Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicated by check mark whether the registrant is an accelerated filer (as defined in Exchange Rule 12b-2).

Based upon the closing price of the registrant's Common Stock as of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was $62,673,327.

As of February 29, 2004 there were 3,725,692 shares of Common Stock, $0.01 par value outstanding.

Portions of the Proxy Statement for the Annual Shareholders meeting to be held on May 20, 2004 are incorporated by reference into Part III, Items 10, 11, 12 and 13 of this 10-K.

Some of the information contained in this report concerning the markets and industry in which we operate is derived from publicly available information and from industry sources. Although we believe that this publicly available information and information provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.

Chemung Financial Corporation has been a financial holding company since June 22, 2000. This provides the Corporation with the flexibility to offer an array of financial services, such as insurance products, mutual funds, and brokerage services. The Corporation believes that this allows us to better serve the needs of our clients as well as provide an additional source of fee based income. To that end, the Corporation established a financial services subsidiary, CFS Group, Inc., which commenced operations during September 2001. As such, Chemung Financial Corporation now operates as a financial holding company with two subsidiaries, Chemung Canal Trust Company, a full-service community bank with full trust powers, and CFS Group, Inc., a subsidiary offering non-traditional financial services such as mutual funds, annuities, brokerage services and insurance.

Chemung Financial Corporation's Annual Report on Form 10-K, quarter end reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act and filed with the Securities and Exchange Commission ("SEC") are available without charge through the Internet, at our website: www.chemungcanal.com. A hyperlink to the SEC archives for the Corporation, is located within the Shareholder Info section of our website, under Company Information. These same reports are also available free of charge by written request to: Jane H. Adamy, Vice President and Secretary, Chemung Canal Trust Company, One Chemung Canal Plaza, Elmira, NY 14901.

The Bank is a New York State chartered, independent commercial bank, which engages in full-service commercial and consumer banking and trust business. The Bank's services include accepting time, demand and savings deposits including NOW accounts, Super NOW accounts, regular savings accounts, insured money market accounts, investment certificates, fixed-rate certificates of deposit and club accounts. Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions either directly or participating with regional industrial development and community lending corporations, making commercial, residential and home equity mortgage loans, revolving credit loans with overdraft checking protection, small business loans and student loans. Additional services include renting safe deposit facilities, selling uninsured annuity and mutual fund investment products, and the use of networked automated teller facilities.

Trust services provided by the Bank include services as executor, trustee under wills and agreements, guardian and custodian and trustee and agent for pension, profit-sharing and other employee benefit trusts as well as various investment, pension, estate planning and employee benefit administrative services.

CFS Group, Inc. commenced operations in September 2001 and offers an array of financial services including mutual funds, full and discount brokerage services, annuity and other insurance products.

For additional information, which focuses on the results of operations of the Corporation and its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.

There have been no material changes in the manner of doing business by the Corporation or its subsidiaries during the fiscal year ended December 31, 2003.

Six of the Bank's 13 full-service branches, in addition to the main office, are located in Chemung County. The other seven 7 full-service branches are located in the adjacent counties of Schuyler, Steuben, and Tioga. All facilities are located in New York State. The Corporation defines its market areas as those areas within a 25-mile radius of its branches in Chemung, Steuben, Schuyler, and Tioga counties, including the northern tier of Pennsylvania. The Corporation's lending policy restricts substantially all lending efforts to these geographical regions.

Within these market areas, the Bank encounters intense competition in the lending and deposit gathering aspects of its business from commercial and thrift banking institutions, credit unions and other providers of financial services, such as brokerage firms, investment companies, insurance companies and Internet vendors. The Corporation also competes with non-financial institutions, including retail stores and certain utilities that maintain their own credit programs, as well as governmental agencies that make available loans to certain borrowers. Unlike the Corporation, many of these competitors are not subject to regulation as extensive as that of the Corporation and, as a result, they may have a competitive advantage over the Corporation in certain respects. This is particularly true of credit unions, as their pricing structure is not encumbered by income taxes.

Competition for the Corporation's fiduciary services comes primarily from brokerage firms and independent investment advisors. This is considered to be significant competition, as these firms devote much of their considerable resources toward gaining larger positions in these markets. The market value of trust assets under administration totaled $1.3 billion at year-end 2003. Relative to the Corporation's consolidated assets, the Trust and Investment Division is unusually large and is responsible for the largest component of non-interest revenue.

The Bank is chartered under the laws of New York State and is supervised by the New York State Banking Department ("NYSBD"). The Bank also is a member bank of the Federal Reserve System and, as such, the Federal Reserve Board serves as its primary federal regulator.

