Edgar Filing: CORTLAND BANCORP INC

Filed by Bowne Pure Compliance

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition from to

Commission file number: 0-13814

Cortland Bancorp

(Exact name of registrant as specified in its charter)


Ohio		34-1451118

(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

194 West Main Street, Cortland, Ohio		44410

(Address of principal executive offices)		(Zip code)

(330) 637-8040

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Small reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


TITLE OF CLASS		SHARES OUTSTANDING
Common Stock, No Par Value		at November 5, 2008 4,409,255 Shares


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Cortland Bancorp and Subsidiaries:

Consolidated Balance Sheets — September 30, 2008 and December 31, 2007 (unaudited)			2

Unaudited Consolidated Statements of Income — Three Months And Nine Months Ended September 30, 2008 and 2007			3

Unaudited Consolidated Statement of Changes in Shareholders’ Equity — Nine months ended September 30, 2008 and 2007			4

Unaudited Consolidated Statements of Cash Flows — Nine months ended September 30, 2008 and 2007			5

Unaudited Notes to Consolidated Financial Statements September 30, 2008			6-16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17

Consolidated Average Balance Sheets, Yields And Rates — Year to Date September 30, 2008, December 31, 2007 and September 30, 2007			18

Consolidated Average Balance Sheets, Yields And Rates — Quarter to Date September 30, 2008, June 30, 2008 and September 30, 2007			19

Selected Financial Data			20

Financial Review			21-33

Item 3. Quantitative and Qualitative Disclosures About Market Risk			34-35

Item 4. Controls and Procedures			36

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			37

Item 1A. Risk Factors			37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37

Item 3. Defaults Upon Senior Securities			37

Item 4. Submission of Matters to a Vote of Security Holders			37

Item 5. Other Information			37

Item 6. Exhibits			38

Signatures			41

Exhibit 31.1
Exhibit 31.2
Exhibit 32

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)


	(Unaudited)
	SEPTEMBER 30,			DECEMBER 31,
	2008			2007
ASSETS
Cash and due from banks	$	8,717		$	9,441
Federal funds sold		10,200

Total cash and cash equivalents		18,917			9,441

Investment securities available for sale (Note 3)		137,894			126,507
Investment securities held to maturity (estimated fair value of $75,511 at September 30, 2008 and $113,087 at December 31, 2007) (Note 3)		75,536			112,115
Total loans (Note 4)		230,654			223,109
Less allowance for loan losses (Note 4)		(1,595	)		(1,621	)

Net loans		229,059			221,488

Premises and equipment		7,350			6,206
Other assets		19,852			16,937


Total assets	$	488,608		$	492,694


LIABILITIES
Noninterest-bearing deposits	$	55,957		$	58,224
Interest-bearing deposits		304,797			306,564

Total deposits		360,754			364,788

Federal Home Loan Bank advances		68,000			64,000
Other short term borrowings		6,316			6,413
Subordinated debt		5,155			5,155
Other liabilities		4,039			3,514

Total liabilities		444,264			443,870


SHAREHOLDERS’ EQUITY
Common stock — $5.00 stated value — authorized 20,000,000 shares; issued 4,639,973 in 2008 and 2007		23,200			23,200
Additional paid-in capital		20,770			20,976
Retained earnings		8,860			9,386
Accumulated other comprehensive loss		(4,038	)		(94	)
Treasury shares at cost, 250,766 at September 30, 2008 and 250,545 at December 31, 2007		(4,448	)		(4,644	)

Total shareholders’ equity		44,344			48,824


Total liabilities and shareholders’ equity	$	488,608		$	492,694

See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except per share data)


	THREE					NINE
	MONTHS ENDED					MONTHS ENDED
	SEPTEMBER 30,					SEPTEMBER 30,
	2008			2007		2008		2007
INTEREST INCOME
Interest and fees on loans	$	3,847		$	3,976	$	11,601	$	11,677
Interest and dividends on investment securities:
Taxable interest income		1,279			1,729		4,071		4,985
Nontaxable interest income		381			446		1,155		1,385
Dividends		47			55		144		169
Interest on mortgage-backed securities		1,260			1,071		3,609		2,956
Other interest income		35			67		179		353

Total interest income		6,849			7,344		20,759		21,525


INTEREST EXPENSE
Deposits		2,090			2,764		6,791		7,804
Borrowed funds		776			826		2,380		2,497
Subordinated debt		55			61		190		61

Total interest expense		2,921			3,651		9,361		10,362

Net interest income		3,928			3,693		11,398		11,163
Provision for loan losses		105					495


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,823			3,693		10,903		11,163


OTHER INCOME
Fees for other customer services		596			581		1,730		1,697
Investment securities gains — net		34			5		116		37
Gain on sale of loans — net		4			35		25		78
Gain (loss) on sale of other real estate owned — net		(2	)				49		(1	)
Earnings on bank owned life insurance		137			130		402		388
Other non-interest income		29			38		95		79

Total other income		798			789		2,417		2,278


OTHER EXPENSES
Salaries and employee benefits		1,788			1,803		5,371		5,435
Net occupancy and equipment expense		500			473		1,471		1,399
State and local taxes		138			146		416		439
Bank exam and audit expense		129			112		337		308
Office supplies		90			110		282		295
Other operating expenses		613			488		1,795		1,525

Total other expenses		3,258			3,132		9,672		9,401


INCOME BEFORE FEDERAL INCOME TAXES		1,363			1,350		3,648		4,040

Federal income taxes		285			275		731		806


NET INCOME	$	1,078		$	1,075	$	2,917	$	3,234


BASIC EARNINGS PER COMMON SHARE (NOTE 6)	$	0.25		$	0.24	$	0.66	$	0.71

DILUTED EARNINGS PER COMMON SHARE (NOTE 6)	$	0.25		$	0.24	$	0.66	$	0.71

CASH DIVIDENDS DECLARED PER SHARE	$	0.22		$	0.21	$	0.66	$	0.65

See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands)


									ACCUMULATED						TOTAL
			ADDITIONAL						OTHER						SHARE-
	COMMON		PAID-IN			RETAINED			COMPREHENSIVE			TREASURY			HOLDERS’
	STOCK		CAPITAL			EARNINGS			LOSS			SHARES			EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2007

BALANCE AT JANUARY 1, 2007	$	22,972	$	20,835		$	9,553		$	(455	)	$	(2,313	)	$	50,592
Comprehensive income:
Net income							3,234									3,234
Other comprehensive income, net of tax:
Unrealized losses on available- for-sale securities, net of reclassification adjustment										(164	)					(164	)

Total comprehensive income																3,070


Common stock transactions:
Treasury shares reissued				(204	)								913			709
Treasury shares purchased													(2,705	)		(2,705	)
Cash dividends declared							(2,938	)								(2,938	)


BALANCE AT SEPTEMBER 30, 2007	$	22,972	$	20,631		$	9,849		$	(619	)	$	(4,105	)	$	48,728


NINE MONTHS ENDED SEPTEMBER 30, 2008

BALANCE AT JANUARY 1, 2008	$	23,200	$	20,976		$	9,386		$	(94	)	$	(4,644	)	$	48,824

Cumulative effect of adjustment from adoption of of Emerging Issues Task Force issue 06-04							(539	)								(539	)


Balance after cumulative effect of adjustment		23,200		20,976			8,847			(94	)		(4,644	)		48,285

Comprehensive loss:
Net income							2,917									2,917
Other comprehensive loss, net of tax benefit:
Unrealized losses on available- for-sale securities, net of reclassification adjustment										(3,944	)					(3,944	)

Total comprehensive loss																(1,027	)


Common stock transactions:
Treasury shares reissued				(206	)								942			736
Treasury shares purchased													(746	)		(746	)
Cash dividends declared							(2,904	)								(2,904	)


BALANCE AT SEPTEMBER 30, 2008	$	23,200	$	20,770		$	8,860		$	(4,038	)	$	(4,448	)	$	44,344


	SEPTEMBER 30,
	2008			2007
DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE FOR SALE SECURITY GAINS AND LOSSES:

Net unrealized holding losses on available-for-sale securities arising during the period, net of tax benefit	$	(3,867	)	$	(139	)
Less: Reclassification adjustment for net gains realized in net income, net of tax		77			25


Net unrealized losses on available- for-sale securities, net of tax benefit	$	(3,944	)	$	(164	)

See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)


	FOR THE
	NINE MONTHS ENDED
	SEPTEMBER 30,
	2008			2007
NET CASH FLOWS FROM OPERATING ACTIVITIES	$	3,506		$	2,600

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(30,518	)		(28,765	)
Purchases of securities held to maturity		(11,908	)		(13,502	)
Proceeds from call, maturity and principal payments on securities		61,695			30,815
Net increase in loans made to customers		(9,005	)		(16,288	)
Proceeds from disposition of other real estate		405			34
Purchase of premises and equipment		(1,654	)		(1,308	)

Net cash flows from investing activities		9,015			(29,014	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts		(4,034	)		16,728
Proceeds from Federal Home Loan Bank advances		10,000			19,000
Pay down of Federal Home Loan Bank borrowings		(6,000	)		(14,000	)
Net increase (decrease) in short term borrowings		(97	)		1,878
Proceeds from subordinated debt issuance					5,155
Dividends paid		(2,904	)		(2,938	)
Treasury shares purchased		(746	)		(2,705	)
Treasury shares reissued		736			709

Net cash flows from financing activities		(3,045	)		23,827


NET CHANGE IN CASH AND CASH EQUIVALENTS		9,476			(2,587	)

CASH AND CASH EQUIVALENTS
Beginning of period		9,441			14,375

End of period	$	18,917		$	11,788


SUPPLEMENTAL DISCLOSURES
Interest paid	$	9,526		$	10,238
Income taxes paid	$	635		$	750

See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

1.) Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2007, included in our Form 10-K for the year ended December 31, 2007, filed with the United States Securities and Exchange Commission. The accompanying consolidated balance sheet at December 31, 2007, has been derived from the audited consolidated balance sheet but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

2.) Reclassifications:

Certain items contained in the 2007 financial statements have been reclassified to conform to the presentation for 2008. Such reclassifications had no effect on the net results of operations.

3.) Investment Securities:

Securities classified as held to maturity are those that management has the positive intent and ability to hold to maturity. Securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, with such amortization or accretion included in interest income.

Securities classified as available for sale are those that could be sold for liquidity, investment management, or similar reasons even though management has no present intentions to do so. Securities available for sale are carried at fair value using the specific identification method. Changes in the unrealized gains and losses on available for sale securities are recorded net of tax effect as a component of comprehensive income.

