   |        |  |       
|Premises and equipment - net                   | $ | 14,325 |  | 14,902
|                                               |   |        |  |       
|                                               |   |        |  |       
|                                               |   |        |  |       

|                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------
|Depreciation and amortization expense amounted to $2,355,000, $2,397,000, and $2,497,000, for the years ended December 31, 2006, 2005, and 2004, respectively.

|37
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
|                                                                           
|(6) Mortgage Servicing Assets                                              
|                                                                           
|Changes in mortgage servicing assets were as follows (in thousands):       

|                  | Year ended December 31, |      
|----------------- | ----------------------- | -----
|                  |                         |      
|                  |                         | 2006 
|                  |                         |      
|Beginning balance | $                       | 1,569
|Originations      |                         | 108  
|Amortization      |                         | (346 
|                  |                         |      
|                  |                         |      
|Ending balance    | $                       | 1,331
|                  |                         |      
|                  |                         |      
|                  |                         |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The estimated fair value of mortgage servicing rights was approximately $2,540,000 at December 31, 2006, and $2,420,000 at December 31, 2005. 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 are a willing buyer and willing seller in the transaction. Management does not intend the o sell these servicing rights. Amortization expense is estimated to be $353,000, $353,000, $313,000, $186,000, and $85,000 for the next five years.                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The key economic assumptions used to determine the fair value of mortgage servicing rights at December 31, 2006, 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                      |   | 200  | %
|------------------------------------------------------ | - | ---- | -
|Impact on fair value of 20% adverse change             | $ | (195 | )
|Impact on fair value of 20% positive change            |   | 251  |  
|                                                       |   |      |  
|Weighted-average current coupon for similar loans      |   | 5.53 | %
|Impact on fair value of 50 basis point adverse change  | $ | (140 | )
|Impact on fair value of 50 basis point positive change |   | 112  |  

|(7) Time Deposits                                                                           
|--------------------------------------------------------------------------------------------
|                                                                                            
|At December 31, 2006, the scheduled maturity of time deposits was as follows (in thousands):

|2007 | $ | 375,022
|---- | - | -------
|2008 |   | 44,945 
|2009 |   | 5,561  
|2010 |   | 18     
|     |   |        
|     |   |        
|     | $ | 425,546
|     |   |        
|     |   |        
|     |   |        

|                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Time deposits of $100,000 or more amounted to $246,161,000 at December 31, 2006, and $183,318,000 at December 31, 2005. Interest expense on all time deposits of $100,000 or more was as follows: $9,361,000 in 2006, $2,564,000 in 2005, and $1,004,000 in 2004.
|                                                                                                                                                                                                                                                                 

|(8) Borrowings                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                             
|There were no short-term borrowings outstanding at December 31, 2006, or 2005. The following table presents information about short-term borrowings during each of the three years ended December 31, (dollars in thousands):

|                                    |   | 2006  |   | 2005   |   | 2004 | 
|----------------------------------- | - | ----- | - | ------ | - | ---- | 
|                                    |   |       |   |        |   |      | 
|                                    |   |       |   |        |   |      | 
|Highest amount at a month end       | $ | 3,200 |   | 34,200 |   | None | 
|Daily average amount outstanding    | $ | 80    |   | 5,422  |   | None | 
|Weighted average interest rate paid |   | 5.27  | % | 3.51   | % | N/A  | 
|                                    |   |       |   |        |   |      | 

|38
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                           
|(8) Borrowings (continued)                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                           
|The following table presents information about the Company's formal available lines of credit and related loan collateral at December 31, 2006 (in thousands).  Amounts outstanding include borrowings, and undrawn letters of credit in the Company's favor of $3,129,000.
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Federal Home Loan Bank of New York                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                           
|Federal Reserve Bank of New York                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           

|Borrowings consisted of the following at December 31, 2006, and 2005 (in thousands):
|------------------------------------------------------------------------------------

|                   |   | 2006 |  | 2005
|------------------ | - | ---- |  | ----
|                   |   |      |  |     
|                   |   |      |  |     
|FHLB term Advances | $ | 721  |  | 754 
|Other              |   | 103  |  | 131 
|                   |   |      |  |     
|                   |   |      |  |     
|                   | $ | 824  |  | 885 
|                   |   |      |  |     
|                   |   |      |  |     
|                   |   |      |  |     

