Edgar Filing: CORTLAND BANCORP INC

Cortland Bancorp 10-Q

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: March 31, 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 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 May 6, 2008 4,413,488 Shares


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets — March 31, 2008 (unaudited) and December 31, 2007			2
Unaudited Consolidated Statements of Income — Three Months Ended March 31, 2008 and 2007			3
Unaudited Consolidated Statement of Changes in Shareholders’ Equity - Three months ended March 31, 2008 and 2007			4
Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2008 and 2007			5
Unaudited Notes to Consolidated Financial Statements March 31, 2008			6 - 16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Average Balance Sheets, Yields And Rates - Year to Date March 31, 2008, December 31, 2007 and March 31, 2007			17
Selected Financial Data			18
Financial Review			19 - 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29 - 30
Item 4. Controls and Procedures			31
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			32
Item 6. Exhibits			33 - 35
Signatures			36
EX-31.1
EX-31.2
EX-32

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)


	(Unaudited)
	MARCH 31,			DECEMBER 31,
	2008			2007
ASSETS
Cash and due from banks	$	9,825		$	9,441
Federal funds sold		3,800

Total cash and cash equivalents		13,625			9,441

Investment securities available for sale (Note 3)		140,489			126,507
Investment securities held to maturity (estimated fair value of $86,541 at March 31, 2008 and $113,087 at December 31, 2007) (Note 3)		84,975			112,115
Total loans (Note 4)		225,797			223,109
Less allowance for loan losses (Note 4)		(1,486	)		(1,621	)

Net loans		224,311			221,488

Premises and equipment		6,538			6,206
Other assets		18,621			16,937


Total assets	$	488,559		$	492,694


LIABILITIES
Noninterest-bearing deposits	$	54,592		$	58,224
Interest-bearing deposits		304,711			306,564

Total deposits		359,303			364,788

Federal Home Loan Bank advances		68,000			64,000
Other short term borrowings		4,960			6,413
Subordinated debt		5,155			5,155
Other liabilities		4,292			3,514

Total liabilities		441,710			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		20,912			20,976
Retained earnings		8,914			9,386
Accumulated other comprehensive income (loss)		(1,685	)		(94	)
Treasury shares at cost, 246,095 at March 31, 2008 and 250,545 at December 31, 2007		(4,492	)		(4,644	)

Total shareholders’ equity		46,849			48,824


Total liabilities and shareholders’ equity	$	488,559		$	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
	MONTHS ENDED
	MARCH 31,
	2008		2007
INTEREST INCOME
Interest and fees on loans	$	3,905	$	3,785
Interest and dividends on investment securities:
Taxable interest income		1,546		1,609
Nontaxable interest income		389		477
Dividends		44		53
Interest on mortgage-backed securities		1,103		892
Other interest income		79		114

Total interest income		7,066		6,930


INTEREST EXPENSE
Deposits		2,477		2,382
Borrowed funds		833		834
Subordinated debt		79

Total interest expense		3,389		3,216

Net interest income		3,677		3,714
Provision for loan losses		75


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,602		3,714


OTHER INCOME
Fees for other customer services		554		541
Investment securities gains — net		73		12
Gain on sale of loans — net		10		16
Gain (loss) on sale of other real estate owned — net		51		(1	)
Earnings on bank owned life insurance		134		131
Other non-interest income		49		25

Total other income		871		724


OTHER EXPENSES
Salaries and employee benefits		1,787		1,820
Net occupancy and equipment expense		480		468
State and local taxes		139		146
Bank exam and audit expense		115		94
Office supplies		94		86
Other operating expenses		542		449

Total other expenses		3,157		3,063


INCOME BEFORE FEDERAL INCOME TAXES		1,316		1,375

Federal income taxes		282		273


NET INCOME	$	1,034	$	1,102


BASIC EARNINGS PER COMMON SHARE (NOTE 6)	$	0.23	$	0.24

DILUTED EARNINGS PER COMMON SHARE (NOTE 6)	$	0.23	$	0.24

CASH DIVIDENDS DECLARED PER SHARE	$	0.22	$	0.22

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
THREE MONTHS ENDED MARCH 31, 2007