Trading securities are principally held with the intention of selling in the near term. Trading securities are carried at fair value with changes in fair value reported in the Consolidated Statements of Income (unaudited).

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of securities sold, or called using the specific identification method. The table below sets forth the proceeds and gains or losses realized on securities sold or called for the period ended:

THREE MONTHS

NINE MONTHS

September 30,

2008

2007

2008

2007

Proceeds on securities sold

None

Gross realized gains

None

Gross realized losses

None

Proceeds on securities called

4,970

170

36,523

3,001

Gross realized gains

116

Gross realized losses

None

Securities available for sale, carried at fair value, totaled $137,894 at September 30, 2008 and $126,507 at December 31, 2007 representing 64.61% and 53.02%, respectively, of all investment securities. These levels provide an adequate level of liquidity in management’s opinion.

Investment securities with a carrying value of approximately $103,968 at September 30, 2008 and $95,137 at December 31, 2007 were pledged to secure deposits and for other purposes.

The unrealized losses on the Company’s investment in U.S. Government agencies and corporations, obligations, of states and political subdivisions, and mortgage-backed and related securities were caused by changes in market rates and related spreads as well as reflecting current distressed conditions in the credit markets and the market’s on-going reassessment of appropriate liquidity and risk premiums. It is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment because the decline in market value is attributable to changes in interest rates and relative spreads, and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be at maturity. The Company does not consider those investments to be other-than-temporarily impaired at September 30, 2008.

The Company’s unrealized loss on investments in corporate securities relates in part, to a $2,350 investment in debt instruments of the General Motors Corporation. The unrealized loss was primarily caused by (a) the decrease in profitability and profit forecasts by industry analysts resulting from intense competitive pressures in the automotive industry, and (b) a sector downgrade by industry analysts reflecting the sharp spike in the cost of energy, dysfunctional credit markets and the resultant adverse sales trend. The contractual terms of those investments do not permit General Motors to settle the security at a price less than the par value of the investment. While General Motors’ credit rating has declined, the Company believes it is probable that it will be able to collect all amounts due according to the contractual terms of the investment. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because the Company has the ability and intent to hold the investments until a recovery of fair value, which may be at maturity, it does not consider the investment in the General Motors notes to be other-than- temporarily impaired at September 30, 2008.

The remaining unrealized loss on investments in corporate securities relates to Collateralized Debt Obligations, (CDO’S), representing pools of trust preferred debt primarily issued by bank holding companies and insurance companies. The unrealized loss on these securities at September 30, 2008 was $5,425 as compared to an $817 loss at December 31, 2007. All available cash flows for the cash flow portion of the Other Than Temporary Impairment (“OTTI”) test under EITF 99-20 indicate that there has been no adverse effect on projected cash flows as of September 30, 2008. As the Company has the ability and intent to hold the investments until a recovery of fair value, which may be at maturity, it does not consider the investments to be other-than-temporarily impaired at September 30, 2008.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

During September 2008, the U.S. government placed mortgage finance companies Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), under conservatorship, giving management control to their regulator, the Federal Housing Finance Agency, or FHFA, and providing both companies with access to credit from the U.S. Treasury. Debt obligations now provide an explicit guarantee of the full faith and credit of the United States government to existing and future debt holders of Fannie Mae and Freddie Mac.

In response to the takeover, the Federal Deposit Insurance Corporation tentatively approved a rule, proposed by all four federal bank regulators, that eases capital requirements for federally insured depository institutions that hold FNMA and FHLMC corporate debt, subordinated debt, mortgage guarantees and derivatives. The so-called risk weighting for banks on FNMA and FHLMC’s credit claims was cut to 10 percent from 20 percent. The change has the effect of increasing the risk-based capital ratios of financial institutions holding such obligations, providing additional capacity for lending and asset growth.

Adversely affected by these actions were the value of the common stock and preferred stock of both FNMA and FHLMC. Neither the Company nor its bank subsidiary owned any common or preferred shares of either FNMA or FHLMC.

The amortized cost and estimated fair value of debt securities at September 30, 2008, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.


Investment securities	AMORTIZED		ESTIMATED
available for sale	COST		FAIR VALUE

Due in one year or less	$	2,996	$	3,017
Due after one year through five years		5,051		4,025
Due after five years through ten years		2,728		2,587
Due after ten years		46,923		41,782

		57,698		51,411
Mortgage-backed securities		82,565		82,734

	$	140,263	$	134,145


Investment securities	AMORTIZED		ESTIMATED
held to maturity	COST		FAIR VALUE

Due in one year or less	$	769	$	784
Due after one year through five years		3,443		3,523
Due after five years through ten years		10,887		11,022
Due after ten years		45,404		45,617

		60,503		60,946
Mortgage-backed securities		15,033		14,565

	$	75,536	$	75,511

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

The amortized cost and estimated fair value of investment securities available for sale and investment securities held to maturity as of September 30, 2008, are as follows:


			GROSS		GROSS		ESTIMATED
Investment securities	AMORTIZED		UNREALIZED		UNREALIZED		FAIR
available for sale	COST		GAINS		LOSSES		VALUE

U.S. Government agencies and corporations	$	12,472	$	208	$		$	12,680
Obligations of states and political subdivisions		8,298		245		20		8,523
Mortgage-backed and related securities		82,565		612		443		82,734
Corporate securities		36,928				6,720		30,208

Total debt securities		140,263		1,065		7,183		134,145
Other securities		3,749						3,749

Total available for sale	$	144,012	$	1,065	$	7,183	$	137,894


			GROSS		GROSS		ESTIMATED
Investment securities	AMORTIZED		UNREALIZED		UNREALIZED		FAIR
held to maturity	COST		GAINS		LOSSES		VALUE

U.S. Treasury Securities	$	136	$	9	$		$	145
U.S. Government agencies and corporations		36,896		99		131		36,864
Obligations of states and political subdivisions		23,471		604		138		23,937
Mortgage-backed and related securities		15,033		51		519		14,565

Total held to maturity	$	75,536	$	763	$	788	$	75,511

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

The following provides a summary of the amortized cost and estimated fair value of investment securities available for sale and investment securities held to maturity as of December 31, 2007:


			GROSS		GROSS		ESTIMATED
Investment securities	AMORTIZED		UNREALIZED		UNREALIZED		FAIR
available for sale	COST		GAINS		LOSSES		VALUE

U.S. Government agencies and corporations	$	12,365	$	314	$	2	$	12,677
Obligations of states and political subdivisions		8,428		344				8,772
Mortgage-backed and related securities		66,508		607		268		66,847
Corporate securities		35,769		36		1,175		34,630

Total debt securities		123,070		1,301		1,445		122,926
Other securities		3,581						3,581

Total available for sale	$	126,651	$	1,301	$	1,445	$	126,507


			GROSS		GROSS		ESTIMATED
Investment securities	AMORTIZED		UNREALIZED		UNREALIZED		FAIR
held to maturity	COST		GAINS		LOSSES		VALUE

U.S. Treasury Securities	$	139	$	7	$		$	146
U.S. Government agencies and corporations		71,179		361		24		71,516
Obligations of states and political subdivisions		23,990		886		7		24,869
Mortgage-backed and related securities		16,807		63		314		16,556

Total held to maturity	$	112,115	$	1,317	$	345	$	113,087

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

4.) Concentration of Credit Risk and Off Balance Sheet Risk:

The Company currently does not enter into derivative financial instruments including futures, forwards, interest rate risk swaps, option contracts, or other financial instruments with similar characteristics. The Company also does not participate in any partnerships that might give rise to off-balance sheet liabilities.

The Company, through its subsidiary bank, is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

In the event of nonperformance by the other party, the Company’s exposure to credit loss on these financial instruments is represented by the contract or notional amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. The amount and nature of collateral obtained, if any, is based on management’s credit evaluation.


	CONTRACT OR
	NOTIONAL AMOUNT
	September 30,		December 31,
	2008		2007

Financial instruments whose contract amount represents credit risk:
Commitments to extend credit:
Fixed rate	$	1,980	$	2,125
Variable		44,332		36,576
Standby letters of credit		850		1,179

Standby letters of credit are conditional commitments issued by the Company’s subsidiary bank to guarantee the performance of a customer to a third party. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Generally these financial arrangements have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company’s subsidiary bank also offers limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing for business, personal or household use. The Company reserves the right to discontinue this service without prior notice. The available amount of overdraft protection on depositors’ accounts not included in the table above at September 30, 2008 totaled $11,480 and $11,698 at December 31, 2007. The total average daily balance of overdrafts used in 2008 was $160 and $153 in 2007, or approximately 1.4% of the total aggregate overdraft protection available to depositors at September 30, 2008 and 1.3% at December 31, 2007.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

The Company, through its subsidiary bank, grants residential, consumer and commercial loans, and also offers a variety of saving plans to customers located primarily in Northeast Ohio and Western Pennsylvania. The following represents the composition of the loan portfolio:


	September 30,			December 31,
	2008			2007

1-4 family residential mortgages		29.8	%		30.5	%
Commercial mortgages		54.0	%		54.3	%
Consumer loans		3.7	%		3.8	%
Commercial loans		7.5	%		6.7	%
Home equity loans		5.0	%		4.7	%

There are $68 in mortgage loans held for sale included in 1-4 family residential mortgages as of September 30, 2008, and none at December 31, 2007. These loans are carried, in the aggregate, at the lower of cost or estimated market value based on secondary market prices.

The following table sets forth the aggregate balance of underperforming loans for each of the following categories at September 30, 2008 and December 31, 2007:


	September 30,		December 31,
	2008		2007

Loans accounted for on a non-accrual basis	$	1,944	$	2,285

Loans contractually past due 90 days or more as to interest or principal payments (not included in non-accrual loans above)	NONE		NONE

Loans considered troubled debt restructurings (not included in non-accrual loans or loans contractually past due above)		97		546

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

The following shows the amounts of contractual interest income and interest income actually reflected in income on loans accounted for on a non-accrual basis and loans considered troubled debt restructuring for the nine months ended September 30, 2008 and 2007.


	September 30,		September 30,
	2008		2007

Gross interest income that would have been recorded if the loans had been current in accordance with their original terms (contractual interest income)	$	148	$	204

Interest income actually included in income on the loans		29		35

A loan is placed on a non-accrual basis whenever sufficient information is received to question the collectibility of the loan or any time legal proceedings are initiated involving a loan. When a loan is placed on non-accrual status, any interest that has been accrued and not collected on the loan is charged against earnings. Cash payments received while a loan is classified as non-accrual are recorded as a reduction to principal or reported as interest income according to management’s judgment as to collectibility of principal.