|                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, and in 2000 borrowed $262,000 at 6.5% to purchase a banking branch location.
|                                                                                                                                                                                                           
|Scheduled maturities of the Company's borrowings at December 31, 2006, follows (in thousands):                                                                                                             
|                                                                                                                                                                                                           

|               |   |        |  | Weighted Average |     
|-------------- | - | ------ |  | ---------------- | ----
|               |   | Amount |  | Interest Rate    |     
|               |   |        |  |                  |     
|2007           | $ | 36     |  |                  | 3.87
|2008           |   | 36     |  |                  | 3.87
|2009           |   | 36     |  |                  | 3.87
|2010           |   | 36     |  |                  | 3.87
|2011           |   | 637    |  |                  | 2.63
|2012 and after |   | 43     |  |                  | 6.50
|               |   |        |  |                  |     
|               |   |        |  |                  |     
|Total          | $ | 824    |  |                  | 3.05
|               |   |        |  |                  |     
|               |   |        |  |                  |     
|               |   |        |  |                  |     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 $100,000,000 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 15, 2006, the Company issued $30,928,000 of 30-year floating rate junior subordinated deferrable interest debentures (T2) through a wholly-owned business trust. The debentures carry an interest rate of 3-month LIBOR plus 1.40% (6.76% at December 31, 2006). Interest is payable quarterly. The debentures' final maturity is June 2036, and are callable, in whole or in part, at par after five years at the Company's option, and subject to Federal Reserve Bank of New York approval.Interest payments can be deferred for up to five years, but would restrict the Company's ability to pay dividends. At December 31, 2006, approximately $7.6 million of the debentures were considered Tier I capital of the Company, while the remainder was considered Tier II capital.  The proceeds were used for general corporate purposes, and will be used for the retirement of, subject to regulatory approval, the $20.6 million T1 (below) debentures in 2007.                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|On June 26, 2002, the Company issued $20,619,000 of 30-year floating rate junior subordinated deferrable interest debentures (T1) through a wholly-owned business trust. These debentures carry an interest rate of 3-month LIBOR plus 3.45% (8.82% at December 31, 2006) capped at 11.95% for the first five years. Interest is payable quarterly. The debentures' final maturity are June 2032, and are callable, in whole or in part, at par after five years at the Company's option, upon regulatory approval. Interest payments can be deferred for up to five years, but would restrict the Company's ability to pay dividends. At December 31, 2006, all of the debentures were considered Tier I capital of the Company. The Company incurred approximately $0.6 million of issuance costs, which were amortized on a ten-year basis until 2006, when the amortization was accelerated in contemplation of the Company calling the debentures in 2007. Amortization expense will be $145,000 in 2007.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|39                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                  
|-------------------------------------------------------------------------------------------------------------------
|                                                                                                                   
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                        
|                                                                                                                   
|(10) Income Taxes                                                                                                  
|                                                                                                                   
|Total income taxes for the years ended December 31, 2006, 2005, and 2004, were allocated as follows (in thousands):
|                                                                                                                   

|                                              |   | 2006  |   |  | 2005  |   |  | 2004  |  
|--------------------------------------------- | - | ----- | - |  | ----- | - |  | ----- | -
|                                              |   |       |   |  |       |   |  |       |  
|                                              |   |       |   |  |       |   |  |       |  
|Income from operations                        | $ | 4,244 |   |  | 4,258 |   |  | 3,913 |  
|Income tax benefit from stock option exercise |   | (349  | ) |  | (367  | ) |  | (343  | )
|Change in stockholders' equity for unrealized |   |       |   |  |       |   |  |       |  
|(loss) gain on securities available for sale  |   | 39    |   |  | (596  | ) |  | (248  | )
|                                              |   |       |   |  |       |   |  |       |  
|                                              |   |       |   |  |       |   |  |       |  
|                                              | $ | 3,934 |   |  | 3,295 |   |  | 3,322 |  
|                                              |   |       |   |  |       |   |  |       |  
|                                              |   |       |   |  |       |   |  |       |  
|                                              |   |       |   |  |       |   |  |       |  