BALANCE AT JANUARY 1, 2007	$	22,972	$	20,835		$	9,553		$	(455	)	$	(2,313	)	$	50,592
Comprehensive income:
Net income							1,102									1,102
Other comprehensive income, net of tax:
Unrealized gains or (losses) on available- for-sale securities, net of reclassification adjustment										182						182

Total comprehensive income																1,284


Common stock transactions:
Treasury shares reissued				(80	)								313			233
Cash dividends declared							(993	)								(993	)


BALANCE AT MARCH 31, 2007	$	22,972	$	20,755		$	9,662		$	(273	)	$	(2,000	)	$	51,116


THREE MONTHS ENDED MARCH 31, 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 income:
Net income							1,034									1,034
Other comprehensive loss, net of tax benefit:
Unrealized losses on available- for-sale securities, net of reclassification adjustment										(1,591	)					(1,591	)

Total comprehensive loss																(557	)


Common stock transactions:
Treasury shares reissued				(64	)								300			236
Treasury shares purchased													(148	)		(148	)
Cash dividends declared							(967	)								(967	)


BALANCE AT MARCH 31, 2008	$	23,200	$	20,912		$	8,914		$	(1,685	)	$	(4,492	)	$	46,849


	MARCH 31,
	2008			2007

DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE FOR SALE SECURITY GAINS AND LOSSES:

Net unrealized holding gains or (losses) on available-for-sale securities arising during the period, net of tax	$	(1,543	)	$	190
Less: Reclassification adjustment for net gains realized in net income, net of tax		48			8


Net unrealized gains (losses) on available- for-sale securities, net of tax	$	(1,591	)	$	182

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
	THREE MONTHS ENDED
	MARCH 31,
	2008			2007
NET CASH FLOWS FROM OPERATING ACTIVITIES	$	777		$	368

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity		(6,912	)		(998	)
Purchases of securities available for sale		(20,857	)		(5,463	)
Proceeds from sales of securities available for sale		—			—
Proceeds from call, maturity and principal payments on securities		38,569			8,518
Net increase in loans made to customers		(3,282	)		(3,813	)
Proceeds from disposition of other real estate		190			34
Purchase of premises and equipment		(484	)		(391	)

Net cash flows from investing activities		7,224			(2,113	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts		(5,485	)		3,660
Proceeds from Federal Home Loan Bank advances		4,000			4,500
Net increase (decrease) in short term borrowings		(1,453	)		300
Dividends paid		(967	)		(993	)
Treasury shares purchased		(148	)
Treasury shares reissued		236			233

Net cash flows from financing activities		(3,817	)		7,700


NET CHANGE IN CASH AND CASH EQUIVALENTS		4,184			5,955

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

End of period	$	13,625		$	20,330


SUPPLEMENTAL DISCLOSURES
Interest paid	$	3,426		$	3,205
Income taxes paid	$	0		$	0

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 months ended March 31, 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, using the specific identification method. The table below sets forth the proceeds, gains and losses realized on securities sold or called for the period ended:


	THREE MONTHS
	March 31,
	2008		2007

Proceeds on securities sold	$	None	$	None
Gross realized gains		None		None
Gross realized losses		None		None

Proceeds on securities called	$	25,411	$	617
Gross realized gains		73		12
Gross realized losses		None		None

Securities available for sale, carried at fair value, totaled $140,489 at March 31, 2008 and $126,507 at December 31, 2007 representing 62.31% 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 $92,346 at March 31, 2008 and $95,137 at December 31, 2007 were pledged to secure deposits and for other purposes.

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 debt securities at March 31, 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	$	2,448	$	2,475
Due after one year through five years		4,049		4,201
Due after five years through ten years		4,505		4,086
Due after ten years		45,823		42,256

		56,825		53,018
Mortgage-backed securities		82,560		83,815

	$	139,385	$	136,833


Investment securities	AMORTIZED		ESTIMATED
held to maturity	COST		FAIR VALUE
Due in one year or less	$	6,182	$	6,200
Due after one year through five years		3,443		3,577
Due after five years through ten years		7,080		7,259
Due after ten years		51,909		53,144