A loan is returned to accrual status when either all of the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, collectible, or when it otherwise becomes well secured and in the process of collection. When a loan is charged-off, any interest accrued but not collected on the loan is charged against earnings.

Impaired loans are generally included in non-accrual loans. Management does not individually evaluate certain smaller balance loans for impairment as such loans are evaluated on an aggregate basis. These loans include 1 — 4 family, consumer and home equity loans. Impaired loans were evaluated using the fair value of collateral as the measurement method. At September 30, 2008, the recorded investment in impaired loans was $1,479 while the related portion of the allowance for loan losses was $642. At December 31, 2007, there were $2,274 in loans considered impaired while the allocated portion of the allowance for loan losses for such loans was $716.

Loans in the amount of $19,550 as of September 30, 2008, and $14,691 as of December 31, 2007 were not included in any of the above categories and were not currently considered impaired, but which can be considered to be potential problem loans.

Any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed above either do not (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

The following is an analysis of the allowance for loan losses for the periods ended September 30, 2008 and September 30, 2007:


	THREE MONTHS						NINE MONTHS
	2008			2007			2008			2007

Balance at beginning of period	$	1,554		$	2,041		$	1,621		$	2,211
Loan charge-offs:
1-4 family residential mortgages		22			31			174			45
Commercial mortgages		45			209			258			324
Consumer loans and other loans		69			81			186			168
Commercial loans		1			—			20			—
Home equity loans		—			—			17			—

		137			321			655			537
Recoveries on previous loan losses
1-4 family residential mortgages		—			—			—			—
Commercial mortgages		1			1			2			2
Consumer loans and other loans		37			23			97			67
Commercial loans		35			—			35			1
Home equity loans		—			—			—			—

		73			24			134			70

Net charge-offs		(64	)		(297	)		(521	)		(467	)

Provision charged to operations		105			—			495			—

Balance at end of period	$	1,595		$	1,744		$	1,595		$	1,744

Ratio of annualized net charge-offs to average loans outstanding		0.11	%		0.54	%		0.31	%		0.29	%

For each of the periods presented above, the provision for loan losses charged to operations is based on management’s judgment after taking into consideration all known factors connected with the collectibility of the existing portfolio. Management evaluates the portfolio in light of economic conditions, changes in the nature and volume of the portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operations include previous loan loss experience; the status of past due interest and principal payments; the quality of financial information supplied by customers; the cash flow coverage and trends evidenced by financial information supplied by customers; the nature and estimated value of any collateral supporting specific loan credits; risk classifications determined by the Company’s loan review systems or as the result of the regulatory examination process; and general economic conditions in the lending area of the Company’s bank subsidiary. Key risk factors and assumptions are systematically updated to reflect actual experience and changing circumstances.

The Company maintains an allowance for losses on unfunded commercial lending commitments to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for loan losses. This allowance is reported as a liability on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these losses is recorded as a component of other expense.

Certain asset-specific loans are evaluated individually for impairment, based on management’s best estimate of discounted cash repayments and the anticipated proceeds from liquidating collateral. The actual timing and amount of repayments and the ultimate realizable value of the collateral may differ from management’s estimates.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

The expected loss for certain other commercial credits utilizes internal risk ratings. These loss estimates are sensitive to changes in the customer’s risk profile, the realizable value of collateral, other risk factors and the related loss experience of other credits of similar risk. Consumer credits generally employ statistical loss factors, adjusted for other risk indicators, applied to pools of similar loans stratified by asset type. These loss estimates are sensitive to changes in delinquency status and shifts in the aggregate risk profile.

5.) Legal Proceedings:

The Bank is involved in legal actions arising in the ordinary course of business. In the opinion of management, the outcomes from these matters, either individually or in the aggregate, are not expected to have any material effect on the Company.

6.) Earnings Per Share and Capital Transactions:

The following table sets forth the computation of basic earnings per common share and diluted earnings per common share. Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the applicable period.


	THREE MONTHS ENDED				NINE MONTHS ENDED
	September 30,				September 30,
	2008		2007		2008		2007

Net Income	$	1,078	$	1,075	$	2,917	$	3,234
Weighted average common shares outstanding*		4,398,235		4,470,728		4,402,663		4,521,163

Basic earnings per share*	$	0.25	$	0.24	$	0.66	$	0.71
Diluted earnings per share*	$	0.25	$	0.24	$	0.66	$	0.71
Dividends declared per share*	$	0.22	$	0.21	$	0.66	$	0.65


*		Average shares outstanding and the resulting per share amounts have been restated to give retroactive effect to the 1% stock dividend of January 1, 2008.

7.) Stock Repurchase Program

On February 27, 2007, the Company’s Board of Directors approved a Stock Repurchase Program which permitted the Company to repurchase up to 100,000 shares of its outstanding common shares in the over-the-counter market or in privately negotiated transactions in accordance with applicable regulations of the Securities and Exchange Commission. Based on the value of the Company’s stock on February 27, 2007, the commitment to repurchase the stock over the program was approximately $1,715.

On August 14, 2007, the Company’s Board of Directors authorized the repurchase of up to an additional 100,000 shares of its outstanding common shares in over-the-counter market or in privately negotiated transactions. Based on the value of the Company’s stock on August 14, 2007, the commitment to repurchase these additional shares over the program was approximately $1,635.

On November 27, 2007, the Company’s Board of Directors increased to 300,000 shares the size of its current stock buyback program by authorizing the repurchase of up to an additional 100,000 shares of its outstanding common shares in the over-the-counter market or in privately negotiated transactions. Based on the value of the Company’s stock on November 27, 2007, the commitment to repurchase these additional shares over the program was approximately $1,375.

The repurchase program will terminate on February 28, 2009 or upon the purchase of 300,000 shares, if earlier. Repurchased shares are designated as treasury shares, available for general corporate purposes, including possible use in connection with the Company’s dividend reinvestment program, employee benefit plans, acquisitions or other distributions. Under the program the Company repurchased 205,986 shares in 2007 and 51,817 shares so far in 2008, for a total of 257,803 shares. The Company has also reissued 51,593 shares to existing shareholders through its dividend reinvestment program during 2008, net of repurchased fractional shares. Based on the price of the Company’s stock at September 30, 2008, the remaining commitment to repurchase the 42,197 remaining shares of stock was approximately $506.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except for per share amounts)

8.) Subordinated Debt

In July 2007 a trust formed by the Company issued $5,000 of floating rate trust preferred securities as part of a pooled offering of such securities due December 2037. The Bancorp owns all $155 of the common securities related to this trust. The Company issued subordinated debentures to the trust at an interest rate that floats quarterly at the 3-month Libor rate plus 1.45% in exchange for the proceeds of the trust preferred offering. The debentures constitute the assets of this trust. The Company may redeem the subordinated debentures, in whole or in part, at a premium declining ratably to par in September 2012.

In accordance with FASB Interpretation NO.46, as revised in December 2003, the trust is not consolidated with the Company’s financial statements. Accordingly, the Company does not report the securities issued by the trust as liabilities, but instead reports as liabilities the subordinated debentures issued by the Company and held by the trust. The subordinated debentures qualify as Tier 1 capital for regulatory purposes in determining and evaluating the Company’s capital adequacy.

9.) Fair Value Measurements (SFAS No. 157)

Effective January 1, 2008, the Company adopted SFAS No. 157, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. SFAS No. 157 establishes an hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined as the SFAS No. 157 hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of September 30, 2008 by level within the fair value hierarchy. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Fair Value Measurements at 09/30/08 Using

(In thousands)

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

Description

09/30/08

(Level 1)

(Level 2)

(Level 3)

Available for Sale Securities

137,894

None

108,745

29,149

Loans measured for impairment

837

None

837

None

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except for per share amounts)

The following table presents the changes in the Level III fair-value category for the nine months ended September 30, 2008. The Company classifies financial instruments in Level III of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.


			Net realized/
			unrealized gains				Transfers		Purchases				Unrealized
			(losses) included in				In and/or		Issuances				gains
	January 1,		Principal				Out of		and		September 30,		(losses)
	2008		Transactions		Other		Level III		settlements		2008		still held
Assets:
Securities available for sale	$	—	$	—	$	—	$	29,149	$	—	$	29,149	$	(5,425	)

On September 30, 2008, the Company changed its valuation technique for pooled trust preferred holdings available-for-sale. Previously, the Company relied on prices compiled by third party vendors using observable market data (Level 2) to determine the values of these securities. However, SFAS 157 assumes that fair values of financial assets are determined in an orderly transaction and not a forced liquidation or distressed sale at the measurement date. Based on financial market conditions at September 30, 2008, the Company concluded the fair values obtained from third party vendors reflected forced liquidation or distressed sales for these trust preferred securities. Therefore, the Company estimated fair value based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. The change in the valuation technique for these trust preferred securities resulted in a transfer of $29,149 into Level 3 financial assets.

Impaired Loans — A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured, as a practical expedient, at the loan’s observable market price or the fair market value of the collateral if the loan is collateral dependent. At September 30, 2008, the recorded investment in impaired loans was $1,479, with a related reserve of $642, resulting in a net balance of $837.