CFS Group, Inc. is subject to supervision by other regulatory authorities as determined by the activities in which it is engaged. Insurance activities are supervised by the New York State Insurance Department, and brokerage activities are subject to supervision by the SEC and the National Association of Securities Dealers, Inc. ("NASD").

The Corporation is subject to capital adequacy guidelines of the Federal Reserve Board. The guidelines apply on a consolidated basis and require bank holding companies to maintain a minimum ratio of Tier 1 capital to total average assets (or "leverage ratio") of 4%. For the most highly rated bank holding companies, the minimum ratio is 3%. The Federal Reserve Board capital adequacy guidelines also require bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of 8%. As of December 31, 2003, the Corporation's leverage ratio was 9.62%, its ratio of Tier 1 capital to risk-weighted assets was 15.70% and its ratio of qualifying total capital to risk-weighted assets was 17.61%. The Federal Reserve Board may set higher minimum capital requirements for bank holding companies whose circumstances warrant it, such as companies anticipating significant growth or facing unusual risks. The Federal Rese rve Board has not advised the Corporation that any special capital requirements applicable would apply.

Any bank holding company whose capital does not meet the minimum capital adequacy guidelines is considered to be undercapitalized, and is required to submit an acceptable plan to the Federal Reserve Board for achieving capital adequacy, and the company's ability to pay dividends to its shareholders and expand its lines of business through the acquisition of new banking or non-banking subsidiaries also could be restricted.

The Bank is subject to leverage and risk-based capital requirements and minimum capital guidelines of the Federal Reserve Board that are similar to those applicable to the Corporation. As of December 31, 2003, the Bank was in compliance with all minimum capital requirements. The Bank's leverage ratio was 9.18%, its ratio of Tier 1 capital to risk-weighted assets was 15.02%, and its ratio of qualifying total capital to risk-weighted assets was 16.92%.

The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Corporation. Under Federal Reserve Board and NYSBD regulations, the Bank may not pay a dividend, without prior approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceed the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. As of December 31, 2003, approximately $4.3 million was available for the payment of dividends by the Bank to the Corporation without prior approval, after giving effect to the payment of dividends in the fourth quarter of 2003. The Bank's ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements.

The deposits of the Bank are insured up to regulatory limits by the Federal Deposit Insurance Corporation ("FDIC") and are subject to deposit insurance assessments to maintain the Bank Insurance Fund ("BIF") of the FDIC. In light of the prevailing favorable financial situation of federal deposit insurance funds and the low number of depository institution failures, since January 1, 1997, banks classified in the highest capital and supervisory evaluation categories have not been required to pay any annual insurance premiums on bank deposits insured by the BIF. BIF assessment rates are subject to semi-annual adjustment by the FDIC within a range of up to five basis points without public comment. Recent increases in the amount of deposits subject to BIF and FDIC insurance protection, increases in the number of bank failures, and lower interest rate returns on the assets held in the BIF have increased the likelihood that the annual insurance premiums on bank deposits insured by the BIF will increase in the se cond half of 2004 or thereafter. The FDIC also possesses authority to impose special assessments from time to time.

The Federal Deposit Insurance Act provides for additional assessments to be imposed on insured depository institutions to pay for the cost of Financing Corporation ("FICO") funding. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC insurance funds and do not vary depending upon a depository institution's capitalization or supervisory evaluation. During 2003, FDIC assessments for purposes of funding FICO bond obligations ranged from an annualized $0.017 per $100 of deposits for the first quarter of 2003 to $0.0152 per $100 of deposits for the fourth quarter of 2003. The Bank paid $87,690 of FICO assessments in 2003. For the first quarter of 2004, the FICO assessment rate is $0.0154 per $100 of deposits.

Transactions between the Bank, and either the Corporation or CFS Group, Inc., are governed by sections 23A and 23B of the Federal Reserve Act. Generally, sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates, by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms that are consistent with safe and sound banking practices.

On October 31, 2002, the Federal Reserve Board adopted a new regulation, Regulation W, effective April 1, 2003, that implements sections 23A and 23B of the Federal Reserve Act. The regulation unifies and updates staff interpretations issued over the years, incorporates several new interpretative proposals (such as to clarify when transactions with an unrelated third party will be attributed to an affiliate), and addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in by banks and bank holding companies in recent years and authorized for financial holding companies under the Gramm-Leach-Bliley Act ("GLB Act").