		68,614		70,180
Mortgage-backed securities		16,361		16,361

	$	84,975	$	86,541

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 March 31, 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	$	11,367	$	506	$		$	11,873
Obligations of states and political subdivisions		8,417		396				8,813
Mortgage-backed and related securities		82,560		1,339		84		83,815
Corporate securities		37,041		62		4,771		32,332

Total debt securities		139,385		2,303		4,855		136,833
Other securities		3,656						3,656

Total available for sale	$	143,041	$	2,303	$	4,855	$	140,489


			GROSS		GROSS		ESTIMATED
Investment securities	AMORTIZED		UNREALIZED		UNREALIZED		FAIR
held to maturity	COST		GAINS		LOSSES		VALUE
U.S. Treasury Securities	$	138	$	14	$		$	152
U.S. Government agencies and corporations		44,667		517		6		45,178
Obligations of states and political subdivisions		23,809		1,052		11		24,850
Mortgage-backed and related securities		16,361		179		179		16,361

Total held to maturity	$	84,975	$	1,762	$	196	$	86,541

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
	March 31,		December 31,
	2008		2007
Financial instruments whose contract amount represents credit risk:
Commitments to extend credit:
Fixed rate	$	1,152	$	2,125
Variable		36,635		36,576
Standby letters of credit		1,490		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 March 31, 2008 totaled $11,711 and $11,698 at December 31, 2007. The total average daily balance of overdrafts used in 2008 was $162 and $153 in 2007, or approximately 1.4% of the total aggregate overdraft protection available to depositors at March 31, 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:


	March 31,			December 31,
	2008			2007
1-4 family residential mortgages		29.8	%		30.5	%
Commercial mortgages		54.6	%		54.3	%
Consumer loans		3.7	%		3.8	%
Commercial loans		7.2	%		6.7	%
Home equity loans		4.7	%		4.7	%

There are $41 mortgage loans held for sale included in 1-4 family residential mortgages as of March 31, 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 March 31, 2008 and December 31, 2007:


	March 31,		December 31,
	2008		2007
Loans accounted for on a non-accrual basis	$	2,028	$	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)		125		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 three months ended March 31, 2008 and 2007.


	March 31,		March 31,
	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)	$	52	$	72

Interest income actually included in income on the loans		5		4

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 March 31, 2008, the recorded investment in impaired loans was $1,716 while the related portion of the allowance for loan losses was $572. 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 $14,805 as of March 31, 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 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 March 31, 2008 and March 31, 2007:


	THREE MONTHS
	2008			2007
Balance at beginning of period	$	1,621		$	2,211
Loan charge-offs:
1 — 4 family residential mortgages		140			—
Commercial mortgages		31			115
Consumer loans and other loans		56			34
Commercial loans		1			—
Home equity loans		17			—

		245			149

Recoveries on previous loan losses
1 — 4 family residential mortgages		—			—
Commercial mortgages		1			—
Consumer loans and other loans		34			21
Commercial loans		—			—
Home equity loans		—			—

		35			21

Net charge-offs		(210	)		(128	)

Provision charged to operations		75			—

Balance at end of period	$	1,486		$	2,083

Ratio of annualized net charge-offs to average loans outstanding		0.38	%		0.25	%

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
	March 31,
	2008		2007
Net Income	$	1,034	$	1,102
Weighted average common shares outstanding*		4,401,763		4,556,228

Basic earnings per share*	$	0.23	$	0.24
Diluted earnings per share*	$	0.23	$	0.24
Dividends declared per share*	$	0.22	$	0.22


*		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. Subsequently, 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. Once again, 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 has repurchased 205,986 shares in 2007 and 11,772 shares in 2008, a total of 217,758 shares. The Company has also reissued 16,222 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 March 31, 2008, the remaining commitment to repurchase the 82,242 remaining shares of stock was approximately $1,020.

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. The securities bear interest at the 3-month LIBOR rate plus 1.45%. The Company issued subordinated debentures to the trust in exchange for the proceeds of the trust preferred offering. The $5,155 million in debentures represent the sole 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 a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by 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 traded 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 March 31, 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 03/31/08 Using

(In thousands)

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable

Unobservable

Description

03/31/08

(Level 1)

Inputs (Level 2)

Inputs (Level 3)

Available for Sale Securities

140,489

Loans measured for impairment

1,144

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 March 31, 2008 the recorded investment in impaired loans was $1,716 with a related reserve of $572, leaving a net balance of $1,144.