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS,
YIELDS AND RATES (UNAUDITED)

(Fully taxable equivalent basis in thousands of dollars)


	YEAR TO DATE AS OF
	SEPTEMBER 30, 2008							DECEMBER 31, 2007							SEPTEMBER 30, 2007
	Average				Average			Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
ASSETS
Federal funds sold and earning assets	$	10,209	$	179		2.4	%	$	6,950	$	366		5.3	%	$	8,971	$	353		5.3	%
Investment securities (1) (2)		225,265		9,509		5.6	%		238,904		13,664		5.7	%		237,659		10,123		5.7	%
Loans (2) (3)		226,407		11,659		6.9	%		215,496		15,856		7.4	%		213,234		11,731		7.3	%

Total interest-earning assets		461,881	$	21,347		6.2	%		461,350	$	29,886		6.5	%		459,864	$	22,207		6.4	%

Cash and due from banks		7,784							8,220							8,278
Bank premises and equipment		6,893							5,374							5,159
Other assets		11,700							14,103							13,950

Total non-interest-earning assets		26,377							27,697							27,387

Total Assets	$	488,258						$	489,047						$	487,251


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits	$	48,299	$	511		1.4	%	$	46,508	$	888		1.9	%	$	46,175	$	653		1.9	%
Savings		76,830		620		1.1	%		78,072		799		1.0	%		78,996		602		1.0	%
Time		179,377		5,660		4.2	%		184,586		8,769		4.8	%		184,395		6,549		4.7	%

Total interest-bearing deposits		304,506		6,791		3.0	%		309,166		10,456		3.4	%		309,566		7,804		3.4	%
Federal funds purchased		206		7		4.4	%		605		29		4.8	%		9				5.5	%
Other borrowings		71,539		2,373		4.4	%		65,570		3,346		5.2	%		64,552		2,497		5.2	%
Subordinated Debt		5,155		190		4.9	%		2,175		154		7.1	%		1,171		61		6.9	%

Total interest-bearing liabilities		381,406	$	9,361		3.3	%		377,516	$	13,985		3.7	%		375,298	$	10,362		3.7	%

Demand deposits		55,963							57,668							57,658
Other liabilities		5,681							3,775							3,842
Shareholders’ equity		45,208							50,088							50,453

Total liabilities and Shareholders’ equity	$	488,258						$	489,047						$	487,251

Net interest income			$	11,986						$	15,901						$	11,845

Net interest rate spread (4)						2.9	%						2.8	%						2.7	%

Net interest margin (5)						3.5	%						3.5	%						3.4	%

Ratio of interest-earning assets to interest-bearing liabilities						1.21							1.22							1.23


(1)		Includes both taxable and tax exempt securities.

(2)		Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%. The tax equivalent income adjustment for loans and investment is $58 and $530 for September 30, 2008, $155 and $1,809 for December 31, 2007, and $54 and $628 for September 30,2007.

(3)		Includes applicable loan origination and commitment fees, net of deferred origination cost amortization.

(4)		Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing liabilities.

(5)		Interest margin is calculated by dividing the difference between total interest earned and total interest expensed by total interest-earning assets.

See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS,
YIELDS AND RATES (UNAUDITED)

(Fully taxable equivalent basis in thousands of dollars)


	QUARTER TO DATE AS OF
	SEPTEMBER 30, 2008							JUNE 30, 2008							SEPTEMBER 30, 2007
	Average				Average			Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
ASSETS
Federal funds sold and other earning assets	$	7,410	$	35		1.9	%	$	12,799	$	65		2.1	%	$	5,141	$	67		5.2	%
Investment securities (1) (2)		226,087		3,866		5.6	%		221,857		3,108		5.6	%		242,352		3,503		5.8	%
Loans (2) (3)		228,248		3,143		6.8	%		227,222		3,868		6.8	%		218,102		3,993		7.3	%

Total interest-earning assets		461,745	$	7,044		6.1	%		461,878	$	7,041		6.1	%		465,595	$	7,563		6.5	%

Cash and due from banks		7,758							7,891							7,940
Bank premises and equipment		7,293							6,982							5,381
Other assets		7,336							13,003							14,160

Total non-interest-earning assets		22,387							27,876							27,481

Total Assets	$	484,132						$	489,754						$	493,076


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits	$	50,459	$	167		1.3	%	$	50,071	$	164		1.3	%	$	48,277	$	258		2.1	%
Savings		78,435		219		1.1	%		77,273		204		1.1	%		77,330		200		1.0	%
Time		175,638		1,704		3.9	%		179,252		1,856		4.2	%		190,345		2,306		4.8	%

Total interest-bearing deposits		304,532		2,090		2.7	%		306,596		2,224		2.9	%		315,952		2,764		3.5	%
Federal funds purchased																27				5.5	%
Other borrowings		72,018		776		4.3	%		70,820		771		4.4	%		63,190		826		5.2	%
Subordinated Debt		5,155		55		4.2	%		5,155		56		4.3	%		3,474		61		6.9	%

Total interest-bearing liabilities		381,705	$	2,921		3.0	%		382,571	$	3,051		3.2	%		382,643	$	3,651		3.8	%

Demand deposits		56,365							55,792							57,261
Other liabilities		5,578							5,131							3,765
Shareholders’ equity		40,484							46,260							49,407

Total liabilities and Shareholders’ equity	$	484,132						$	489,754						$	493,076

Net interest income			$	4,123						$	3,990						$	3,912

Net interest rate spread (4)						3.1	%						2.9	%						2.7	%

Net interest margin (5)						3.6	%						3.4	%						3.4	%

Ratio of interest-earning assets to interest-bearing liabilities						1.21							1.21							1.22


(1)		Includes both taxable and tax exempt securities.

(2)		Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%. The tax equivalent income adjustment for loans and investment is $19 and $176 for September 30, 2008, $19 and $178 for June 30, 2008, and $16 and $202 for September 30, 2007.

(3)		Includes applicable loan origination and commitment fees, net of deferred origination cost amortization.

(4)		Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing liabilities.

(5)		Interest margin is calculated by dividing the difference between total interest earned and total interest expensed by total interest-earning assets.

See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA FOR QUARTER ENDED

(In thousands of dollars, except for ratios and per share amounts)


	September 30,			June 30,			March 31,			December 31,			September 30,
Unaudited	2008			2008			2008			2007			2007
SUMMARY OF OPERATIONS
Total interest income	$	6,849		$	6,844		$	7,066		$	7,467		$	7,344
Total interest expense		(2,921	)		(3,051	)		(3,389	)		(3,623	)		(3,651	)

NET INTEREST INCOME (NII)		3,928			3,793			3,677			3,844			3,693
Provision for loan losses		(105	)		(315	)		(75	)		(40	)		—

NII after loss provision		3,823			3,478			3,602			3,804			3,693
Security gains (losses)		34			9			73			40			5
Gain on sale of loans		4			11			10			10			35
Total other income (excluding security and loan gains)		760			728			788			761			749
Total other noninterest expense		(3,258	)		(3,257	)		(3,157	)		(3,194	)		(3,132	)

Income before tax		1,363			969			1,316			1,421			1,350
Net income	$	1,078		$	805		$	1,034		$	1,116		$	1,075

Core earnings (1)	$	1,058		$	793		$	946		$	1,083		$	1,049


Net income (Rolling 4 Quarters) (2)	$	4,033		$	4,030		$	4,282		$	4,350		$	4,416
Core earnings (Rolling 4 Quarters)	$	3,880		$	3,871		$	4,106		$	4,246		$	4,329

PER COMMON SHARE DATA (3)
Net income, both basic and diluted	$	0.25		$	0.19		$	0.23		$	0.25		$	0.24
Net income, both basic and diluted (Rolling 4 Quarters)		0.92			0.91			0.96			0.97			0.99
Core income, both basic and diluted		0.24			0.18			0.21			0.24			0.23
Core income, both basic and diluted (Rolling 4 Quarters)		0.88			0.88			0.91			0.94			0.97
Cash dividends declared		0.22			0.22			0.22			0.22			0.21
Cash dividends declared (Rolling 4 Quarters)		0.88			0.87			0.87			0.86			0.88
Book value		10.10			9.58			10.66			11.12			11.00

BALANCE SHEET DATA
Assets	$	488,608		$	489,470		$	488,559		$	492,694		$	498,689
Investments		213,430			215,336			225,464			238,622			244,165
Net loans		229,059			226,857			224,311			221,488			218,893
Deposits		360,754			363,068			359,303			364,788			372,546
Borrowings		74,316			68,829			72,960			70,413			68,893
Subordinated Debt (See Note 8 - Subordinated Debt)		5,155			5,155			5,155			5,155			5,155
Shareholders equity		44,344			42,036			46,849			48,824			48,728

AVERAGE BALANCES
Assets	$	484,132		$	489,754		$	490,933		$	494,604		$	493,076
Investments		226,087			221,857			227,843			242,596			242,352
Net loans		226,667			225,728			222,233			220,554			216,233
Deposits		360,897			363,388			358,118			365,683			373,213
Borrowings		72,018			70,820			72,393			70,963			63,217
Subordinated Debt		5,155			5,155			5,155			5,155			3,474
Shareholders equity		40,484			46,260			48,931			48,983			49,407

ASSET QUALITY RATIOS
Underperforming assets (4) as a percentage of:
Total assets		0.61	%		0.55	%		0.59	%		0.63	%		0.64	%
Equity plus allowance for loan losses		6.51			6.23			5.93			6.17			6.35
Tier I capital		5.61			5.11			5.36			5.78			5.91

FINANCIAL RATIOS
Return on average equity		10.65	%		6.96	%		8.45	%		9.11	%		8.70	%
Return on average equity (Rolling 4 Quarters)		8.74			8.33			8.60			8.65			8.71
Return on average assets		0.89			0.66			0.84			0.90			0.87
Return on average assets (Rolling 4 Quarters)		0.82			0.82			0.87			0.89			0.91
Effective tax rate		20.90			16.90			21.43			21.46			20.37
Net interest margin ratio		3.58			3.44			3.34			3.49			3.38


(1)		Core earnings are earnings before gains on loans sold, investment securities sold or called, trading security gains, other real estate losses and certain other non recurring items.

(2)		Rolling 4 quarters is calculated by using the current quarter plus the preceding 3 quarters.

(3)		Basic and diluted earnings per share are based on weighted average shares outstanding adjusted retroactively for stock dividends. Cash dividends per common share are based on actual cash dividends declared, adjusted retroactively for the stock dividends. Book value per common share is based on shares outstanding at each period , adjusted retroactively for the stock dividends.

(4)		Underperforming assets include non accrual loans, OREO and restructured loans.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except for per share amounts)

Financial Review

The following is management’s discussion and analysis of the financial condition and results of operations of Cortland Bancorp (the “Company”). The discussion should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this report.