Under the GLB Act, all financial institutions, including the Corporation, the Bank and CFS Group, Inc. are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer's request, and establish procedures and practices to protect customer data from unauthorized access.

Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial Institution, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the GLB Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the finan cial institution under the Bank Merger Act, which applies to the Bank, or the BHC Act, which applies to the Corporation.

As of December 31, 2003, the Corporation and its subsidiaries employed 286 persons on a full-time equivalent basis as compared to 311 at December 31, 2002 and 315 at December 31, 2001. The reduction in FTE's during 2003 reflects management's efforts to reduce operating costs and gain greater efficiency of operations. This reduction was accomplished primarily through attrition, and the Corporation expects further reductions in staffing levels during 2004. None of the Corporation's employees are covered by collective bargaining agreements, and the Corporation believes that its relationship with its employees is good.

Financial Information About Foreign and Domestic Operations and Export Sales

Neither the Corporation nor its subsidiaries relies on foreign sources of funds or income.

The following disclosures present certain summarized statistical data covering the Corporation and its subsidiaries. See also Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, of this report for other required statistical data.

The following table sets forth the carrying amount of investment securities at the dates indicated (in thousands of dollars):

Included in the above table are $282,920, $257,154 and $239,137 (in thousands of dollars) of securities available for sale at December 31, 2003, 2002 and 2001, respectively.

The following table sets forth the carrying amounts and maturities of debt securities at December 31, 2003 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security). Federal tax equivalent adjustments have been made in calculating yields on municipal obligations (in thousands of dollars):

The following table shows the maturity of loans (excluding residential mortgages and consumer loans) outstanding as of December 31, 2003. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates (in thousands of dollars)

Allocation of the Allowance for Loan Losses

The allocated portions of the allowance reflect management's estimates of specific known risk elements in the respective portfolios. Among the factors considered in allocating portions of the allowance by loan type are the current levels of past due, non-accrual and impaired loans. The unallocated portion of the allowance represents risk elements in the loan portfolio that have not been specifically identified. Factors considered in determining the appropriate level of unallocated allowance include historical loan loss history, current economic conditions, and loan growth. The following table summarizes the Corporation's allocation of the loan loss allowance for each year in the five-year period ended December 31, 2003:

The above allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.

The average daily amounts of deposits and rates paid on such deposits is summarized for the periods indicated in the following table (in thousands of dollars):

Scheduled maturities of time deposits at December 31, 2003 are summarized as follows (in thousands of dollars):

Maturities of time deposits in denominations of $100,000 or more outstanding at December 31, 2003 are summarized as follows (in thousands of dollars):

Information regarding securities sold under agreements to repurchase and FHLB advances is included in notes 8 and 9 to the consolidated financial statements appearing elsewhere in this report.

The Corporation and the Bank currently conduct all their business activities from the Bank's main office in Elmira, NY, 13 branch locations situated in a four-county area, owned office space adjacent to the Bank's main office in Elmira, NY, and ten off-site automated teller facilities (ATMs), three of which are located on leased property. The main office is a six-story structure located at One Chemung Canal Plaza, Elmira, New York, in the downtown business district. The main office consists of approximately 60,000 square feet of space, of which 745 square feet is occupied by the Corporation's subsidiary CFS Group, with the remaining 59,255 square feet entirely occupied by the Bank. The combined square footage of the 13 branch banking facilities totals approximately 65,000 square feet. The office building adjacent to the main office was acquired during 1995 and consists of approximately 33,186 square feet of which 30,766 square feet are occupied by operating departments of the Bank and 2,420 square feet ar e leased. The leased automated teller facility spaces total approximately 150 square feet.

The Bank holds one (1) of its branch facilities (Bath Office), three (3) automated teller facilities (Elmira/Corning Regional Airport, Elmira College and WalMart Store) and an office facility in Binghamton for Trust and Investment business activity under lease arrangements; and owns the rest of its offices including the main office and the adjacent office building.

The Corporation holds no real estate in its own name.

Neither the Corporation nor its subsidiaries are a party to any material pending legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

There were no matters submitted to a vote of shareholders during the fourth quarter of 2003.

The Corporation's stock is traded in the over-the-counter market under the symbol CHMG.OB.

Below are the quarterly market price ranges for the Corporation's stock for the past three years, based upon actual transactions as reported by securities brokerage firms which maintain a market or conduct trades in the Corporation's stock and other transactions known by the Corporation's management.

Market Prices During Past Three Years (dollars)

Below are the dividends paid quarterly by the Corporation for each share of the Corporation's common stock over the last three years:

As of February 29, 2004 there were 658 registered holders of record of the Corporation's stock.

