UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2000

Commission file number 0-13814

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X     NO    

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.

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CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)

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

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CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except per share data)

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

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CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands)

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

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CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)

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

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      1.) Management Representation:

      The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 1999.

      2.) Reclassifications:

      Certain items contained in the 1999 financial statements have been reclassified to conform with the presentation for 2000. 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.

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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands)

      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:

      Securities available for sale, carried at fair value, totalled $109,296 at March 31, 2000 and $113,804 at December 31, 1999 representing 54.7% and 56.4%, respectively, of all investment securities. These levels were deemed to provide an adequate level of liquidity in management’s opinion.

      Investment securities with a carrying value of approximately $92,758 at March 31, 2000 and $96,527 at December 31, 1999 were pledged to secure deposits and for other purposes. Approximately 60% of the securities pledged were to facilitate a line of credit with the Federal Reserve to accommodate any extraordinary liquidity needs that may have arisen as a result of the century date change. The line became effective on November 1, 1999 and expired unused on April 7, 2000.

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      The amortized cost and estimated market value of debt securities at March 31, 2000, 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.

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      The amortized cost and estimated fair value of investment securities available for sale and investment securities held to maturity as of March 31, 2000, are as follows:

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      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, 1999:

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

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

      The Company 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.

      Standby letters of credit are conditional commitments issued by the Company 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.

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      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:

      There are no mortgage loans held for sale included in 1-4 family residential mortgages as of March 31, 2000, or at December 31, 1999.

      The following table sets forth the aggregate balance of underperforming loans for each of the following categories at March 31, 2000 and December 31, 1999:

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      The following shows the amounts of contractual interest income and interest income actually reflected in income on loans accounted for on a nonaccrual basis and loans considered troubled debt restructuring as of March 31, 2000.

      A loan is placed on a nonaccrual 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 nonaccrual 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 nonaccrual are recorded as a reduction to principal or reported as interest income according to management’s judgement as to collectibility of principal.

      Impaired loans are generally included in nonaccrual 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, 2000, the recorded investment in impaired loans was $423 while the related portion of the allowance for loan losses was $38.

      As of March 31, 2000, there were $1,622 in loans not included in the above categories and not considered impaired, but which can be considered 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.

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      The following is an analysis of the allowance for loan losses for the three month periods ended March 31, 2000 and March 31, 1999:

      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 anticipated impact of Year 2000 problems on certain commercial customers, the quality of financial information supplied by customers and the general economic condition present in the lending area of the Company’s bank subsidiary.

      5.) Legal Proceedings:

      The Company’s subsidiary bank was a defendant in a class action lawsuit Frank Slentz, et al. v. Cortland Savings and Banking Company, involving purchased interests in two campgrounds.

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CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share data)

      On October 20, 1997 the judge presiding over this case filed a judgment entry dismissing all claims against the Bank without prejudice. The judgment was appealed by the plaintiffs. On March 2, 1999, the United States Court of Appeals for the Sixth Circuit affirmed the decision of the district court to grant summary judgment in favor of the defendant Bank. The plaintiffs have the right to appeal to the United States Supreme Court. Plaintiffs have also filed a similar suit in the Common Pleas Court of Trumbull County. Accordingly, the ultimate outcome of this litigation presently cannot be determined, and therefore no provision for any liability relative to such litigation has been made in the accompanying consolidated financial statements.

      The Bank is also involved in other legal actions arising in the ordinary course of business. In the opinion of management, the outcome of these matters is 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.

	*Average shares outstanding and resultant per share amounts have been restated to give retroactive effect to the 3% stock dividend of January 1, 2000.

      7.) Stock Repurchase Program

      On January 26, 2000, the Company’s Board of Directors approved a Stock Repurchase Program (the “Program”) under which the Company may repurchase up to 185,000 shares (or approximately 4.9% of the 3,764,759 shares outstanding as of January 26, 2000) of the Company’s outstanding common stock. The Program will expire on February 3, 2001, and results will depend on market conditions. Accordingly, there is no guarantee as to the exact number of shares to be repurchased. The repurchased shares will become treasury shares available for general corporate purposes, including possible use in connection with acquisitions or other distributions such as stock dividends or stock splits. Any repurchase would be effected through open market purchases 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 January 26, 2000, the commitment to repurchase the stock over the next year was approximately $2,636. As of March 31, 2000 the company had repurchased 59,651 shares at a cost of $945.