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
	MARCH 31, 2008							DECEMBER 31, 2007							MARCH 31, 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	$	10,450	$	79		3.0	%	$	6,950	$	366		5.3	%	$	8,773	$	114		5.3	%
Investment securities (1) (2)		227,843		3,259		5.7	%		238,904		13,664		5.7	%		231,391		3,249		5.6	%
Loans (2) (3)		223,731		3,925		7.0	%		215,496		15,856		7.4	%		208,869		3,803		7.3	%

Total interest-earning assets		462,024	$	7,263		6.3	%		461,350	$	29,886		6.5	%		449,033	$	7,166		6.4	%

Cash and due from banks		7,703							8,220							8,440
Bank premises and equipment		6,400							5,374							4,898
Other assets		14,806							14,103							13,409

Total non-interest-earning assets		28,909							27,697							26,747

Total Assets	$	490,933						$	489,047						$	475,780


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits	$	44,342	$	180		1.6	%	$	46,508	$	888		1.9	%	$	44,363	$	189		1.7	%
Savings		74,765		196		1.1	%		78,072		799		1.0	%		80,245		201		1.0	%
Time		183,281		2,101		4.6	%		184,586		8,769		4.8	%		173,433		1,992		4.7	%

Total interest-bearing deposits		302,388		2,477		3.3	%		309,166		10,456		3.4	%		298,041		2,382		3.2	%
Federal funds purchased		620		7		4.4	%		605		29		4.8	%
Other borrowings		71,773		826		4.6	%		65,570		3,346		5.2	%		65,550		834		5.2	%
Subordinated Debt		5,155		79		6.1	%		2,175		154		7.1	%

Total interest-bearing liabilities		379,936	$	3,389		3.6	%		377,516	$	13,985		3.7	%		363,591	$	3,216		3.6	%

Demand deposits		55,730							57,668							57,747
Other liabilities		6,336							3,775							3,473
Shareholders’ equity		48,931							50,088							50,969

Total liabilities and Shareholders’ equity	$	490,933						$	489,047						$	475,780

Net interest income			$	3,874						$	15,901						$	3,950

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

Net interest margin (5)						3.3	%						3.5	%						3.5	%

Ratio of interest-earning assets to interest-bearing liabilities						1.22							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 $20 and $177 for 2008, $155 and $1,809 for December 31, 2007, and $18 and $218 for March 31,2007.

(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)


	March 31,			December 31,			September 30,			June 30,			March 31,
Unaudited	2008			2007			2007			2007			2007

SUMMARY OF OPERATIONS
Total interest income	$	7,066		$	7,467		$	7,344		$	7,251		$	6,930
Total interest expense		3,389			3,623			3,651			3,495			3,216

NET INTEREST INCOME (NII)		3,677			3,844			3,693			3,756			3,714
Provision for loan losses		75			40			—			—			—

NII after loss provision		3,602			3,804			3,693			3,756			3,714
Security gains (losses)		73			40			5			20			12
Gain on sale of loans		10			10			35			27			16
Total other income (including security and loan gains)		871			811			789			765			724
Total other expense		3,157			3,194			3,132			3,206			3,063

Income before tax		1,316			1,421			1,350			1,315			1,375
Net income	$	1,034		$	1,116		$	1,075		$	1,057		$	1,102

Core earnings (1)	$	946		$	1,083		$	1,049		$	1,028		$	1,086

Net income (Rolling 4 Quarters) (2)	$	4,282		$	4,350		$	4,416		$	4,484		$	4,503
Core earnings (Rolling 4 Quarters)	$	4,106		$	4,246		$	4,329		$	4,419		$	4,448