The following table presents selected financial data as of December 31, 1999, 2000, 2001, 2002 and 2003. The selected financial data is derived from our audited consolidated financial statements appearing elsewhere in this report.

The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes thereto appearing elsewhere in this report.

Chemung Financial Corporation, through its wholly owned subsidiaries, Chemung Canal Trust Company (the "Bank") and CFS Group, Inc. (a financial services company), provides a wide range of banking, financing, fiduciary and other financial services within its local market areas.

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the level of the allowance required to cover probable credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions, the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a sign ificant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses.

Management of Credit Risk - Loan Portfolio

The Corporation manages credit risk, while conforming to state and federal laws governing the making of loans, through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.

The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the president, two executive vice presidents, credit services division manager, commercial loan manager, consumer loan manager, mortgage loan manager and credit manager, implements the Board-approved loan policy.

The Corporation is subject to intense competition throughout the southern tier of New York State and the northern tier of Pennsylvania in the lending and deposit gathering aspects of its business from commercial and thrift banking institutions, credit unions and other providers of financial services, such as brokerage firms, investment companies, insurance companies and Internet vendors. The Corporation also competes with non-financial institutions, including retail stores and certain utilities that maintain their own credit programs, as well as governmental agencies that make available loans to certain borrowers. Unlike the Corporation, many of these competitors are not subject to regulation as extensive as that of the Corporation and, as a result, they may have a competitive advantage over the Corporation in certain respects. This is particularly true of credit unions, as their pricing structure is not encumbered by income taxes.

Competition for the Corporation's fiduciary services comes primarily from brokerage firms and independent investment advisors. This is considered to be significant competition, as these firms devote much of their considerable resources toward gaining larger positions in these markets. The market value of trust assets under administration totaled $1.3 billion at year-end 2003. Relative to the Corporation's consolidated assets, the Trust and Investment Division is unusually large and is responsible for the largest component of non-interest revenue.

During 2003, total assets decreased by $4.0 million, or 0.5%, to $747.2 million as compared to $751.2 million as of year-end 2002. Total loans, net of unearned income and deferred fees and costs, were down $41.9 million or 9.7% to $390.4 million. The Corporation believes that this decrease was impacted by weakness in the local economy which was reflected in lower commercial loan volumes, with commercial loans (including commercial mortgages) decreasing $22.0 million or 11.1%. Despite mortgage originations totaling $33.3 million during 2003 as compared to $20.3 million during 2002, the residential mortgage portfolio decreased $13.5 million or 13.4%, impacted primarily by the low interest rate environment. In this environment, we not only experienced an increase in mortgage refinancing, but also became much more active in selling mortgages in the secondary mortgage market as opposed to retaining the interest rate risk inherent in this rate environment. During 2003, we sold approxima tely $15.8 million in mortgages to Freddie Mac. Consumer installment loans decreased $5.5 million or 7.9%. This decline is primarily due to a decrease in indirect auto loans outstanding, impacted to a great extent by an extremely competitive pricing environment, including captive automobile financing companies. The decrease in net loans was also impacted by a decrease in student loans of $2.5 million. During the second quarter of 2003, we sold our entire student loan portfolio to Sallie Mae due to the fact that Sallie Mae no longer offered the option of the Corporation owning and servicing these loans until they enter repayment status. Therefore, we converted our student loan program to a new third party processor, which allows us to hold and service these loans as in the past. We would expect the outstanding balance in this portfolio to build back up to the previous level of $4.0-$4.5 million over the next year. The decreases noted above were somewhat offset by a $1.5 million or 2.8% increase in home equity loans as the volume in this portfolio was positively impacted by the rate environment and the increased level of refinancing.

The available for sale segment of the securities portfolio totaled $282.9 million at December 31, 2003 as compared to $257.2 million at the end of 2002, an increase of $25.7 million or 10.0%. At amortized cost, the available for sale portfolio was up $28.9 million since year-end 2002. This increase reflects increased investments primarily in federal agency bonds and mortgage-backed securities, most notably during the second half of 2003, following a steepening of the yield curve in mid-June. Despite the increased investment in mortgage-backed securities, this segment of the portfolio decreased during 2003 due to the high level of paydowns associated with increased mortgage refinancing activity. Unrealized appreciation related to the available for sale portfolio decreased $3.1 million, reflective of the impact on the bond portfolio of an increase in mid to long term rates since the end of 2002. The held to maturity segment of the portfolio, consisting primarily of local municipal obligations, totaled $13 .1 million at amortized cost as of December 31, 2003, an increase of $5.2 million since year-end 2002.