Note Regarding Forward-looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. In addition to historical information, certain information included in this Quarterly Report on Form 10-Q and other material filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) may contain herein, the forward-looking statements that involve risks and uncertainties. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or similar terminology identify forward-looking statements. These statements reflect management’s beliefs and assumptions, and are based on information currently available to management. Economic circumstances, the Company’s operations and actual results could differ significantly from those discussed in any forward-looking statements. Some of the factors that could cause or contribute to such differences are changes in the economy and interest rates either nationally or in the Company’s market area; changes in customer preferences and consumer behavior; increased competitive pressures or changes in either the nature or composition of competitors; changes in the legal and regulatory environment; changes in factors influencing liquidity such as expectations regarding the rate of inflation or deflation, currency exchange rates, and other factors influencing market volatility; unforeseen risks associated with other global economic, political and financial factors. While actual results may differ significantly from the results discussed in the forward-looking statements, the Company undertakes no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

Certain Non GAAP Measures

Certain financial information has been determined by methods other than Generally Accepted Accounting Principles (GAAP). Specifically, certain financial measures are based on core earnings rather than net income. Core earnings exclude income, expense, gains and losses that either are not reflective of ongoing operations or that are not expected to reoccur with any regularity or reoccur with a high degree of uncertainty and volatility. Such information may be useful to both investors and management, and can aid them in understanding the Company’s current performance trends and financial condition. Core earnings are a supplemental tool for analysis and not a substitute for GAAP net income. Reconciliation from GAAP net income to the non GAAP measure of core earnings is shown as part of management’s discussion and analysis of quarterly and year-to-date financial results of operations.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. The most significant accounting policies followed by the Company are presented in “Notes to Consolidated Financial Statements Summary of Significant Accounting Policies” in the 2007 annual report on Form 10-K. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Some of these policies and related methodologies are more critical than others. There has been no material change in critical accounting estimates since those presented in the 2007 annual report on Form 10-K, other than a change in determining the fair value estimates of certain corporate investments, adopting the use of Level III methodology. See FSP No. 157.3 disclosure on page 32, and Note 9 — Fair Value Measurements on page 17.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

The Company has identified its policy on the allowance for loan losses as being critical because it requires management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or by using different assumptions. In determining the appropriate amount to reserve for potential credit losses, the Company’s banking subsidiary also considers unfunded commitments, such as loan commitments, letter of credit and unused lines of credit.

Liquidity

The central role of the Company’s liquidity management is to (1) ensure sufficient liquid funds to meet the normal transaction requirements of its customers, (2) take advantage of market opportunities requiring flexibility and speed, and (3) provide a cushion against unforeseen liquidity needs.

Principal sources of liquidity for the Company include assets considered relatively liquid, such as interest-bearing deposits in other banks, federal funds sold, cash and due from banks, as well as cash flows from maturities and repayments of loans, investment securities and mortgage-backed securities.

Along with its liquid assets, the Company has other sources of liquidity available to it, which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, the ability to obtain deposits through the adjustment of interest rates, the purchasing of federal funds, borrowings from the Federal Home Loan Bank of Cincinnati and access to the Federal Reserve Discount Window.

Cash and cash equivalents increased by $7,129 from September 30, 2007 and increased by $9,476 from levels measured at year-end. The changes are mainly attributable to federal funds sold which increased by $6,750 from September 30, 2007 and $10,200 from year-end. Operating activities provided cash of $3,506 and $2,600 during the nine months ended September 30, 2008 and 2007, respectively. Key differences stem mainly from: 1) a decrease in net income of $317 compared to September 30, 2007; 2) loans held for sale increased by $68 at September 30, 2008 as compared to a decrease of $109 at September 30, 2007; 3) gains on the call of investments were $116 at September 30, 2008 compared to $37 at September 30, 2007; 4) amortization on securities were $64 in 2008 compared to $179 in 2007; 5) provisions for loan loss were $495 at September 30, 2008 compared to

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

none at September 30, 2007; 6) other real estate gains of $49 were recorded at September 30, 2008 compared to a $1 loss at September 30, 2007; and 7) accrued interest receivables on loans and investments of $2,940 were recorded at September 30, 2008, a decrease of $146 from year-end, while the balance at September 30, 2007 was $3,734, an increase of $695 from December 31, 2006. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for September 30, 2008 and 2007, and the following table which details the cash flows from operating activities.


	Nine Months Ended
	September 30,
	2008			2007

Net Income	$	2,917		$	3,234
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization and accretion		567			591
Provision for loan loss		495			—
Investment securities gains		(116	)		(37	)
Other real estate (gains) losses		(49	)		1
Impact of loans held for sale		(68	)		109
FHLMC payments receivable		146			(695	)
Changes in other assets and liabilities		(386	)		(603	)

Net cash flows from operating activities	$	3,506		$	2,600

Capital Resources

The capital management function is a continuous process which consists of providing capital for both the current financial position and the anticipated future growth of the Company. Central to this process is internal equity generation, particularly through earnings retention. Internal capital generation is measured as the annualized rate of return on equity, exclusive of any appreciation or depreciation relating to available for sale securities, multiplied by the percentage of earnings retained. Internally generated capital retained by the Company measured (1.4%) for the nine months ended September 30, 2008 and 0.8% for the nine months ended September 30, 2007. Overall capital (a figure which reflects the cumulative adjustment to retained earnings, earnings, dividends paid, common stock issued, treasury shares purchased, treasury shares reissued and the net change in the estimated fair value of available for sale securities) decreased at an annual rate of 12.2%, primarily due to unrealized losses on available for sale investment securities. Capital remains well above regulatory minimums.

Risk-based standards for measuring capital adequacy require banks and bank holding companies to maintain capital based on “risk-adjusted” assets. Categories of assets with potentially higher credit risk require more capital than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as standby letters of credit and interest rate swaps.

These standards also classify capital into two tiers, referred to as Tier 1 and Tier 2. The Company’s Tier 1 capital consists of common shareholders’ equity (excluding any gain or loss on available for sale debt securities) plus subordinated notes payable to the unconsolidated trust that issued trust preferred securities net of the bank holding Company’s investment in the trust less intangible assets and the net unrealized loss on equity securities with readily determinable fair values. Tier 2 capital includes the allowance for loan and lease losses and the allowance for credit losses on off balance sheet credit exposures reduced for certain regulatory limitations.

Risk based capital standards require a minimum ratio of 8% of qualifying total capital to risk-adjusted total assets with at least 4% constituting Tier 1 capital. Capital qualifying as Tier 2 capital is limited to 100% of Tier 1 capital. All banks and bank holding companies are also required to maintain a minimum leverage capital ratio (Tier 1 capital to total average assets) in the range of 3% to 4%, subject to regulatory guidelines. Capital ratios remained well in excess of regulatory minimums at September 30, 2008.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required banking regulatory agencies to revise risk-based capital standards to ensure that they adequately account for the following additional risks: interest rate, concentration of credit, and non traditional activities. Accordingly, regulators will subjectively consider an institution’s exposure to declines in the economic value of its capital due to changes in interest rates in evaluating capital adequacy. The table below illustrates the Company’s risk weighted capital ratios at September 30, 2008 and December 31, 2007.


	September 30, 2008			December 31, 2007

Tier 1 Capital	$	53,312		$	53,820
Tier 2 Capital		1,604			1,635

TOTAL QUALIFYING CAPITAL	$	54,916		$	55,455


Risk Adjusted
Total Assets (*)	$	292,764		$	289,081

Tier 1 Risk-Based Capital Ratio		18.21	%		18.62	%

Total Risk-Based Capital Ratio		18.76	%		19.18	%

Tier 1 Risk-Based Capital to Average Assets (Leverage Capital Ratio)		10.84	%		10.99	%


(*)		Includes off-balance sheet exposures.

Assets, less intangibles and the net unrealized market value adjustment of investment securities available for sale, averaged $491,714 for the nine months ended September 30, 2008 and $489,443 for the year ended December 31, 2007.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

In management’s opinion, as supported by the data in the table below, the Company met all capital adequacy requirements to which it was subject as of September 30, 2008 and December 31, 2007. As of those dates, Cortland Bancorp was “well capitalized” under regulatory prompt corrective action provisions.


	Actual Regulatory						Regulatory Capital Ratio
	Capital Ratios as of:						requirements to be:
	Sept. 30,			Dec. 31,			Well			Adequately
	2008			2007			Capitalized			Capitalized

Total risk-based capital to risk-weighted assets		18.76	%		19.18	%		10.00	%		8.00	%

Tier 1 capital to risk-weighted assets		18.21	%		18.62	%		6.00	%		4.00	%

Tier 1 capital to average assets		10.84	%		10.99	%		5.00	%		4.00	%

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

First Nine Months of 2008 as Compared to First Nine Months of 2007

Analysis of Net Interest Income


	INTEREST MARGIN YTD
	September 30, 2008							September 30, 2007
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate

INTEREST-EARNING ASSETS

Federal funds sold and other earning assets	$	10,209	$	179		2.4	%	$	8,971	$	353		5.3	%
Investment securities (1) (2)		225,265		9,509		5.6	%		237,659		10,123		5.7	%
Loans (2) (3)		226,407		11,659		6.9	%		213,234		11,731		7.3	%

Total interest-earning assets	$	461,881	$	21,347		6.2	%	$	459,864	$	22,207		6.4	%


INTEREST-BEARING LIABILITIES

Interest-bearing demand deposits	$	48,299	$	511		1.4	%	$	46,175	$	653		1.9	%
Savings		76,830		620		1.1	%		78,996		602		1.0	%
Time		179,377		5,660		4.2	%		184,395		6,549		4.7	%


Total interest-bearing deposits		304,506		6,791		3.0	%		309,566		7,804		3.4	%
Federal funds purchased		206		7		4.4	%		9				5.5	%
Other borrowings		71,539		2,373		4.4	%		64,552		2,497		5.2	%
Subordinated debt		5,155		190		4.9	%		1,171		61		6.9	%


Total interest-bearing liabilities	$	381,406	$	9,361		3.3	%	$	375,298	$	10,362		3.7	%

Net interest income			$	11,986						$	11,845

Net interest rate spread (4)						2.9	%						2.7	%

Net interest margin (5)						3.5	%						3.4	%


(1)		Includes both taxable and tax exempt securities.

(2)		Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%. The tax equivalent income adjustment for loans and investments is $58 and $530 for September 2008 and $54 and $628 for September 2007.

(3)		Includes applicable loan origination and commitment fees, net of deferred origination cost amortization.

(4)		Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing deposits.

(5)		Interest margin is calculated by dividing the difference between total interest earned and total interest expensed by total interest-earning assets.

The decrease in interest income, on a fully taxable equivalent basis, of $860 was the product of a 0.4% year-over-year increase in average earning assets and a 26 basis point decrease in interest rates earned. The decrease in interest expense of $1,001 was a product of a 41 basis point decrease in rates paid offset slightly by a 1.6% increase in interest-bearing liabilities. The net result was a 1.2% increase in net interest income on a fully taxable equivalent basis and a 5 basis point increase in the Company’s net interest margin ratio.