PER COMMON SHARE DATA (3)
Net income, both basic and diluted	$	0.23		$	0.25		$	0.24		$	0.24		$	0.24
Net income, both basic and diluted (Rolling 4 Quarters)		0.96			0.97			0.99			1.00			1.00
Core income, both basic and diluted		0.21			0.24			0.23			0.23			0.24
Core income, both basic and diluted (Rolling 4 Quarters)		0.91			0.94			0.97			0.98			0.99
Cash dividends declared		0.22			0.22			0.21			0.22			0.22
Cash dividends declared (Rolling 4 Quarters)		0.87			0.86			0.88			0.87			0.86
Book value		10.66			11.12			11.00			10.98			11.22

BALANCE SHEET DATA
Assets	$	488,559		$	492,694		$	498,689		$	485,636		$	480,854
Investments		225,464			238,622			244,165			240,271			231,234
Net loans		224,311			221,488			218,893			213,624			207,019
Deposits		359,303			364,788			372,546			371,809			359,478
Borrowings		72,960			70,413			68,893			61,188			66,815
Subordinated Debt (See Note 8 — Subordinated Debt)		5,155			5,155			5,155
Shareholders equity		46,849			48,824			48,728			49,259			51,116

AVERAGE BALANCES
Assets	$	490,933		$	494,604		$	493,076		$	492,565		$	475,780
Investments		227,843			242,596			242,352			239,114			231,391
Net loans		222,233			220,554			216,233			210,568			206,736
Deposits		358,118			365,683			373,213			371,664			355,788
Borrowings		72,393			70,963			63,217			64,941			65,550
Subordinated Debt		5,155			5,155			3,474
Shareholders equity		48,931			48,983			49,407			51,822			50,969

ASSET QUALITY RATIOS
Underperforming assets as a percentage of:
Total assets		0.59	%		0.63	%		0.64	%		0.62	%		0.71	%
Equity plus allowance for loan losses		5.93			6.17			6.35			5.89			6.45
Tier I capital		5.36			5.78			5.91			6.04			6.69

FINANCIAL RATIOS
Return on average equity		8.45	%		9.11	%		8.70	%		8.16	%		8.65	%
Return on average equity (Rolling 4 Quarters)		8.60			8.65			8.71			8.85			9.02
Return on average assets		0.84			0.90			0.87			0.86			0.93
Return on average assets (Rolling 4 Quarters)		0.87			0.89			0.91			0.95			0.97
Effective tax rate		21.43			21.46			20.37			19.62			19.85
Net interest margin ratio		3.34			3.49			3.38			3.38			3.51


(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.

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.

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 decreased by $6,705 from March 31, 2007 and increased by $4,184 from levels measured at year-end. The changes are mainly attributable to federal funds sold. Operating activities provided cash of $777 and $368 during the three months ended March 31, 2008 and 2007, respectively. Key differences stem mainly from: 1) a decrease in net income of $68 compared to March 31, 2007; 2) loans held for sale increased by $41 at March 31, 2008 as compared to an increase of $352 at March 31, 2007; 3) gains on the call of investments was $73 at March 31, 2008 where there was $12 at March 31, 2007; 4) amortization on securities was $22 in 2008 compared to $100 in 2007; 5) provision for loan loss was $75 at March 31, 2008 compared to none at March 31, 2007; and 6) other real estate gains of $51 was recorded at March 31, 2008 and a $1 loss at March 31, 2007. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for March 31, 2008 and 2007, and the following table which details the cash flows from operating activities.

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)


	Three Months Ended
	March 31,
	2008			2007
Net Income	$	1,034		$	1,102
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization and accretion		174			227
Provision for loan loss		75
Investment securities gains		(73	)		(12	)
Other real estate (gains) losses		(51	)		1
Impact of loans held for sale		(41	)		(352	)
Changes in other assets and liabilities		(341	)		(598	)

Net cash flows from operating activities	$	777		$	368

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 (3.84%) for the three months ended March 31, 2008 and 0.85% for the three months ended March 31, 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 16.2%. Capital ratios remained well in excess of 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.

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 March 31, 2008 and December 31, 2007.


	March 31, 2008			December 31, 2007
Tier 1 Capital	$	53,446		$	53,820
Tier 2 Capital		1,501			1,635

TOTAL QUALIFYING CAPITAL	$	54,947		$	55,455


Risk Adjusted Total Assets (*)	$	289,475		$	289,081

Tier 1 Risk-Based Capital Ratio		18.46	%		18.62	%

Total Risk-Based Capital Ratio		18.98	%		19.18	%

Tier 1 Risk-Based Capital to Average Assets (Leverage Capital Ratio)		10.88	%		10.99	%


(*)		Includes off-balance sheet exposures.