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CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

      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

      In addition to historical information contained herein, the following discussion may contain forward-looking statements that involve risks and uncertainties. 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; 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 and financial factors.

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.

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CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

      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 compared to year end 1999, as vault cash balances returned to normal levels following the century date change. Operating activities provided cash of $150 and $4,591 during the three months ended March 31, 2000 and 1999, respectively. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for March 31, 2000 and 1999.

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. Internal capital generation was 5.1% for the three months ended March 31, 2000, as compared to 11.1% for the like period during 1999. The decrease reflects the Company’s adoption of a quarterly dividend payment schedule in contrast to the semi-annual one previously used. Overall capital growth (a figure which reflects earnings, dividends paid, common stock issued, treasury shares purchased and the net change in the estimated fair value of available for sale securities) slowed to an annual rate of 2.0%. Factors contributing to the slowing were the change to a quarterly dividend, implementation of a stock repurchase program, and a decline in the value of available for sale securities due to rising interest rates.

      Prior to adopting the stock repurchase program, the Company issued 43,280 shares of common stock which resulted in proceeds of $817. Of the 43,280 shares issued, 37,391 shares were issued through the Company’s dividend reinvestment plan. The remaining 5,889 shares were issued through the subsidiary bank’s 401-k Plan, which offers employees the opportunity to invest in the common stock of the Company as one of several participant directed investment alternatives.

      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.

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CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

      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) less intangible assets and the net unrealized loss on equity securities with readily determinable fair values. Tier 2 capital is the allowance for loan and lease losses 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.

      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 nontraditional 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, 2000 and December 31, 1999.

      (*) Includes off-balance sheet exposures.

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CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

      Assets, less intangibles and the net unrealized market value adjustment of investment securities available for sale, averaged $419,315 for the three months ended March 31, 2000 and $407,637 for the year ended December 31, 1999.

First Three Months of 2000 as Compared to First Three Months of 1999

      During the first three months of 2000, net interest income after provision for loan losses increased by $243 compared to the first three months of 1999. Total interest income increased by $611, or 8.9%, from the level recorded in 1999. This was accompanied by an increase in interest expense of $318, or 10.6%, and a $50 increase in the provision for loan loss.

      The average rate paid on interest sensitive liabilities increased by 12 basis points year-over-year. The average balance of interest sensitive liabilities increased by $19,293 or 6.4%. Compared to the first quarter of last year, average borrowings, primarily with the Federal Home Loan Bank, increased by $16,606 while the average rate paid on borrowings increased by 23 basis points, from 5.26% to 5.49%. Average interest bearing demand deposits increased by $1,362, while savings and money market accounts declined by $1,829 and $968, respectively. The average rate paid on these products declined by 12 basis points in the aggregate. The average balance on time deposit products increased by $4,122, as the average rate paid increased by 11 basis points, from 5.32% to 5.43%.

      Interest and dividend income on securities registered an increase of $570, or 21.9%, during the first three months of 2000 when compared to 1999, while on a fully tax equivalent basis income on securities increased by $590 or 21.2%. The average invested balances increased by 15.0%, increasing by $26,558 over the levels of a year ago. The increase in the average balance of investment securities was accompanied by a 33 basis point increase in the tax equivalent yield of the portfolio.

      Interest and fees on loans increased by $93 for the first three months of 2000 compared to 1999. A $429 increase in the average balance of the loan portfolio, or 0.2%, was accompanied by a 14 basis point increase in the portfolio’s tax equivalent yield.