Interest and dividend income on securities registered a decrease of $516 or 5.4%, during the nine months ended September 30, 2008 when compared to 2007. On a fully taxable equivalent basis, income on investment securities decreased by $614 or 6.1%. The decrease in tax equivalent versus actual is due to a $6,148 decrease in the average balance of tax free municipal investments. The average invested balances in securities decreased by $12,394 or 5.2% from the levels of a year ago. The decrease in the average balance of investment securities was accompanied by a 5 basis point decrease in the tax equivalent yield of the portfolio.

Interest and fees on loans decreased by $76, or 0.7%, while on a fully taxable equivalent basis, income on loans decreased by $72, or 0.6%, for the nine months of 2008 compared to 2007. A $13,173 increase in the average balance of the loan portfolio, or 6.2%, was accompanied by a 42 basis point decrease in the portfolio’s tax equivalent yield.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

Other interest income decreased by $174 from the same period a year ago. The average balance of federal funds sold and other money market funds increased by $1,238, or 13.8%. The yield decreased by 293 basis points during the first nine months of 2008 compared to 2007, reflecting the Federal Reserve’s shift in monetary policy.

Average interest-bearing demand deposits and money market accounts increased by $2,124 while savings decreased by $2,166. The average rate paid on these products remained fairly consistent at 1.2% at both September 2008 and at September 30, 2007. The average balance of time deposit products decreased by $5,018, as the average rate paid decreased by 53 basis points, from 4.7% to 4.2%.

Compared to last year, average borrowings, subordinated debt and federal funds purchased increased by $11,168, while the average rate paid on borrowings decreased by 73 basis points. Included in this increase is an average balance of $5,155 at September 30, 2008 and an average balance of $1,171 at September 30, 2007 in subordinated debt issued in July of 2007.

Net interest income after provision for loan losses was reduced by $495 of provisions booked in 2008 compared to none booked at September 30, 2007. The amount charged to operations as a provision for loan loss in the first nine months of 2008 was made to account for charge-offs against the allowance, as well as an increase in loan balances recorded in the portfolio, expected losses on specific problem loans and several qualitative factors including factors specific to the local economy and to industries operating in the local market.

Analysis of Other Income, Other Expense and Federal Income Tax

Other income from all sources increased by $139 from the same period a year ago. Gains on 1-4 residential mortgage loans sold in the secondary mortgage market decreased by $53 from the same period a year ago. Gains on securities called and net gains on the sale of available for sale investment securities increased by $79 from year ago levels. With rates falling during the quarter, U.S. Government agencies and corporations elected to call an increasing number of issues. The Bank held several of these issues at a discount and thus recognized a gain when they were called. Fees for other customer services increased by $33. Gain on the sale of Other Real Estate Owned (OREO) was $49 at September 30, 2008, an increase of $50 from the loss of $1 recorded at September 30, 2007. This gain in 2008 was on the sale of one property that was held in OREO since 2007. Other sources of non-recurring non-interest income increased by $30 from the same period a year ago. This latter income category is subject to fluctuation due to the non-recurring nature of the items.

Total other expenses in the first nine months were $9,672 in 2008 compared to $9,401 in 2007, an increase of $271 or 2.9%. Full time equivalent employment averaged 161 during the first nine months of 2008, a 2.4% decrease compared to 165 at September 30, 2007. Salaries and benefits decreased by $64 or 1.2%, from the similar period a year ago. This decrease is a combination of regular staff salary and benefit increases and the decrease in full-time equivalent employment.

For the first nine months of 2008, state and local taxes decreased by $23. Occupancy and equipment expense increased by $72 or 5.1%. Office supplies decreased by $13. Bank exam and audit expense increased by $29, due to differences in the timing of expenditures. All other expense categories increased by 17.7%, or $270 as a group. This expense category is subject to fluctuation due to non-recurring items. The increase in 2008 is due in part to costs associated with the Company’s Strategic Growth Plan initiated in mid 2007. These expenses include costs for professional consulting, information system software, licensing and maintenance and educational programs for the Company’s employees.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

Income before income tax expense amounted to $3,648 for the first nine months of 2008 compared to $4,040 for the similar period of 2007. The effective tax rate for the first nine months was 20.0% in 2008 and 2007, resulting in income tax expense of $731 and $806, respectively. The provision for income taxes differs from the amount of income tax determined applying the applicable U.S. statutory federal income tax rate to pre-tax income as a result of the following differences:


	NINE MONTHS ENDED
	September 30,
	2008			2007

Provision at statutory rate	$	1,240		$	1,374
Add (Deduct):
Tax effect of non-taxable income		(571	)		(642	)
Tax effect of non-deductible expense		62			74

Federal income taxes	$	731		$	806

Net income for the first nine months registered $2,917 in 2008 compared to $3,234 in 2007, representing per share amounts of $0.66 in 2008 and $0.71 in 2007. Dividends declared per share were $0.66 in 2008 and $0.65 in 2007.

Core earnings (earnings before gains on loans sold, investment securities sold or called, other real estate losses and certain other non-recurring items) decreased by $364, or 11.5%, in the first nine months of 2008 compared to 2007, primarily due to the increase in the provision for loan losses. Core earnings for the first nine months of 2008 were $2,797 compared to $3,161 for the same nine month period in 2007. Core earnings per share were $0.64 in 2008 and $0.70 in 2007. The following is reconciliation between core earnings and earnings as reported under generally accepted accounting principles in the United States (GAAP earnings):


	Nine Months Ended
	September 30,
	2008			2007
GAAP Earnings	$	2,917		$	3,234
Investment security gains		(116	)		(37	)
Gain on sale of loans		(25	)		(78	)
(Gain) Loss on sale of other real estate		(49	)		1
Loss on disposition of fixed assets		8			4
Tax effect of adjustments		62			37

Core Earnings	$	2,797		$	3,161


Core earnings per share	$	0.64		$	0.70

The decrease in core earnings is the result of increased provisions for loan losses in 2008 which resulted in a decline in core earnings per share of $0.07.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

Analysis of Assets and Liabilities

Total cash and cash equivalents increased by $9,476 from year-end, and by $7,129 from the twelve month period ending September 30, 2007. This is due mainly to federal funds sold, which increased by $10,200 from year-end and increased by $6,750 from September 30, 2007. Bank management has elected to employ a higher level of federal funds sold since year end, to achieve a higher level of short-term liquidity needed to support increased loan demand, and compensate for poorly functioning credit markets.

The Bank’s management elected not to reinvest all of the proceeds from called securities that were realized during the nine months ended September 30, 2008. Instead, a portion was used to lower the level of public fund jumbo certificates of deposit, pay-off FHLB of Cincinnati advances, increase federal funds sold balances and fund commercial loans. Investment securities decreased by $25,192 from year-end levels and by $30,735 from the same quarter a year ago. The investment portfolio represented 59.2% of each deposit dollar, down from 65.5% a year ago and 65.4% of year end levels.

Loans net of the allowance for losses increased by $10,166 during the twelve month period from September 30, 2007 to September 30, 2008, and increased by $7,571 from year-end. Gross loans as a percentage of earning assets stood at 52.6% as of September 30, 2008 and 47.1% at September 30, 2007. The loan to deposit ratio at the end of the first nine months of 2008 was 63.9% as compared to 59.2% for the same period a year ago. The increase in loans has primarily resulted from a marketing campaign designed to increase market share for commercial and small business loans primarily secured by real estate. At September 30, 2008 the loan loss allowance of $1,595 represented approximately 0.7% of outstanding loans, and at September 30, 2007, the loan loss allowance of $1,744 represented approximately 0.8% of outstanding loans.

During the first nine months, loan charge-offs were $655 in 2008 compared to $537 in 2007, while the recovery of previously charged-off loans amounted to $134 in 2008 compared to $70 in 2007. Non-accrual loans at September 30, 2008 represented 0.8% of the loan portfolio compared to 1.3% at September 30, 2007.

Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during the year. The number of loan accounts and the amount of charge-off associated with account balances vary from period to period as loans are deemed uncollectible by management.

Premises and equipment increased by $1,144 from year-end and $1,678 from September 30, 2007. This is mainly due to the following: (1) renovation of a new branch office in Middlefield, Ohio which opened in May 2008, (2) purchased property and construction of a new banking office in Brookfield, Ohio. This branch opened in June of 2008, and replaced an existing leased bank location; and (3) construction in progress and property purchased in North Lima, Ohio which will replace an existing leased branch office.

Other assets increased by $2,915 or 17.2% from year-end and $1,681 or 9.3% from September 30, 2007. Other real estate owned increased to $933 in September 2008 as compared to $242 at December 31, 2007 and $284 at September 30, 2007, resulting from increased foreclosure activity. Net deferred tax assets measured $2,225 at September 30, 2008, $291 at December 31, 2007 and $601 at September 30, 2007, primarily reflecting an increase in deferred tax benefits arising from unrealized losses on available for sale investment securities. Interest receivable on investments and loans stood at $2,952 at September 30, 2008, $3,099 at December 31, 2007 and $3,734 at September 30, 2007. Also included in other assets is bank owned life insurance with a cash surrender value of $12,631 at September 30, 2008, $12,283 at December 31, 2007 and $12,165 at September 30, 2007.

Non interest-bearing deposits decreased by $2,267 from year-end and increased by $521 from twelve months ago. Interest-bearing deposits decreased by $1,767 from year-end and decreased by $12,313 from September 30, 2007. The decrease is due primarily to a decrease in certificates of deposit in the amount of $100 or more, which decreased by $4,080 from September 30, 2007. There are no brokered deposits among the Company’s deposit totals.

Federal Home Loan Bank advances and other short term borrowings increased by $3,903 from year-end and increased by $5,423 from September 30, 2007 as the Company was able to obtain advances at competitive rates to assist in funding the loan growth since September 2007.