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

|          |   | Years ended December 31, |  
|--------- | - | ------------------------ | -
|          |   |                          |  
|          |   |                          |  
|Current:  |   | 2006                     |  
|          |   |                          |  
|          |   |                          |  
|Federal   | $ | 4,387                    |  
|State     |   | 748                      |  
|          |   |                          |  
|          |   |                          |  
|          |   | 5,135                    |  
|          |   |                          |  
|          |   |                          |  
|Deferred: |   |                          |  
|Federal   |   | (723                     | )
|State     |   | (168                     | )
|          |   |                          |  
|          |   |                          |  
|          |   | (891                     | )
|          |   |                          |  
|          |   |                          |  
|          | $ | 4,244                    |  
|          |   |                          |  
|          |   |                          |  
|          |   |                          |  

|                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, |  
|----------------------------------------------------- | - | ------------------------ | -
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   | 2006                     |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|Tax expense at statutory rate of 34%                  | $ | 5,491                    |  
|Tax-exempt interest                                   |   | (1,784                   | )
|Interest expense disallowance                         |   | 231                      |  
|State taxes, net of Federal benefit                   |   | 383                      |  
|Change in valuation allowance for deferred tax assets |   | (2                       | )
|Change in rate                                        |   | -                        |  
|Other                                                 |   | (75                      | )
|                                                      |   |                          |  
|                                                      |   |                          |  
|Total                                                 | $ | 4,244                    |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|Effective tax rate                                    |   | 26.3%                    |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   |                          |  

|40
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                
|                                                                                                                                                                                           
|(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, 2006 and 2005, are presented below:
|                                                                                                                                                                                           

|Deferred tax assets                                  |   | 2006  |   |  | 2005  |  
|---------------------------------------------------- | - | ----- | - |  | ----- | -
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Allowance for loan losses - books                    | $ | 3,549 |   |  | 3,135 |  
|Incentive stock and retirement plans                 |   | 341   |   |  | 464   |  
|Stock options                                        |   | 35    |   |  | -     |  
|Loss carryforwards from subsidiaries                 |   | 177   |   |  | 119   |  
|Interest on nonaccrual loans                         |   | 727   |   |  | 776   |  
|Minority-owned entities                              |   | 134   |   |  | 52    |  
|Depreciation                                         |   | 231   |   |  | -     |  
|Net unrealized loss on available for sale securities |   | 612   |   |  | 651   |  
|Other                                                |   | 331   |   |  | 196   |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax assets before allowance                 |   | 6,137 |   |  | 5,393 |  
|Valuation allowance                                  |   | (88   | ) |  | (90   | )
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax assets                                  |   | 6,049 |   |  | 5,303 |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax liabilities:                            |   |       |   |  |       |  
|Allowance for loan losses - tax                      |   | 62    |   |  | 70    |  
|Depreciation                                         |   | -     |   |  | 10    |  
|Mortgage servicing rights                            |   | 522   |   |  | 616   |  
|Other                                                |   | 10    |   |  | 4     |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax liabilities                             |   | 594   |   |  | 700   |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Net deferred tax asset                               | $ | 5,455 |   |  | 4,603 |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  

|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, 2006, $28,761,000 was available for dividends to the Company without the approval of the OCC.                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(12) Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Basic earnings per share for the years ended December 31, 2006, 2005, and 2004, were computed as follows (dollars in thousands, except share data):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                             |   | 2006    |  | 2005    |  | 2004   
|-------------------------------------------- | - | ------- |  | ------- |  | -------
|                                             |   |         |  |         |  |        
|Basic Earnings Per Share                     |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|Net Income applicable to common shareholders | $ | 11,906  |  | 11,225  |  | 10,599 
|Weighted average common shares outstanding   |   | 478,392 |  | 479,961 |  | 478,776
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|Basic earnings per share                     | $ | 24.89   |  | 23.39   |  | 22.14  
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        

|41
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                    
|-----------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                     
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                          
|                                                                                                                                                     
|(12) Earnings Per Share (continued)                                                                                                                  
|                                                                                                                                                     
|Diluted earnings per share for the years ended December 31, 2006, 2005, and 2004, were computed as follows (dollars in thousands, except share data):
|                                                                                                                                                     