Assets, less intangibles and the net unrealized market value adjustment of investment securities available for sale, averaged $491,055 for the three months ended March 31, 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 March 31, 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:
	March 31,			Dec. 31,			Well			Adequately
	2008			2007			Capitalized			Capitalized

Total risk-based capital to risk-weighted assets		18.98	%		19.18	%		10.00	%		8.00	%
Tier 1 capital to risk-weighted assets		18.46	%		18.62	%		6.00	%		4.00	%
Tier 1 capital to average assets		10.88	%		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 Three Months of 2008 as Compared to First Three Months of 2007

Analysis of Net Interest Income


	INTEREST MARGIN YTD
	March 31, 2008							March 31, 2007
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate

INTEREST-EARNING ASSETS

Federal funds sold and other earning assets	$	10,450	$	79		3.0	%	$	8,773	$	114		5.3	%
Investment securities (1) (2)		227,843		3,259		5.7	%		231,391		3,249		5.6	%
Loans (2) (3)		223,731		3,925		7.0	%		208,869		3,803		7.3	%

Total interest-earning assets	$	462,024	$	7,263		6.3	%	$	449,033	$	7,166		6.4	%


INTEREST-BEARING LIABILITIES

Interest-bearing demand deposits	$	44,342	$	180		1.6	%	$	44,363	$	189		1.7	%
Savings		74,765		196		1.1	%		80,245		201		1.0	%
Time		183,281		2,101		4.6	%		173,433		1,992		4.7	%


Total interest-bearing deposits		302,388		2,477		3.3	%		298,041		2,382		3.2	%
Federal funds purchased		620		7		4.4	%
Subordinated Debt		5,155		79		6.1	%
Other borrowings		71,773		826		4.6	%		65,550		834		5.2	%


Total interest-bearing liabilities	$	379,936	$	3,389		3.6	%	$	363,591	$	3,216		3.6	%

Net interest income			$	3,874						$	3,950

Net interest rate spread (4)						2.7	%						2.8	%

Net interest margin (5)						3.3	%						3.5	%


(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 $20 and $177 for March 2008 and $18 and $218 for March 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 increase in interest income, on a fully tax equivalent basis, of $97 was the product of a 2.9% year-over-year increase in average earning assets and a 13 basis point decrease in interest rates earned. The increase in interest expense of $173 was a product of a 4.5% increase in interest-bearing liabilities and a no basis point change in rates paid. The net result was a 1.9% decrease in net interest income on a fully tax equivalent basis and a 17 basis point decrease in the Company’s net interest margin ratio.

Interest and dividend income on securities registered an increase of $51 or 1.7%, during the three months ended March 31, 2008 when compared to 2007. On a fully tax equivalent basis, income on investment securities increased by $10, or 0.3%. The decrease in tax equivalent versus actual is due to a $7,089 decrease in tax free municipal investments. The average invested balances decreased by $3,548, or 1.5% from the levels of a year ago. The decrease in the average balance of investment securities was accompanied by an 11 basis point increase in the tax equivalent yield of the portfolio.

Interest and fees on loans increased by $120, or 3.2%, while on a fully tax equivalent basis, income on loans increased by $122, or 3.2%, for the three months of 2008 compared to 2007. A $14,862 increase in the average balance of the loan portfolio, or 7.1%, was accompanied by a 33 basis point decrease in the portfolio’s tax equivalent yield.

Other interest income decreased by $35 from the same period a year ago. The average balance of federal funds sold and other money market funds increased by $1,677, or 19.1%. The yield decreased by 224 basis points during the first three months of 2008 compared to 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)

Average interest-bearing demand deposits and money market accounts decreased by $21, while savings decreased by $5,480. The average rate paid on these products stayed consistent at 1.27% at March 2008 and 2007. The average balance on time deposit products increased by $9,848, as the average rate paid decreased by 5 basis points, from 4.65% to 4.60%.