Total cash and cash equivalents at year-end 2003 were up $9.0 million due to a $12.9 million increase in federal funds sold and interest bearing deposits, offset to some extent by a $3.9 million decrease in cash and due from banks. The increase in federal funds sold and interest-bearing deposits is reflective primarily of the fact that cash flows from the decrease in net loans as well as an increase in deposits, exceeded the total increase in the securities portfolio. The decrease in cash and due from banks resulted primarily from a lower volume of fed items in transit on December 31, 2003 as compared to year-end 2002.

Total deposits increased $9.3 million or 1.7% from $541.8 million at December 31, 2002 to $551.1 million at December 31, 2003. Period-end public funds deposit balances (primarily local municipal deposits) increased $11.8 million. Other personal and non-personal period-end balances decreased $2.5 million, impacted to a great extent by lower time deposit balances (including IRA accounts), which were down $17.4 million. This decrease can be explained by the fact that with loan volume decreasing during 2003, the Corporation was not aggressive in the pricing of these deposits. Additionally, period-end personal and non-personal Now and insured money market accounts were down $1.6 million and $2.3 million, respectively. These decreases were somewhat offset primarily by increases in other personal and non-personal demand deposit and savings balances of $12.0 million and $6.4 million, respectively. The $15.8 million decrease in Federal Home Loan Bank advances reflects the repayment of overnight advances outstan ding on December 31, 2002 under the Corporation's line of credit.

The $1.9 million increase in other liabilities is due to an increase in accounts payable for pending investments. During December of 2003, the Corporation committed to the purchase of a $2.0 million municipal bond. While this bond does not settle until January of 2004, it is reflected in our December 31, 2003 securities portfolio balance, offset by the $2.0 million account payable.

SECURITIES AVAILABLE FOR SALE (in thousands)

Included in the preceding table are 51,336 shares of SLM Corp. (formerly USA Education, Inc.) at a cost basis of approximately $2 thousand and estimated fair value of $1.934 million. These shares were acquired as preferred shares of Student Loan Marketing Association, or Sallie Mae, a permitted exception to the Government regulation banning bank ownership of equity securities in the original capitalization of the U.S. Government Agency. Later, the shares were converted to common stock as SALLIE MAE recapitalized. Additionally, at December 31, 2003, the Corporation held marketable equities totaling $734 thousand at cost, with a total estimated fair value of $5.243 million. The shares, other than SLM Corp., were acquired prior to the enactment of the Banking Act of 1933.

Non-marketable equity securities included in the Corporation's portfolio are 10,864 shares of Federal Reserve Bank stock and 49,250 shares of the Federal Home Loan Bank of New York stock. They are carried at their cost of $543 thousand and $4.925 million, respectively. The fair value of these securities is assumed to approximate their cost. The number of shares of these last two investments is regulated by regulatory policies of the respective institutions.

Non-performing loans at year-end 2003 totaled $12.331 million as compared to $12.994 million at year-end 2002, a decrease of $663 thousand. This decrease in non-performing loans is primarily the result of a $3.105 million reduction in troubled debt restructurings, as during the year, a commercial mortgage was removed from this non-performing loan category as the borrower had demonstrated a sufficient period of adequate cash flow to amortize this market-rate loan in accordance with the restructured terms, and the properties securing this mortgage provide adequate collateral coverage. Loans in non-accrual status increased $2.382 million, impacted primarily by the addition during 2003 of seven commercial relationships totaling $4.002 million to non-accrual status. The addition of these relationships to non-accrual status reflects the impact that a weak local economy during 2003 has had on several of our commercial loan relationships. The above additions to non-accrual loans were some what offset primarily by the charge-off of $1.9 million of a commercial relationship during the first quarter of 2003. It is the Corporation's policy that when a past due loan is referred to legal counsel, or in the case of a commercial loan which becomes 90 days delinquent, or in the case of a consumer, mortgage or home equity loan not guaranteed by a government agency which becomes 120 days delinquent, the loan is placed in non-accrual and previously accrued interest is reversed unless, because of collateral or other circumstances, it is deemed to be collectible. Loans may also be placed in non-accrual if management believes such classification is warranted for other reasons.