|                                              |   | 2006    |  | 2005    |  | 2004   
|--------------------------------------------- | - | ------- |  | ------- |  | -------
|                                              |   |         |  |         |  |        
|Diluted Earnings Per Share                    |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Net income applicable to common shareholders  | $ | 11,906  |  | 11,225  |  | 10,599 
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Weighted average common shares outstanding    |   | 478,392 |  | 479,961 |  | 478,776
|Effect of dilutive securities - stock options |   | 11,494  |  | 13,668  |  | 23,816 
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Total                                         |   | 489,886 |  | 493,629 |  | 502,592
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Diluted earnings per share                    | $ | 24.30   |  | 22.74   |  | 21.09  
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(13) Employee Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Retirement Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|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. Expenses of these plans amounted to $1,817,000, $1,740,000, and $1,415,000 for the years ended December 31, 2006, 2005, and 2004, 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 $129,000, $125,000, and $121,000 for the years ended December 31, 2006, 2005, and 2004, 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, 2006, and 2005, the plan held 6,637 and 6,558 shares with an estimated fair value, at the respective dates, of $2,258,000 and $2,363,000.                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(14) Stock-Based Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The Company has two stock-based compensation plans (Stock Option Plan and Incentive Stock Plan) for executives, which are described below.  Amounts recognized in the financial statements with respect to these plans are as follows (dollars in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Stock option plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Incentive stock plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Pre-tax cost of plans included in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|salaries and employee benefits expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Amount of related income tax benefit recognized in income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The Company's stock option plan authorized grants of options to purchase up to 48,000 shares of common stock.  All 48,000 options available were granted by year-end 2004. Future expenses associated with the unvested options will amount to approximately $100,000.  The options were granted with an exercise price equal to the market value of the common stock on the grant date based on the most recent public stock sale known to the Company immediately preceding the grant. The options are exercisable either five years from the date of grant or at the later of age 55 or 15 years of continuous employment with the Company or at normal retirement age (65).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|42                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                      
|                                                                                                 
|(14) Stock Based Compensation Plans (continued)                                                  
|                                                                                                 
|The following summarizes outstanding and exercisable options at December 31, 2006, 2005 and 2004:

|                                    | 2006   |   | 2005             |        | 2004
|----------------------------------- | ------ | - | ---------------- | ------ | ----
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|                                    |        |   | Weighted Average |        |     
|                                    | #      |   | Exercise Price   |        | #   
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|Options outstanding, January 1      | 40,687 |   | $                | 171.68 |     
|Granted                             | -      |   |                  | -      |     
|Exercised                           | (4,308 | ) |                  | 143.38 |     
|Expired                             | -      |   |                  | -      |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|Options outstanding, December 31    | 36,379 |   | $                | 175.04 |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|Options exercisable, December 31    | 26,275 |   | $                | 166.41 |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|Options available for future grants | none   |   |                  |        |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     
|                                    |        |   |                  |        |     

|                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The intrinsic value of the options exercised in 2006, shown in the table above, was $874,000.  At December 31, 2006, the intrinsic value of all outstanding options was approximately $6,008,000, while the intrinsic value of vested options included in this total was approximately $4,566,000.  The fair value of options vested during the year ended December 31, 2006, was $194,000.      
|                                                                                                                                                                                                                                                                                                                                                                                                 
|Options outstanding (both exercisable and unexercisable) at December 31, 2006, had exercise prices ranging from $120.17 to $293.85. The weighted average expected life of the options is eight 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 source of shares issued upon exercise has historically been, and is expected to be treasury shares.  From time to time, the Company expects to purchase shares for treasury to be used for these exercises.  The amount of shares, timing, and cost of these purchases cannot be determined, as the Company does not know when and in what quantity participants will exercise their options.

|The per-share fair value of stock options granted during 2004 was $67.50, and was determined using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |  | 2004      
|----------------------- |  |  | ----------
|                        |  |  |           
|                        |  |  |           
|Expected dividend yield |  |  | 2.03%     
|Risk-free interest rate |  |  | 4.27%     
|Expected life           |  |  | 10.6 years
|Volatility              |  |  | 13.95%    

|Incentive Stock Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|The Company has an incentive stock plan for executives which allows for the award of Phantom Stock Awards (PSA) and Stock Appreciation Rights (SAR) [awards] to key employees. The number of awards issued is based upon return on beginning equity in each period. PSA's and SAR's represent the right to receive payment in cash or stock 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 PSA's or SAR's grant price. PSA's are exercisable at the later of age 55 and 15 years of continuous employment with the Company or at normal retirement age (65). SAR's are exercisable five years from the date of grant or upon retirement. The following summarizes the activity of these awards as of and for the year ended December 31, 2006.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|43                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
|                                                                           
|(14) Stock Based Compensation Plans (continued)                            
|                                                                           