Compared to last year, average borrowings, subordinated debt and federal funds purchased increased by $11,998, while the average rate paid on borrowings decreased by 43 basis points. Included in this increase is an average balance of $5,155 in subordinated debt issued in July of 2007.

Net interest income after provision for loan losses was reduced by $75 in provisions booked in 2008 compared to none booked at March 31, 2007.

Analysis of Other Income, Other Expense and Federal Income Tax

Other income from all sources increased by $147 from the same period a year ago. Gains on 1-4 residential mortgage loans sold in the secondary mortgage market decreased by $6 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 $61 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 $13. Gain on the sale of Other Real Estate Owned (OREO) was $51 at March 31, 2008, an increase of $52 from the loss of $1 recorded at March 31, 2007. This gain in 2008 was on the sale of one property that was in OREO since 2007. Other sources of non-recurring non-interest income increased by $24 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 three months were $3,157 in 2008 compared to $3,063 in 2007, an increase of $94 or 3.1%. Full time equivalent employment averaged 159 during the first three months of 2008, a 4.8% decrease compared to 167 at March 31, 2007. Salaries and benefits decreased by $33 or 1.8%, 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 three months of 2008, state and local taxes decreased by $7. Occupancy and equipment expense increased by $12 or 2.6%. Office supplies increased by $8. Bank exam and audit expense increased by $21, due to differences in the timing of expenditures. All other expense categories increased by 20.7%, or $93 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 $1,316 for the first three months of 2008 compared to $1,375 for the similar period of 2007. The effective tax rate for the first three months was 21.4% in 2008 compared to 19.9% in 2007, resulting in income tax expense of $282 and $273, 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:


	THREE MONTHS ENDED
	March 31,
	2008			2007

Provision at statutory rate	$	447		$	468
Add (Deduct):
Tax effect of non-taxable income		(192	)		(221	)
Tax effect of non-deductible expense		27			26

Federal income taxes	$	282		$	273

Net income for the first three months registered $1,034 in 2008 compared to $1,102 in 2007, representing per share amounts of $0.23 in 2008 and $0.24 in 2007. Dividends declared per share were $0.22 in both 2008 and 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 $140, or 12.9%, in the first three months of 2008 compared to 2007. Core earnings for the three months of 2008 were $946 compared to last year’s $1,086. Core earnings per share were $0.21 in 2008 and $0.24 in 2007. The following is reconciliation between core earnings and earnings as reported under generally accepted accounting principles in the United States (GAAP earnings):


	Three Months Ended
	March 31,
	2008			2007

GAAP Earnings	$	1,034		$	1,102
Investment security gains		(73	)		(12	)
Gain on sale of loans		(10	)		(16	)
(Gain) Loss on sale of other real estate		(51	)		1
Loss on disposition of fixed assets					2
Tax effect of adjustments		46			9

Core Earnings	$	946		$	1,086


Core earnings per share	$	0.21		$	0.24

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 $4,184 from year-end, and decreased by $6,705 from the twelve month period ending March 31, 2007. This is due mainly to federal funds sold, which increased by $3,800 from year-end and decreased by $7,650 from March 31, 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.

The Bank elected not to reinvest all of the proceeds from the abundance of called securities that were realized during the quarter. Instead, a portion was used to lower the level of public fund jumbo certificates of deposit, pay-off FHLB of Cincinnati advances and fund commercial loans. As a result, investment securities decreased by $13,158 from year-end levels and by $5,770 from the same quarter a year ago. The investment portfolio represented 62.8% of each deposit dollar, down from 64.3% a year ago and 65.4% year end levels.

Loans net of the allowance for losses increased by $17,292 during the twelve month period from March 31, 2007 to March 31, 2008, and increased by $2,823 from year-end. Gross loans as a percentage of earning assets stood at 49.6% as of March 31, 2008 and 46.3% at March 31, 2007. The loan to deposit ratio at the end of the first three months of 2008 was 62.8% and 58.2% 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 secured by real estate. At March 31, 2008 the loan loss allowance of $1,486 represented approximately 0.7% of outstanding loans, and at March 31, 2007, the loan loss allowance of $2,083 represented approximately 1.0% of outstanding loans.