Other liabilities ranged from $3,367 at September 30, 2007 to $3,514 at December 31, 2007 and were $4,039 at September 30, 2008. The increase in other liabilities was due in part to an entry made to record the cumulative effect of a change in accounting principle for recognizing a liability under split-dollar life insurance arrangements. The entry was made to increase the liability and decrease retained earnings for $539. This was made in accordance with the Emerging Issues Task Force issue 06-04 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements”.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

Third Quarter of 2008 as Compared to Third Quarter of 2007

Analysis of Net Interest Income


	INTEREST MARGIN QTD
	September 30, 2008							September 30, 2007
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
INTEREST-EARNING ASSETS

Federal funds sold and other money market funds	$	7,410	$	35		1.9	%	$	5,141	$	67		5.2	%
Investment securities (1) (2)		226,087		3,866		5.6	%		242,352		3,503		5.8	%
Loans (2) (3)		228,248		3,143		6.8	%		218,102		3,993		7.3	%

Total interest-earning assets	$	461,745	$	7,044		6.1	%	$	465,595	$	7,563		6.5	%


INTEREST-BEARING LIABILITIES

Interest-bearing demand deposits	$	50,459	$	167		1.3	%	$	48,277	$	258		2.1	%
Savings		78,435		219		1.1	%		77,330		200		1.0	%
Time		175,638		1,704		3.9	%		190,345		2,306		4.8	%


Total interest-bearing deposits		304,532		2,090		2.7	%		315,952		2,764		3.5	%
Federal funds purchased									27				5.5	%
Other Borrowings		72,018		776		4.3	%		63,190		826		5.2	%
Subordinated debt		5,155		55		4.2	%		3,474		61		6.9	%


Total interest-bearing liabilities	$	381,705	$	2,921		3.0	%	$	382,643	$	3,651		3.8	%

Net interest income			$	4,123						$	3,912

Net interest rate spread (4)						3.1	%						2.7	%

Net interest margin (5)						3.6	%						3.4	%


(1)		Includes both taxable and tax exempt securities.

(2)		Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%. The tax equivalent income adjustment for loans and investments is $19 and $176 for September 2008 and $16 and $202 for September 2007.

(3)		Includes loan origination and commitment fees.

(4)		Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing deposits.

(5)		Interest margin is calculated by dividing the difference between total interest earned and total interest expensed by total interest-earning assets.

Tax equivalent net interest income for the Company during the third quarter of 2008 increased by $211, a 5.4% increase from the third quarter of 2007. The yield on earning assets decreased by 39 basis points while third quarter average earning assets decreased by 0.8%, or $3,850, when compared to a year ago. The result was a decrease in tax equivalent interest income of $519. The rate paid on interest-bearing liabilities decreased by 73 basis points from the same quarter a year ago, while third quarter average interest-bearing liabilities decreased by $1,138 when compared to a year ago, resulting in a decrease in total interest expense of $730. The net interest margin ratio for the quarter registered 3.6%, up 20 basis points from last year’s third quarter.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in Thousands, except for per share amounts)

Analysis of Other Income, Other Expense and Federal Income Tax

Loan charge-offs during the quarter were $137 in 2008 compared to $321 in 2007, while the recovery of previously charged-off loans amounted to $73 during the third quarter of 2008 compared to $24 in the same period of 2007. The Company’s provision for loan losses during the quarter ended September 30, 2008 was $105 and none in the third quarter of 2007. Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during the year. The number of loan accounts and the amount of charge-off associated with account balances vary from period to period as loans are deemed uncollectible by management. The balance of the allowance for loan loss and provisions to the loan loss allowance are based on an assessment and the risk of loss and the amount of loss on loans within the loan portfolio. The company has allocated a portion of the allowance for a number of specific problem loans through the three months ending September 30, 2008, but has not experienced significant deterioration in any loan type including the residential real estate portfolios or the commercial loan portfolio as some peer banking company’s have experienced, and accordingly has not added any special provision for these loan types.

Other income increased by $9 from a year ago. Fees for customer services increased by $15. Gains on investments netted $34 in the third quarter of 2008, an increase of $29 from the same quarter of 2007. Non-taxable income on bank owned life insurance policies increased by $7. The net gain on loans sold during the quarter amounted to $4, compared to $35 a year ago. Other items decreased by $11.

Total other non-interest expenses in the third quarter were $3,258 in 2008 compared to $3,132 in 2007, an increase of $126 or 4.0%. Salaries and benefits constituted a $15 decrease, or 0.8%. Bank exam and audit fees increased by $17, or 15.2%, mainly due to the timing of expenses associated with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Other expenses increased by $124 or 10.2%.

Income before income tax during the third quarter amounted to $1,363 in 2008 compared to $1,350 in 2007. Income tax expense for the third quarter of 2008 was $285 compared to $275 in 2007. Third quarter net income was $1,078 in 2008 compared to $1,075 in 2007, representing an increase of $3, or 0.3%. Earnings per share for the third quarter, adjusted for the 1% stock dividend paid January 1, 2008, were $0.25 in September 2008 and $0.24 in September 2007.

Core earnings (earnings before gains on loans sold, investment securities sold or called and certain other non-recurring items) increased by 0.9% in the third quarter of 2008 compared to 2007. Core earnings for the third quarter of 2008 were $1,058 compared to last year’s $1,049. Core earnings per share were $0.24 in 2008 and $0.23 in 2007.

The following is a reconciliation between core earnings and earnings under generally accepted accounting principles in the United States (GAPP earnings):


	Three Months Ended
	September 30,
	2008			2007
GAAP Earnings	$	1,078		$	1,075
Investment security gains		(34	)		(5	)
Gain on sale of loans		(4	)		(35	)
Loss on sale of other real estate		2
Loss on disposition of fixed assets		6
Tax effect of adjustments		10			14

Core Earnings	$	1,058		$	1,049


Core earnings per share	$	0.24		$	0.23

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

New Accounting Standards

In September 2006, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 (postretirement benefit plans) or APB No. 12 (deferred compensation plan). The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement; therefore, a liability should be recognized for future benefits. Issue 06-4 is effective for years beginning after December 15, 2007. The Company adopted EITF Issue No. 06-04 as of January 1, 2008 and the cumulative effect of a change in accounting principle to recognize a liability for the death benefit promised under a split-dollar life insurance arrangement totaled $539 and was recorded as a reduction of retained earnings.

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. This FSP clarifies the application of FAS Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FAS Statement No. 154, Accounting Changes and Error Corrections. The disclosure provisions of Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application.)

Subsequent Events

On October 14, 2008, the U.S. Treasury Department and the Federal Deposit Insurance Corporation (“FDIC”) each announced steps to further address the issues that confront the banking system. The U.S. Treasury Department announced details of its voluntary TARP (Troubled Asset Relief Program) Capital Purchase Program, whereby the U.S. Treasury will make direct equity investments into banks in the form of senior preferred equity and common equity warrants. Under the TARP Capital Purchase Program, the U.S. Treasury will purchase up to $250 billion of senior preferred equity in qualifying financial institutions providing an immediate influx of Tier 1 capital into the banking system. Participants must adopt the U.S. Treasury Department’s standards for executive compensation and corporate governance, for the period during which the U.S. Treasury holds equity issued under this program.

Also on October 14, 2008, the systemic risk exception to the FDIC Act was signed enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in noninterest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points pre annum for noninterest bearing transaction deposits. The Company is in the process of fully analyzing the benefits and costs of participating in the Programs in order to make a final determination as to whether or to what extent the Company would participate in these Programs.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

(Dollars in thousands, except for per share amounts)

Available Information

The Company files an annual report on Form 10K, quarterly reports on Form 10Q, current reports on Form 8K and amendments to those reports with the Securities and Exchange Commission (SEC) pursuant to Section 13 (a) or (15) d of the Exchange Act. The Company’s Internet address is www.cortland-banks.com. The Company makes available through this address, free of charge, the reports filed, as soon as reasonably practicable after such material is electronically filed, or otherwise furnished to the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(Dollars in thousands, except for per share amounts)

Management considers interest rate risk to be the Company’s principal source of market risk. Interest rate risk is measured as the impact of interest rate changes on the Company’s net interest income. Components of interest rate risk comprise re-pricing risk, basis risk and yield curve risk. Re-pricing risk arises due to timing differences in the re-pricing of assets and liabilities as interest rate changes occur. Basis risk occurs when re-pricing assets and liabilities reference different key rates. Yield curve risk arises when a shift occurs in the relationship among key rates across the maturity spectrum.

The effective management of interest rate risk seeks to limit the adverse impact of interest rate changes on the Company’s net interest margin, providing the Company with the best opportunity for maintaining consistent earnings growth. Toward this end, Management uses computer simulation to model the Company’s financial performance under varying interest rate scenarios. These scenarios may reflect changes in the level of interest rates, changes in the shape of the yield curve, and changes in interest rate relationships.

The simulation model allows Management to test and evaluate alternative responses to a changing interest rate environment. Typically when confronted with a heightened risk of rising interest rates, the Company will evaluate strategies that shorten investment and loan re-pricing intervals and maturities, emphasize the acquisition of floating rate over fixed rate assets, and lengthen the maturities of liability funding sources. When the risk of falling rates is perceived, Management will typically consider strategies that shorten the maturities of funding sources, lengthen the re-pricing intervals and maturities of investments and loans, and emphasize the acquisition of fixed rate assets over floating rate assets.

The most significant assumptions used in the simulation relate to the cash flows and re-pricing characteristics of the Company’s balance sheet. Re-pricing and runoff rate assumptions are based on a detailed interface with actual customer information and investment data stored on the subsidiary bank’s information systems. Consensus prepayment speeds derived from an independent third party source are used to adjust the runoff cash flows for the impact of the specific interest rate environments under consideration. Simulated results are benchmarked against historical results. Actual results may differ from simulated results not only due to the timing, magnitude and frequency of interest rate changes, but also due to changes in general economic conditions, changes in customer preferences and behavior, and changes in strategies by both existing and potential competitors.

The table on the following page shows the Company’s current estimate of interest rate sensitivity based on the composition of the balance sheet at September 30, 2008 and December 31, 2007. For purposes of this analysis, short term interest rates as measured by the federal funds rate and the prime lending rate are assumed to increase (decrease) gradually over the subsequent twelve months reaching a level 300 basis points higher (lower) than the rates in effect at September 30, 2008 and December 31, 2007 for the respective simulations. Under both the rising rate scenario and the falling rate scenario, the yield curve is assumed to exhibit a parallel shift.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(CONTINUED)

(Dollars in thousands, except for per share amounts)

Over the past twelve months, the Federal Reserve has lowered the rate on overnight federal funds by 275 basis points. At September 30, 2008, the difference between the yield on the ten-year Treasury and the three-month Treasury was a positive 293 basis points compared to a positive 68 basis points at December 31, 2007. With longer-term rates exceeding short-term rates the yield curve has a positive slope.

The base case against which interest rate sensitivity is measured assumes no change in short-term rates. The base case also assumes no growth in assets and liabilities and no change in asset or liability mix. Under these simulated conditions the base case projects net interest income of $15,848 for the twelve month period ending September 30, 2009.