|                                        | PSA    |   | SAR
|--------------------------------------- | ------ | - | ---
|                                        |        |   |    
|                                        |        |   |    
|                                        | #      |   |    
|                                        |        |   |    
|                                        |        |   |    
|Awards outstanding, January 1, 2006     | 2,618  |   | $  
|Granted                                 | 1,801  |   | $  
|Exercised                               | (1,550 | ) | $  
|Expired                                 | -      |   |    
|                                        |        |   |    
|Awards outstanding at December 31, 2006 | 2,869  |   | $  
|                                        |        |   |    
|                                        |        |   |    
|                                        |        |   |    
|Awards exercisable at December 31, 2006 | 1,499  |   | $  
|                                        |        |   |    
|                                        |        |   |    
|                                        |        |   |    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In March 2006, certain executives were awarded a total of 1,801 Phantom Stock Awards (PSA) and 1,201 Stock Appreciation Rights (SAR), all at a grant price of $360.28 per share, the then current market value (based on the most recent public stock sale known to the Company immediately preceding the grant) of the Company's common stock. The total amount of cash used to settle the exercise of the awards during 2006 shown in the table above was $277,000 and is equivalent to their intrinsic value.  During the year ended December 31, 2006, 2,359 PSA's with a total intrinsic value of $231,000 were vested. Also during the period, 188 SAR's with a total intrinsic value of $45,000 were vested. The intrinsic value of vested awards is approximately $276,000 at December 31, 2006.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|The weighted average estimated per-award fair value, as of December 31, 2006, for PSA's was $107.98 and for SAR's was $105.09.  Fair value was estimated using the Black-Scholes-Merton option-pricing model with the following assumptions. No forfeitures are assumed, as none are anticipated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|Award Type              | PSA        |  | SAR       
|----------------------- | ---------- |  | ----------
|                        |            |  |           
|Per-award fair value    | $  107.98  |  | $  105.09 
|Expected dividend yield | 2.03%      |  | 2.03%     
|Risk-free interest rate | 4.70%      |  | 4.70%     
|Expected Life           | 8.37 years |  | 8.37 years
|Volatility              | 11.99%     |  | 11.99%    



|PSA's outstanding (both exercisable and unexercisable) at December 31, 2006, had exercise prices ranging from $0.00 to $360.28. SAR's outstanding (both exercisable and unexercisable) at December 31, 2006, had exercise prices ranging from $111.94 to $360.28. The weighted average expected life of these awards is eight years. Since these awards have no stated expiration date, the expected life is calculated as the number of years from grant date to the grantee's 60th birthday, which is the historical life for similar past awards.  Based upon current assumptions, the estimated compensation cost related to non-vested awards not yet recognized is $521,000, which is expected to be recognized over a weighted average period of six years. The Company had accrued a liability of $509,000 at December 31, 2006, representing the accumulated fair-value vested obligation of these awards under the plan.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) Leases                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                        
|The Company leases certain buildings and office space under operating lease arrangements. Rent expense under these arrangements amounted to $1,289,000 in 2006, $1,252,000 in 2005, and $1,250,000 in 2004. 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, 2006, follows (in thousands):                                                                                                                                                                                                                                                     



|Years ending December 31, |  |   | Amount
|------------------------- |  | - | ------
|                          |  |   |       
|                          |  |   |       
|2007                      |  | $ | 1,205 
|2008                      |  |   | 1,129 
|2009                      |  |   | 983   
|2010                      |  |   | 689   
|2011                      |  |   | 363   
|2012 and after            |  |   | 4,345 
|                          |  |   |       
|                          |  |   |       
|Total                     |  | $ | 8,714 
|                          |  |   |       
|                          |  |   |       
|                          |  |   |       

|44
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
|                                                                           
|(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, | 
|---------------------------------------- | - | ----------------------- | 
|                                         |   |                         | 
|                                         |   |                         | 
|                                         |   | 2006                    | 
|                                         |   |                         | 
|                                         |   | Notional                | 
|                                         |   | Amount                  | 
|                                         |   |                         | 
|Commitments to extend credit:            |   |                         | 
|Commercial lines of credit               | $ | 95,575                  | 
|Commercial real estate and construction  | $ | 34,932                  | 
|Residential real estate at fixed rates   | $ | 2,500                   | 
|Home equity lines of credit              | $ | 52,244                  | 
|Unsecured personal lines of credit       | $ | 15,810                  | 
|Standby and commercial letters of credit | $ | 11,635                  | 
|Commitments to sell real estate loans    | $ | 3,466                   | 
|                                         |   |                         | 