The following table summarizes the Corporation's non-performing assets (in thousands of dollars):

Information with respect to interest income on non-accrual and troubled debt restructured loans for the years ended December 31 is as follows (in thousands of dollars):

At December 31, 2002, the Corporation's available for sale securities portfolio included an investment in a $2.5 million par value corporate bond which was downgraded by nationally recognized rating agencies in July of 2002 to below investment grade status. Management had determined that the resulting decline in the estimated fair value of the bond was other-than-temporary, and accordingly had written the bond down to its estimated fair value, and placed the bond in non-accrual status. The write-down of the bond to 51.5% of par value resulted in a pre-tax charge to earnings during 2002 of $1.006 million. During 2003, this bond was sold with $950 thousand in pre-tax gains realized.

In addition to non-performing loans, as of December 31, 2003, the Corporation, through its loan review function, has identified 22 commercial relationships totaling $16.874 million in potential problem loans, as compared to $8.131 million (19 relationships) at December 31, 2002. This increase is due primarily to the addition of two commercial relationships totaling $10.794 million. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms, and which may result in the disclosure of such loans as non-performing at some time in the future. At the Corporation, potential problem loans are typically loans that are performing but are classified in the Corporation's loan rating system as "substandard." Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on non-accrual, become restructured, or require increased allowance coverage and provisions for loan losses.

Given the increased level of the total non-performing and potential problem loans, and in recognition of the increased inherent risk of loss in the current loan portfolio, the Corporation increased its provision for loan losses during 2003 to $4.700 million as compared to $3.283 million during 2002, an increase of $1.417 million. The allowance for loan losses is an amount that management believes will be adequate to absorb probable losses on existing loans. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the historical loan loss experience, review of specific problem loans (including evaluations of the underlying collateral), changes in the composition and volume of the loan portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers' ability to pay. At December 31, 2003, the Corporation's allowance for loan losses totaled $9.848 million, resulting in a coverage ra tio of allowance to non-performing loans of 79.86%. An internal review of non-performing loans and associated collateral coverage indicates that the current coverage ratio is adequate. Net loan charge-offs during 2003 totaled $2.526 million or 0.61% of average outstanding loans, compared to $686 thousand or 0.16% of average outstanding loans in 2002. This increase in net charge-offs was due primarily to the above noted charge-off of $1.9 million of a commercial relationship, offset to some extent primarily by lower net consumer loan charge-offs. The allowance for loan losses to total loans at December 31, 2003 was 2.52% as compared to 1.78% as of December 31, 2002.

The following summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 2003 (in thousands of dollars):

Liquidity and Capital Resources

Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, securities sold under agreements to repurchase and other borrowings.

The Corporation is a member of the Federal Home Loan Bank of New York ("FHLB") which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. At December 31, 2003, the Corporation maintained a $74.957 million line of credit with the FHLB, as compared to $74.804 million at December 31, 2002.

During 2003, cash and cash equivalents increased $9.006 million, compared to a decrease of $329 thousand during 2002. In addition to cash provided by operating activities, other primary sources of cash in 2003 included proceeds from maturities, sales and principal payments on securities ($159.478 million), a net decrease in loans (including proceeds from sales of student loans) of $39.294 million and an increase in deposits ($9.286 million). During 2002, primary sources of cash included proceeds from maturities, sales and principal payments on securities ($155.958 million), an increase in deposits ($21.078 million) and an increase in Federal Home Loan Bank advances, net of repayments ($3.150 million).

Cash generated in both periods was used primarily to fund growth in earning assets as well as to reduce Federal Home Loan Bank advances. During 2003, the purchase of securities totaled $193.806 million. Other significant uses of cash during 2003 included the repayment of Federal Home Loan Bank advances ($15.750 million), the payment of cash dividends ($3.460 million), purchases of premises and equipment ($2.161 million) and the purchase of treasury shares (1.287 million). During 2002, the purchase of securities, and funding of loans, net of repayments and proceeds from the sale of student loans, totaled $171.959 million and $9.809 million, respectively. Other significant uses of cash during 2002 included the purchase of premises and equipment ($4.631 million), the purchase of treasury shares ($5.333 million) and the payment of cash dividends ($3.592 million).

The Corporation continues to maintain a strong capital position. As of December 31, 2003, the Corporation's ratio of Total Capital to Risk Weighted Assets was 17.61% compared with 16.12% a year earlier. The Corporation's leverage ratio (Tier I Capital/Average Assets) was 9.62% at December 31, 2003 and 9.26% at December 31, 2002. These ratios are in excess of the requirements for being considered "well capitalized" by the FDIC, the Federal Reserve and the New York State Banking Department.