Loan charge-offs during the first three months were $245 in 2008 compared to $149 in 2007, while the recovery of previously charged-off loans amounted to $35 in 2008 compared to $21 in 2007. Non-accrual loans at March 31, 2008 represented 0.9% of the loan portfolio compared to 1.5 at March 31, 2007.

Premises and equipment increased by $332 from year-end and $1,496 from March 31, 2007. This is mainly due to the following: (1) construction of a 2,500 square foot banking facility. This office replaced an existing leased bank location in the village of Windham. The newly constructed office opened in May of 2007, (2) construction in process on a new office in Middlefield, Ohio and (3) properties purchased in both Brookfield, Ohio and North Lima, Ohio to replace existing branch offices.

Other assets increased by $1,684 or 9.9% from year-end and $1,392 or 8.1% from March 31, 2007. Other real estate owned increased to $568 in March 2008 as compared to $242 at December 31, 2007 and $143 at March 31, 2007. Interest receivable on investments and loans stood at $3,068 at March 31, 2008, $3,099 at December 31, 2007 and $3,481 at March 31, 2007. Also included in other assets is bank owned life insurance with a cash surrender value of $12,401 at March 31, 2008, $12,283 at December 31, 2007 and $11,934 at March 31, 2007.

Non interest-bearing deposits decreased by $3,632 from year-end and $2,863 from twelve months ago. Interest-bearing deposits decreased by $1,853 from year-end and increased by $2,688 from March 31, 2007. The increase is due primarily to an increase in certificates of deposit in the amount of $100 or less, which increased by $3,469 from March 31, 2007. There are no brokered deposits among the Company’s deposit totals. The decrease from year-end is due to a decrease in certificates of deposit in the amount of $100 or more of $6,874 coupled with an increase in money market accounts of $3,049.

Federal Home Loan Bank advances and other short-term borrowings increased by $2,547 from year-end and $6,145 from March 31, 2007 as the Company was able to obtain advances at competitive rates to assist in funding the asset growth.

Other liabilities ranged from $3,445 at March 31, 2007 to $3,514 at December 31, 2007 and $4,292 at March 31, 2008. The increase in other liabilities was due mainly to an entry made to record the cumulative effect of a change in accounting principle for recognizing a liability for the death benefit promised under a split-dollar life insurance arrangement. 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)

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 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires an employer to recognize the funded status of each of its defined pension and postretirement benefit plans in the balance sheet, to recognize changes in the funded status in the year in which changes occur through comprehensive income, and to measure the funded status as of the balance sheet date. The requirement to recognize the funded status of benefit plans and the disclosure requirements are effective for fiscal years ending after December 15, 2006. The requirement to measure the funded status as of the date of the balance sheet is effective for fiscal years ending after December 15, 2008. The Company has determined that its adoption of SFAS No. 158 will not have a material impact on its earnings, cash flows and financial position.

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 March 31, 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 March 31, 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 by 300 basis points the overnight federal funds rate. At March 31, 2008, the difference between the yield on the ten-year Treasury and the three-month Treasury was a positive 207 basis points compared to a positive 68 basis points at December 31, 2007. With longer-term rates exceeding short-term rates the yield curve is now positive.

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 $15,646 for the twelve month period ending March 31, 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	March 31,		Dec. 31,		March 31,			Dec. 31,			March 31,			Dec. 31,
Interest Rates	2009		2008		2009			2008			2009			2008
Graduated increase of +300 basis points	$	15,750	$	15,250	$	104		$	19			0.6	%		0.1	%
Short term rates
unchanged		15,646		15,231
Graduated decrease of
-300 basis points		15,639		14,952		(7	)		(279	)		0.0	%		(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 March 31, 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*

January

NONE

94,014

February

6,772

12.50

6,772

87,242

March

5,000

12.75

5,000

82,242

Total

11,772

12.61

11,772

82,242


*		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: May 6, 2008		/s/ Lawrence A. Fantauzzi
		Lawrence A. Fantauzzi
		President
		(Chief Executive Officer)

DATED: May 6, 2008		/s/ James M. Gasior
		James M. Gasior
		Secretary
		(Chief Financial Officer)

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