|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 an underlying contract with a 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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 job growth in the company's market area.  At December 31, 2006, the Company had funded $233,000 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, 2006, was approximately $2,800,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|45                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(17) Regulatory Matters (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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, 2006, that the Company and Bank met all capital adequacy requirements to which they are subject.                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|As of December 31, 2006, and as of the most recent notification from their 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. Subsequently, there have been no conditions or events which management believes has changed the Company's or Bank's category.

|                                        |   |                          
|--------------------------------------- | - | -------------------------
|                                        |   | December 31, 2006        
|                                        |   |                          
|(Dollars in thousands)                  |   | Actual Regulatory Capital
|                                        |   |                          
|                                        |   | Amount                   
|                                        |   |                          
|                                        |   |                          
|Leverage capital (Tier 1) as percent of |   |                          
|three-month average assets:             |   |                          
|Company                                 | $ | 111,216                  
|Bank                                    | $ | 96,152                   
|As percent of risk-weighted,            |   |                          
|period-end assets                       |   |                          
|Core capital (Tier 1)                   |   |                          
|Company                                 | $ | 111,216                  
|Bank                                    | $ | 96,152                   
|Total capital (Tiers 1 and 2)           |   |                          
|Company                                 | $ | 143,478                  
|Bank                                    | $ | 105,193                  
|                                        |   |                          
|                                        |   |                          

|                                        |   |                          
|--------------------------------------- | - | -------------------------
|                                        |   | 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                   
|                                        |   |                          

##### 

|(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. CNB Mortgage 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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|46                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(18) Segment Information (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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 CNB Mortgage is subject to stand-alone external financial reporting. The reportable segment information as of and for the years ended December 31, 2006, 2005, and 2004 follows (dollars in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                          |   |           | 
|------------------------- | - | --------- | 
|                          |   | 2006      | 
|                          |   |           | 
|                          |   |           | 
|                          |   | Bank      | 
|                          |   |           | 
|Net interest income       | $ | 40,564    | 
|Non-interest income       |   | 13,393    | 
|                          |   |           | 
|                          |   |           | 
|Total revenues            |   | 53,957    | 
|                          |   |           | 
|                          |   |           | 
|Provision for loan losses |   | 1,831     | 
|Operating expenses        |   | 34,567    | 
|                          |   |           | 
|                          |   |           | 
|Total expenses            |   | 36,398    | 
|                          |   |           | 
|                          |   |           | 
|Income before tax         |   | 17,559    | 
|Income tax                |   | 4,244     | 
|                          |   |           | 
|                          |   |           | 
|Net income                | $ | 13,315    | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|Total identifiable assets | $ | 1,205,665 | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   | 2005      | 
|                          |   |           | 
|                          |   |           | 
|                          |   | Bank      | 
|                          |   |           | 
|Net interest income       | $ | 39,358    | 
|Non-interest income       |   | 11,415    | 
|                          |   |           | 
|                          |   |           | 
|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       | $ | 36,210    | 
|Non-interest income       |   | 11,683    | 
|                          |   |           | 
|                          |   |           | 
|Total revenues            |   | 47,893    | 
|                          |   |           | 
|                          |   |           | 
|Provision for loan losses |   | 1,680     | 
|Operating expenses        |   | 31,386    | 
|                          |   |           | 
|                          |   |           | 
|Total expenses            |   | 33,066    | 
|                          |   |           | 
|                          |   |           | 
|Income before tax         |   | 14,827    | 
|Income tax                |   | 3,913     | 
|                          |   |           | 
|                          |   |           | 
|Net income                | $ | 10,914    | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|Total identifiable assets | $ | 974,566   | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 