Cash dividends declared totaled $3.450 million in 2003 versus $3.549 million in 2002 and $3.584 million in 2001. Dividends declared during 2003 amounted to 49.6% of net income compared to 54.3% and 42.2% of 2002 and 2001 net income, respectively. It is management's objective to continue generating sufficient capital internally, while retaining an adequate dividend payout ratio to our shareholders.

When shares of the Corporation become available in the market, we may purchase them after careful consideration of our capital position. On May 9, 2001, the Corporation announced that its Board of Directors authorized the repurchase of up to 400,000 shares, or approximately 10% of its outstanding common shares, principally through open market transactions from time to time as market conditions warrant over a two-year period. During the two-year period this program was in place, a total of 248,018 shares were purchased at an average price of $28.08 per share. While the authorization for this share repurchase program expired on May 9, 2003, the Corporation will continue to evaluate future share repurchases as market conditions warrant, after careful consideration of its capital position. During 2003, 42,748 shares were purchased at a total cost of $1.287 million or an average price of $30.11 per share. During 2002, 187,812 shares were purchased at a total cost of $5.333 million or an average price of $28.3 9 per share, and in 2001 there were 97,275 shares purchased at a total cost of $2.343 million (average of $24.09 per share).

For the year ended December 31, 2003, the Corporation engaged in no off-balance sheet transactions reasonably likely to have a material effect on the Corporation's consolidated financial statements.

Contractual Obligations

As of December 31, 2003, the Corporation is contractually obliged under long-term agreements as follows (in thousands of dollars):

Performance Summary

Consolidated net income for 2003 totaled $6.953 million versus $6.540 million in 2002, an increase of $413 thousand or 6.3%. Earnings per share increased 9.6% from $1.66 to $1.82 per share on 107,526 fewer average shares outstanding. Dividends declared in 2003 totaled $0.92 per share, unchanged from 2002.

Despite continued pressure on net interest income and margin, and a significant increase in the provision for loan loss expense, the Corporation realized the above-noted increase in earnings due to higher non-interest income as well as a reduction in operating expenses. The discussion which follows will highlight those areas which had the greatest impact on the Corporation's 2003 operating results.

Net interest income before the provision for loan losses was down $1.205 million or 4.5%, impacted primarily by a lower interest rate environment as well as lower average loan volume. Despite a $5.7 million increase in average earning assets, total interest and dividend income decreased $5.458 million or 12.4% from $44.163 million in 2002 to $38.705 million in 2003, as the yield on earning assets declined 85 basis points from 6.45% to 5.60%. Average loans were down $16.2 million, with the average yield on loans decreasing 61 basis points from 7.21% in 2002 to 6.60% in 2003. As discussed under the "Financial Condition" section of this report, the average decrease in loans was impacted primarily by the interest rate environment, the continued weakness of the economy in our markets, as well as competitive pricing. Given the low rate environment, and management's decision to sell more mortgages in the secondary market, average mortgages during 2003 were down $9.0 million or 8.7%. The Corporation believes th at an average decrease of $2.5 million in our commercial loan portfolio is reflective of the weakness in our local economy. Average consumer loans during 2003 decreased $4.7 million, impacted primarily by a $4.4 million decrease in consumer installment loans, this decrease impacted by an extremely competitive pricing market related to indirect auto financing. While the average balance of the securities portfolio increased $19.4 million or 8.2%, the yield on these investments was down 108 basis points to 4.41%. Average Fed funds sold and interest-bearing deposits were up $1.6 million, the yield was down 54 basis points to 1.62%.

Total average funding liabilities during 2003 increased $3.8 million or 0.6%. Average deposit balances during 2003 increased $7.6 million or 1.4%. While public fund average balances were down $2.3 million, other personal and non-personal average deposit balances increased $9.9 million. This increase in other personal and non-personal average deposits was reflected primarily in higher average demand deposits of $5.9 million, higher average insured money market accounts of $4.1 million and higher average savings accounts of $9.3 million. These increases were somewhat offset by an $8.5 million decrease in other personal and non-personal time deposits. All other average funding liabilities were down $3.8 million, due primarily to lower average securities sold under agreements to repurchase, reflecting a reduced level of securities leveraged with term repurchase agreements entered into with the Federal Home Loan Bank of New York. Average interest-bearing liabilities during 2003 decreased by $2.2 million or 0.4% and interest expense decreased $4.254 million or 24.9% from $17.094 million in 2002 to $12.840 million in 2003 as the average cost of funds, including the impact of non-interest bearing funding sources (such as demand deposits), was down 66 basis points from 2.60% to 1.94%. The resulting net interest margin for 2003 of 3.74% was 21 basis points lower than the 2002 margin of 3.95%.