      Other interest income decreased by $52 from the same period a year ago. The average balance of Federal Funds sold and other money market funds decreased by $4,427. The yield on federal funds increased by 99 basis points reflecting the change in Federal Reserve policy initiated at the mid point of 1999. The yield on Federal Funds sold is anticipated to increase during the second quarter of 2000 as the Federal Reserve is expected to boost the targeted Federal Funds rate by 25 to 50 basis points at the May 16, 2000 meeting of the Federal Open Market Committee.

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CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

      The tax equivalent yield on earning assets increased by 19 basis points from the same quarter a year ago. The tax equivalent yield of the investment portfolio measured 6.63%, a 33 basis point increase from the same quarter a year ago, while the loan portfolio yielded 8.68%, up 14 basis points from last year’s rate. Meanwhile, the rate paid on interest-bearing liabilities increased 12 basis points compared to a year ago. The net effect of these changes was that the tax equivalent net interest margin improved to 4.33%, an increase of 9 basis points from that achieved during last year’s first quarter.

      Other income from all sources decreased by $36 from the same period a year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage market decreased by $45 from the same period a year ago. Gains on securities called and gains on the sale of available for sale investment securities showed a slight decrease of $2 from year ago levels. Fees for other customer services increased by $23, while other sources of non recurring non-interest income decreased by $12 from the same period a year ago.

      Loans net of the allowance for losses increased by $6,015 during the period. Gross loans as a percentage of earning assets stood at 50.3% as of March 31, 2000 as compared to 50.6% on March 31, 1999. The loan to deposit ratio at the end of the first three months of 2000 was 61.8% compared to 61.7% at the end of the same period a year ago. The investment portfolio represented 61.2% of each deposit dollar, up from 59.7% a year ago.

      Loan charge-offs during the first three months were $162 in 2000 and $76 in 1999, while the recovery of previously charged-off loans amounted to $23 in 2000 compared to $27 in 1999. A provision for loan loss of $100 was charged to operations in 2000, compared to $50 charged in 1999. At March 31, 2000, the loan loss allowance of $2,917 represented 1.44% of outstanding loans. Non accrual loans at March 31, 2000 represented 1.1% of the loan portfolio compared to 1.2% at December 31, 1999 and 1.3% a year ago.

      Total other expenses in the first three months were $2,679 in 2000 compared to $2,544 in 1999, an increase of $135 or 5.3%. Full time equivalent employment during the first three months averaged 173 employees in 2000, a 3.4% decline from the 179 employed in the same quarter of 1999. Salaries and benefits increased by $90 or 6.5% compared to the similar period a year ago, primarily due to the increased cost of benefits.

      For the first three months of 2000, state and local taxes increased by $10 or 7.2%. Occupancy and equipment expense decreased by $21, or 4.3%, reflecting the cost of continued Y2K readiness preparation in 1999. All other expense categories increased by 10.4% or $56 as a group.

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CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

      Income before income tax expense amounted to $1,722 for the first three months of 2000 compared to $1,650 for the similar period of 1999. The effective tax rate for the first three months was 25.8% in 2000 compared to 26.1% in 1999, resulting in income tax expense of $444 and $430 respectively. Net income for the first three months registered $1,278 in 2000 compared to $1,220 in 1999, representing per share amounts of $0.34 in 2000 and $0.33 in 1999.

New Accounting Standards

      In June 1998 the Financial Accounting Standards Board issued Statement Of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This standard has been delayed by SFAS No. 137. The standard is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not anticipate that adoption of this standard will have a material impact on the Company’s financial position or results of operation.

Regulatory Matters

      On March 13, 2000, the Board of Governors of the Federal Reserve System approved the Company’s application to become a financial holding company. As a financial holding company, the Company may engage in activities that are financial in nature or incidental to a financial activity, as authorized by the Gramm-Leach-Bliley Act of 1999 (The Financial Services Reform Act). Under the Financial Services Reform Act, the Company may continue to claim the benefits of financial holding company status as long as each depository institution that it controls remains well capitalized and well managed. The Company is required to provide notice to the Board of Governors of the Federal Reserve System when it becomes aware that any depository institution controlled by the Company ceases to be well capitalized or well managed. Furthermore, current regulation specifies that prior to initiating or engaging in any new activities that are authorized for financial holding companies, the Company’s insured depository institutions must be rated “satisfactory” or better under the Community Reinvestment Act (CRA). As of March 31, 2000, the Company’s bank subsidiary was rated “satisfactory” for CRA purposes, and remained well capitalized and well managed, in management’s opinion.