|47
|--

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                               
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                    
|                                                                                                                                                               
|(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, | 
|                                           |   |              | 
|                                           |   |              |  |  |        | 
|                                           |   | 2006         |  |  | 2005   | 
|                                           |   |              |  |  |        | 
|Assets:                                    |   |              |  |  |        | 
|Cash in subsidiary bank                    | $ | 16,990       |  |  | 230    | 
|Securities available for sale              |   | 16,674       |  |  | 8,636  | 
|Investment in Bank                         |   | 96,673       |  |  | 84,727 | 
|Investment in nonbank subsidiaries         |   | 3,470        |  |  | 2,278  | 
|Other assets                               |   | 1,284        |  |  | 918    | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Total assets                               | $ | 135,091      |  |  | 96,789 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Liabilities:                               |   |              |  |  |        | 
|Junior subordinated debentures             | $ | 51,402       |  |  | 20,222 | 
|Other liabilities                          |   | 130          |  |  | 28     | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Total liabilities                          |   | 51,532       |  |  | 20,250 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Stockholders' Equity                       |   | 83,559       |  |  | 76,539 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Total liabilities and stockholders' equity | $ | 135,091      |  |  | 96,789 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 

|Statements of Income                                      |   |                          |   |  |        |   |  |        |  
|--------------------------------------------------------- | - | ------------------------ | - |  | ------ | - |  | ------ | -
|                                                          |   | Years ended December 31, |  
|                                                          |   |                          |  
|                                                          |   |                          |   |  |        |   |  |        |  
|                                                          |   | 2006                     |   |  | 2005   |   |  | 2004   |  
|                                                          |   |                          |   |  |        |   |  |        |  
|                                                          |   |                          |   |  |        |   |  |        |  
|Dividends from Bank                                       | $ | 2,200                    |   |  | 2,560  |   |  | 2,400  |  
|Dividends from nonbank subsidiaries                       |   | -                        |   |  | -      |   |  | 500    |  
|Other income                                              |   | 980,                     |   |  | 442    |   |  | 425    |  
|Interest and other expenses                               |   | (3,246                   | ) |  | (1,505 | ) |  | (1,160 | )
|                                                          |   |                          |   |  |        |   |  |        |  
|                                                          |   |                          |   |  |        |   |  |        |  
|(Loss) income before undistributed income of subsidiaries |   | (66                      | ) |  | 1,497  |   |  | 2,165  |  
|Undistributed current year income of subsidiaries         |   | 11,797                   |   |  | 9,501  |   |  | 8,192  |  
|                                                          |   |                          |   |  |        |   |  |        |  
|                                                          |   |                          |   |  |        |   |  |        |  
|Income before taxes                                       |   | 11,731                   |   |  | 10,998 |   |  | 10,357 |  
|Income tax benefit                                        |   | 175                      |   |  | 227    |   |  | 242    |  
|                                                          |   |                          |   |  |        |   |  |        |  
|                                                          |   |                          |   |  |        |   |  |        |  
|Net income                                                | $ | 11,906                   |   |  | 11,225 |   |  | 10,599 |  
|                                                          |   |                          |   |  |        |   |  |        |  
|                                                          |   |                          |   |  |        |   |  |        |  
|                                                          |   |                          |   |  |        |   |  |        |  

##### 

|  
|--
|48

##### 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
|                                                                           
|(19) Condensed Financial Information - Parent Company Only(continued)      