The 2003 provision for loan loss expense totaled $4.700 million as compared to $3.283 million in 2002, an increase of $1.417 million. As discussed in detail under the "Asset Quality" section of this report, this increase is reflective of continued asset quality issues related to the weak economic environment, which has resulted in an increase in total non-performing and potential problem loans, which has increased the inherent risk of loss in the loan portfolio.

The impact of reduced net interest income and the increase in the provision for loan loss expense was offset primarily by a $2.965 million or 28.6% increase in non-interest income, from $10.381 million in 2002 to $13.346 million in 2003. This increase was significantly impacted by a $1.643 million increase in net gains on securities transactions. As was noted under the "Asset Quality" section of this report, during 2002, a corporate bond was written-down, resulting in a pre-tax charge to 2002 earnings of $1.006 million. This bond was sold during 2003 with $950 thousand in pre-tax gains realized on the sale. Also having a significant impact on the increase in non-interest income during 2003 was a $1.292 million increase in service charges on deposit accounts. This increase is reflective of fee changes instituted during the fourth quarter of 2002, as well as the introduction of a courtesy pay, overdraft privilege program during the second quarter of 2003. Other increases of note include a gain of $236 tho usand on the sale of mortgages, and a $111 thousand gain on the sale of a portion of our equity investment in Cephas Capital Partners, L.P. ("Cephas"), a small business investment company limited partnership. The increase in the gains on the sale of mortgages reflects the Corporation's increased participation in the sale of mortgages in the secondary mortgage market during 2003. During the fourth quarter of 2003, a new limited partner invested $2.0 million in Cephas. Proceeds from that investment were distributed to all of the existing limited partners on a pro-rata basis, which resulted in the above-noted $111 thousand gain, as well as reducing the Corporation's ownership position going forward from 27.50% to 23.33%. The above-noted increases were offset to some extent primarily by a decrease of $132 thousand in credit card merchant earnings as well as a $149 thousand decrease in non-taxable gains on stock donations. Credit card merchant earnings were impacted by a lower volume of merchant deposit acti vity. The decrease in non-taxable gains on stock donations reflects the fact that the Corporation made accelerated payments during 2002 on certain planned capital campaign contributions to non-profit organizations. Trust and investment services income, the largest component of non-interest income, was down $37 thousand to $4.451 million. This decrease was primarily the result of lower asset market values during the first half of 2003.

Operating expenses during 2003 decreased $385 thousand or 1.5% to $25.020 million. Despite a $321 thousand charge during the third quarter of 2003 related to costs associated with a severance agreement with a former employee, total salaries and wages, and pension and other employee benefits were down $66 thousand or 0.5%. Factors impacting this decrease include a reduction in staff, as well as reductions in profit sharing and health insurance expenses of $359 thousand and $91 thousand, respectively. These decreases were somewhat offset primarily by a $380 thousand increase in net periodic pension costs associated with the Corporation's qualified pension plan. This increase is based upon an actuarial analysis of future benefit obligations related to the plan, and the increase resulted primarily from the impact of a declining stock market on asset values during 2002, as well as a reduction in the discount rate used in calculating future benefit obligations. Based upon actuarial estimates for 2004, we expec t that the periodic pension cost during 2004 will decrease by between approximately $90-110 thousand, primarily due to the increased plan asset value as of December 31, 2003. During 2003, the Corporation was required to make a minimum contribution to the plan in the amount of $144 thousand. Management elected to increase the 2003 contribution to the maximum deductible contribution limit of $291 thousand. This was the first such contribution to the plan since 1995. Additionally impacting the 2003 operating expense decrease was the fact that during 2002, the Corporation incurred a $327 thousand prepayment penalty related to the refinancing of a $10.0 million advance from the Federal Home Loan Bank of New York. With interest rates at historically low levels, management had determined it advantageous to payoff an existing advance carrying a rate of 4.90% at the time, and refinance for a five-year term at a rate of 3.72%. Other major items impacting the 2003 operating expense decrease include a reduction of $197 thousand in credit card and merchant deposit services processing costs and a $148 thousand reduction in donation expense. The decrease in credit card and merchant deposit services processing costs is primarily due to a lower volume of merchant deposit activity. The decrease in donation expense reflects the fact that, as noted above, the Corporation had accelerated certain capital campaign contributions to non-profit organizations during 2002. The above operating expense reductions were somewhat offset primarily by a $301 thousand increase in depreciation expense.

The $315 thousand increase in income tax expense is primarily related to the $729 thousand increase in pre-tax income.