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CORTLAND BANCORP AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(Dollars in thousands)

      Management considers interest rate risk to be the Company’s principal source of market risk. Since December 31, 1999, short term interest rates, as measured by U. S. Treasury securities with maturities of one year or less, have increased by 35 to 55 basis points, reflecting monetary tightening on the part of the Federal Reserve. The Federal Reserve hiked short-term rates by 25 basis points at both the February and March meetings of the Federal Open Market Committee. Intermediate interest rates, as measured by U. S. Treasury securities with maturities of two to five years, increased by approximately 9 to 35 basis points. Meanwhile, long term interest rates, as measured by U.S. Treasury securities with maturities of ten years of more declined by 28 to 52 basis points, reflecting the U.S. Government’s plans to repurchase Treasury debt and expectations of slower growth and lower inflation in the future.

      During that same time period, the Company’s subsidiary bank experienced an increase of 3.0% in its’ loan portfolio funded primarily by a $6,279 increase in deposits. Meanwhile, $6,669 in short term borrowings, used to fund excess vault cash in anticipation of increased customer liquidity demands at the century-date-change, were repaid as cash balances returned to normal levels.

      The net effect of these changes had minimal effect on the Company’s risk position. When these changes are incorporated into the Company’s risk analysis, simulated results for an unchanged rate environment indicate a $303 increase in net interest income for the twelve month horizon subsequent to March 31, 2000, compared to the simulated results for a similar twelve month horizon subsequent to December 31, 1999. The Company’s sensitivity to a declining rate environment increased slightly. The Company’s sensitivity to an increasing rate environment was essentially unchanged. Management expects that the decrease in anticipated net interest income under the rising rate environment will be partially offset by similar declines in operating expense and loan loss provision requirements due to a decline in loan volume.

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CORTLAND BANCORP AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(CONTINUED)

(Dollars in thousands)

      The following table indicates the Company’s current estimate of interest rate sensitivity based on the composition of the balance sheet at March 31, 2000 and December 31, 1999. 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 month period, reaching a level 300 basis points higher (lower) than the rates in effect at March 31, 2000 and December 31, 1999. Under both the rising rate scenario and the falling rate scenario, the yield curve is assumed to exhibit a parallel shift. The analysis assumes no growth in assets and liabilities and no change in asset or liability mix over the subsequent twelve month period.

      Over the past twelve months, the Federal Reserve has increased its target rate for overnight federal funds by 125 basis points. During the quarter ended March 31, 2000, the difference between the yield on the ten year Treasury and the three month Treasury narrowed to 25 basis points from the 112 basis points at December 31, 1999, with interest rates peaking in the 2-3 year maturity range, creating a condition known as an “inverted yield curve.”

      The level of interest rate risk indicated remains 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 relationships in a manner not presently anticipated.

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CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

      See Note (5) of the financial statements.

Item 2. Changes in Securities

      Not applicable

Item 3. Defaults upon Senior Securities

      Not applicable

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

      None

Item 5. Other Information

      Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a)		Exhibits

		2.	Not applicable
		4.	Not applicable
		10.	Not applicable
		11.	See Note (6) of the Financial Statements
		15.	Not applicable
		18.	Not applicable
		19.	Not applicable
		22.	Not applicable
		23.	Not applicable
		24.	Not applicable
		27.	Financial Data Schedule
		99.	Not applicable

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PART II — OTHER INFORMATION

	(b) Reports on Form 8-K

      Form 8-K was filed with the United States Securities and Exchange Commission, dated January 31, 2000. The 8-K applied to Item 5 — Other Events, per the 8-K instructions, and announced that the Board of Directors had approved a stock repurchase program authorizing the acquisition of up to 4.9% of Cortland Bancorp’s outstanding common stock. No financial statements were filed with this report.

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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.

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