|Statements of Cash Flow                                            |   |                          |   |  |        |   |  |        |  
|------------------------------------------------------------------ | - | ------------------------ | - |  | ------ | - |  | ------ | -
|                                                                   |   | Years ended December 31, |  
|                                                                   |   |                          |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   | 2006                     |   |  | 2005   |   |  | 2004   |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Cash flows from operating activities                               |   |                          |   |  |        |   |  |        |  
|Net income                                                         | $ | 11,906                   |   |  | 11,225 |   |  | 10,599 |  
|Adjustments to reconcile net income to net cash                    |   |                          |   |  |        |   |  |        |  
|from operating activities:                                         |   |                          |   |  |        |   |  |        |  
|Depreciation, amortization and accretion                           |   | 259                      |   |  | 76     |   |  | 81     |  
|Undistributed current year earnings of subsidiaries                |   | (11,797                  | ) |  | (9,501 | ) |  | (8,192 | )
|Other                                                              |   | (552                     | ) |  | 108    |   |  | (276   | )
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Net cash (used in) provided by operating activities                |   | (184                     | ) |  | 1,908  |   |  | 2,212  |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Cash flows from investing activities:                              |   |                          |   |  |        |   |  |        |  
|Purchase of securities available for sale                          |   | (9,978                   | ) |  | (1,484 | ) |  | (999   | )
|Proceeds from maturities and call of securities available for sale |   | 2,101                    |   |  | -      |   |  | 2,544  |  
|Purchases of other investments                                     |   | (1,064                   | ) |  | -      |   |  | -      |  
|Fixed assets purchased, net                                        |   | (1                       | ) |  | -      |   |  | (1     | )
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Net cash (used in) provided by investing activities                |   | (8,942                   | ) |  | (1,484 | ) |  | 1,544  |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Cash flows from financing activities:                              |   |                          |   |  |        |   |  |        |  
|Proceeds from junior subordinated debenture                        |   | 30,928                   |   |  | -      |   |  | -      |  
|(Payments for) proceeds from treasury stock transactions, net      |   | (2,040                   | ) |  | (1,386 | ) |  | 553    |  
|Tax benefit from stock option exercise                             |   | 349                      |   |  | -      |   |  | -      |  
|Dividends paid                                                     |   | (3,351                   | ) |  | (2,905 | ) |  | (2,531 | )
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Net cash provided by (used in) financing activities                |   | 25,886                   |   |  | (4,291 | ) |  | (1,978 | )
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Net increase (decrease) in cash                                    |   | 16,760                   |   |  | (3,867 | ) |  | 1,778  |  
|Cash at beginning of year                                          |   | 230                      |   |  | 4,097  |   |  | 2,319  |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|Cash at end of year                                                | $ | 16,990                   |   |  | 230    |   |  | 4,097  |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   |                          |   |  |        |   |  |        |  
|                                                                   |   |                          |   |  |        |   |  |        |  

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|(20) Fair Values of Financial Instruments                                                                                                                                                                                                                                                                                                      
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|The following methods and assumptions were used to estimate the fair value of each class of financial instrument:                                                                                                                                                                                                                              
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|Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                               
|For these short-term instruments that generally mature 90 days or less, the carrying value approximates fair value.                                                                                                                                                                                                                            
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|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.                                                                                       
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|The fair value of performing loans is calculated by discounting scheduled cash flows through the loans' estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan category. The estimate of maturity is based on the average maturity for each loan classification.         
|                                                                                                                                                                                                                                                                                                                                               
|Delinquent loans (not in foreclosure) are valued using the method noted above. 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.                                 
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#### 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                          
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|Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004                                                                                                                                                                                                                                                                
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|(20) Fair Values of Financial Instruments(continued)                                                                                                                                                                                                                                                                                       
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|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 borrowings' 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 face amount.                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                           
|The estimated fair values of the Company's financial instruments are as follows (dollars in thousands):                                                                                                                                                                                                                                    
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|                                  |   | December 31, 2006 |  | December 31, 2005
|--------------------------------- | - | ----------------- |  | -----------------
|                                  |   |                   |  |                  
|                                  |   |                   |  |                  
|                                  |   | Carrying          |  | Fair             
|                                  |   | Amount            |  | Value(1)         
|                                  |   |                   |  |                  
|Financial Assets:                 |   |                   |  |                  
|Cash and equivalents              | $ | 73,340            |  | 73,340           
|Securities                        | $ | 252,824           |  | 252,487          
|Loans-net                         | $ | 844,656           |  | 839,836          
|Mortgage servicing rights         | $ | 1,331             |  | 2,540            
|                                  |   |                   |  |                  
|Financial Liabilities:            |   |                   |  |                  
|Deposits:                         |   |                   |  |                  
|Demand accounts, savings and      |   |                   |  |                  
|money market accounts             | $ | 633,802           |  | 633,802          
|Time deposits                     | $ | 425,546           |  | 423,967          
|Borrowings                        | $ | 824               |  | 693              
|Junior subordinated debentures    | $ | 51,402            |  | 51,547           
|                                  |   |                   |  |                  
|Off-balance-sheet commitments(2): |   |                   |  |                  
|Letters of credit                 | $ | 175               |  | 175              
|Unused lines of credit            | $ | -                 |  | -                
|Commitments to originate loans    | $ | 3                 |  | 3                
|                                  |   |                   |  |                  

|(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.
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|(2)Fair value of off balance-sheet commitments approximates the fee charged to make the commitments.                                                                                                                                                                                                                                                                           
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