Simulated Net Interest Income (NII) Scenarios
Fully Taxable Equivalent Basis
For the Twelve Months Ending


	Net Interest Income				$ Change in NII					% Change in NII
Changes in	Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,			Sept. 30,			Dec. 31,
Interest Rates	2009		2008		2009		2008			2009			2008
Graduated increase of +300 basis points	$	15,890	$	15,250	$	42	$	19			0.3	%		0.1	%
Short term rates unchanged		15,848		15,231
Graduated decrease of -300 basis points		15,878		14,952		30		(279	)		0.2	%		(1.8	)%

The level of interest rate risk indicated is within limits that Management considers acceptable. However, given that interest rate movements can be sudden and unanticipated, and are increasingly influenced by global events and circumstances beyond the purview of the Federal Reserve, no assurance can be made that interest rate movements will not impact key assumptions and parameters in a manner not presently embodied by the model.

It is Management’s opinion that hedging instruments currently available are not a cost effective means of controlling interest rate risk for the Company. Accordingly, the Company does not currently use financial derivatives, such as interest rate options, floors or other similar instruments.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. With the supervision and participation of management, including the Company’s principal executive officer and principal financial officer, the effectiveness of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) has been evaluated as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are, to the best of their knowledge, effective as of the end of the period covered by this report to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them, particularly during the period for which our periodic reports, including this report, are being prepared.

Changes in Internal Control Over Financial Reporting. Our Chief Executive Officer and Chief Financial Officer have concluded that there have been no significant changes during the period covered by this report in the Company’s internal control over financial reporting (as defined in Rules 13a-13 and 15d-15 of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

See Note (5) of the financial statements.

Item 1A Risk Factors

There have been no material changes from the risk factors previously disclosed in response to Item 1A of Part 1 of Form 10-K filed March 17, 2008

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Company’s Common Stock. The following table shows information relating to the repurchase of shares of the Company’s common stock during the three months ended June 30, 2008:

Total Number

Maximum

of Shares

Number

Purchased as

of Shares

Part Of Publicly

That May Yet Be

Total Number

Average

Announced

Purchased Under

of Shares

Price Paid

Plans or

the Plans or

Purchased

Per Share

Programs

Programs*

July

NONE

57,197

August

5,000

13.25

5,000

52,197

September

10,000

13.50

10,000

42,197

Total

15,000

13.42

15,000

42,197


*		On February 27, 2007 the Company’s Board of Directors approved a Stock Repurchase Program. The program allowed the Company to purchase up to 100,000 shares. On August 14, 2007, the Company’s Board of Directors subsequently approved the repurchase of an additional 100,000 shares. Once again, on November 27, 2007, the Company’s Board of Directors approved the repurchase of an additional 100,000 shares. This program will terminate upon the earlier to occur of the purchase of 300,000 shares or February 28, 2009. (See footnote 7)

Item 3. Defaults upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable

Item 5. Other Information

Not applicable

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION (CONTINUED)

Item 6. Exhibits


Exhibit 2		Not applicable

Exhibit 3.1		Restated Amended Articles of Cortland Bancorp reflecting amendment dated May 18, 1999. Note: filed for purposes of SEC reporting compliance only. This restated document has not been filed with the State of Ohio. (1)

Exhibit 3.2		Code of Regulations for the Bancorp, as amended (1) Code of Regulations, Cortland Savings and Banking (2)

Exhibit 4		The rights of holders of equity securities are defined in portions of the Articles of Incorporation and Code of Regulations as referenced in 3.1 and 3.2. (1)

* Exhibit 10.1		Group Term Carve Out Plan dated February 23,2001 and form of endorsement entered into in 2001 by The Cortland Savings and Banking Company with each executive officer other than Rodger W. Platt and with selected other officers, as amended by the August 2002 letter amendment (1)

* Exhibit 10.2		Group Term Carve Out Plan Amended Split Dollar Policy Endorsement entered into by The Cortland Savings and Banking Company on December 15, 2003 with Stephen A. Telego, Sr. (1)

* Exhibit 10.3		Amended Director Retirement Agreement between Cortland Bancorp and Jerry A. Carleton, dated as of December 18, 2007 (3)

* Exhibit 10.4		Amended Director Retirement Agreement between Cortland Bancorp and David C. Cole, dated December 18, 2007 (3)

* Exhibit 10.5		Amended Director Retirement Agreement between Cortland Bancorp and George E. Gessner, dated December 18, 2007 (3)

* Exhibit 10.6		Amended Director Retirement Agreement between Cortland Bancorp and William A. Hagood, dated as of October 12, 2003 (1)

* Exhibit 10.7		Amended Director Retirement Agreement between Cortland Bancorp and James E. Hoffman III, dated December 18, 2007 (3)

* Exhibit 10.8		Amended Director Retirement Agreement between Cortland Bancorp and Neil J. Kaback, dated as of December 18, 2007 (3)

* Exhibit 10.9		Director Retirement Agreement between Cortland Bancorp and K. Ray Mahan, dated as of March 1, 2001 (1)

* Exhibit 10.10		Amended Director Retirement Agreement between Cortland Bancorp and Richard B. Thompson, dated as of December 18, 2007 (3)

* Exhibit 10.11		Amended Director Retirement Agreement between Cortland Bancorp and Timothy K. Woofter, dated December 18, 2007 (3)

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION (CONTINUED)


* Exhibit 10.12		Form of Split Dollar Agreement entered into by Cortland Bancorp and each of Directors David C. Cole, George E. Gessner, William A. Hagood, James E. Hoffman III, K. Ray Mahan, and Timothy K. Woofter as of February 23, 2001, as of March 1, 2004 with Director Neil J. Kaback, and as of October 1, 2001 with Director Richard B. Thompson; as amended on December 26, 2006, for Directors Cole, Gessner, Hoffman, Mahan, Thompson and Woofter (2) and Amended Split Dollar Agreement and Endorsement entered into by Cortland Bancorp as of December 18, 2007 with Director Jerry A. Carleton (3)

* Exhibit 10.13		Split Dollar Agreement between The Cortland Savings and Banking Company and Rodger W. Platt dated of as February 23, 2001, as amended on August 15, 2002 and September 29, 2005 (1)

* Exhibit 10.14		Endorsement Split Dollar Agreement between The Cortland Savings and Banking Company and Rodger W. Platt dated as of September 29, 2005 (1)

* Exhibit 10.15		Form of Indemnification Agreement entered into by Cortland Bancorp with each of its directors as of May 24, 2005 and with James M. Gasior as of November 5, 2005 (1)

* Exhibit 10.16		Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Rodger W. Platt, dated as of August 15, 2002 (1)

* Exhibit 10.17		Second Amended and Restated Salary Continuation Agreement between The Cortland Savings and Banking Company and Timothy Carney, dated as of December 17, 2003 (1)

* Exhibit 10.18		Second Amended and Restated Salary Continuation Agreement between The Cortland Savings and Banking Company and Lawrence A. Fantauzzi, dated as of December 16, 2003 (1)

* Exhibit 10.19		Second Amended and Restated Salary Continuation Agreement between The Cortland Savings and Banking Company and James M. Gasior, dated as of December 15, 2003 (1)

* Exhibit 10.20		Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Marlene Lenio, dated as of September 9, 2002 (1)

* Exhibit 10.21		Salary Continuation Agreement between The Cortland Savings and Banking Company and Craig Phythyon, dated as of December 15, 2003 (1)

* Exhibit 10.22		Second Amended and Restated Salary Continuation Agreement between The Cortland Savings and Banking Company and Stephen A. Telego, Sr., dated as of December 15, 2003 (1)

* Exhibit 10.23		Second Amended and Restated Salary Continuation Agreement between The Cortland Savings and Banking Company and Danny L. White, dated as of December 15, 2003 (1)

* Exhibit 10.24		Second Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Timothy Carney, dated as of December 17, 2003 (1)

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION (Continued)


* Exhibit 10.25		Second Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Lawrence A. Fantauzzi, dated as of December 16, 2003 (1)

* Exhibit 10.26		Second Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and James M. Gasior, dated as of December 15, 2003 (1)

* Exhibit 10.27		Amended Split Dollar Agreement between The Cortland Savings and Banking Company and Marlene Lenio, dated as of September 9, 2002 (1), as amended on December 11, 2006. (2)

* Exhibit 10.28		Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Craig Phythyon, dated as of December 15, 2003 (1)

* Exhibit 10.29		Second Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Stephen A. Telego, Sr., dated as of December 15, 2003 (1)

* Exhibit 10.30		Second Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Danny L. White, dated as of December 15, 2003 (1)

* Exhibit 10.31		Severance Agreement Due to Change in Control of Cortland Bancorp entered by Cortland Bancorp and The Cortland Savings and Banking Company in January 2001 with each of Timothy Carney, Lawrence A. Fantauzzi, James M. Gasior, and Stephen A. Telego, Sr. (1)

* Exhibit 10.32		Severance Agreement Due to Change in Control of Cortland Bancorp entered by Cortland Bancorp and The Cortland Savings and Banking Company in January 2001 with each of Marlene Lenio, Barbara Sandrock, and Danny L. White (1)

Exhibit 11		See Note (6) of the Financial Statements

Exhibit 15		Not applicable

Exhibit 18		Not applicable

Exhibit 19		Not applicable

Exhibit 22		Not applicable

Exhibit 23		Not applicable

Exhibit 24		Not applicable

Exhibit 31.1		CEO certification (Filed herewith)

Exhibit 31.2		CFO certification (Filed herewith)

Exhibit 32		Certifications of Chief Executive Officer and Chief Financial Officer required under Section 906 of Sarbanes-Oxley Act of 2002 (Filed herewith)


*		Management contract or compensatory plan or arrangement

(1)		Filed previously as an Exhibit to form 10-K filed on March 15, 2006

(2)		Filed previously as an Exhibit to form 10-K filed on March 15, 2007

(3)		Filed previously as an Exhibit to form 10-K filed on March 17, 2008

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Cortland Bancorp (Registrant)
DATED: November 5, 2008	/s/ Lawrence A. Fantauzzi
	Lawrence A. Fantauzzi
	President (Chief Executive Officer)


DATED: November 5, 2008	/s/ James M. Gasior
	James M. Gasior
	Secretary (Chief Financial Officer)

EXHIBIT INDEX


Exhibit
No.		Description

Exhibit 31.1		CEO certification (Filed herewith)

Exhibit 31.2		CFO certification (Filed herewith)

Exhibit 32		Certifications of Chief Executive Officer and Chief Financial Officer required under Section 906 of Sarbanes-Oxley Act of 2002 (Filed herewith)