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CORTLAND BANCORP INC
10-Q, 2000-11-14
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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TABLE OF CONTENTS

Item 1. Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II -- OTHER INFORMATION
SIGNATURES
Exhibit 27

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UNITED STATES

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the quarterly period ended September 30, 2000

Commission file number 0-13814

Cortland Bancorp

Ohio		34-1451118
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

194 West Main Street, Cortland, Ohio 44410

(330) 637-8040

     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.

Class		Outstanding at November 8, 2000
Common Stock, No Par Value		3,694,074 Shares

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Table of Contents

PART I — FINANCIAL INFORMATION
Item  1.		Financial Statements (Unaudited)
		Cortland Bancorp and Subsidiaries:
		Consolidated Balance Sheets — September 30, 2000 and December 31,   1999		2
		Consolidated Statements of Income — Nine months ended September 30,   2000 and 1999		3
		Consolidated Statement of Shareholders’ Equity — Nine months ended   September 30, 2000		4
		Consolidated Statements of Cash Flows — Nine months ended   September 30, 2000 and 1999		5
		Notes to Consolidated Financial Statements September 30, 2000		6-16
Item  2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		17-23
Item  3.		Quantitative and Qualitative Disclosures about Market Risk		24-25
PART II — OTHER INFORMATION
Item  1.		Legal Proceedings		26
Item  2.		Changes in Securities		26
Item  3.		Defaults Upon Senior Securities		26
Item  4.		Submission of Matters to a Vote of Security Holders		26
Item  5.		Other Information		26
Item  6.		Exhibits and Reports on Form 8-K		26-27
Signatures				28

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CORTLAND BANCORP AND SUBSIDIARIES

(Amounts in thousands, except share data)

				SEPTEMBER 30,				DECEMBER 31,
				2000				1999
ASSETS
Cash and due from banks				$	10,266			$	16,568
Investment securities available for sale (Note 3)					113,611				113,804
Investment securities held to maturity (approximate market value of $87,549 in 2000 and $84,169 in 1999) (Note 3)					89,564				88,053
Total loans (Note 4)					203,518				196,060
	Less allowance for loan losses (Note 4)				(2,945	)			(2,956	)
	Net loans				200,573				193,104
Premises and equipment					6,004				5,839
Other assets					5,597				5,834
		Total assets		$	425,615			$	423,202
LIABILITIES
Noninterest-bearing deposits				$	49,224			$	50,857
Interest-bearing deposits					279,417				269,546
	Total deposits				328,641				320,403
Federal Home Loan Bank advances and other borrowings					48,419				55,285
Other liabilities					2,193				3,289
		Total liabilities			379,253				378,977
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS’ EQUITY
Common stock — $5.00 stated value — authorized 20,000,000 shares; issued 3,774,653 shares in 2000 and 3,731,373 in 1999 (Note 6)					18,873				18,657
Additional paid-in capital (Note 6)					7,974				7,373
Retained earnings					22,061				20,251
Accumulated other comprehensive income					(991	)			(1,834	)
Treasury stock, at cost, 88,526 shares in 2000 and 9,894 shares in 1999					(1,555	)			(222	)
		Total shareholders’ equity			46,362				44,225
		Total liabilities and shareholders’ equity		$	425,615			$	423,202

See accompanying notes to consolidated financial statements

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CORTLAND BANCORP AND SUBSIDIARIES

(Amounts in thousands, except per share data)

						THREE								NINE
						MONTHS ENDED								MONTHS ENDED
						SEPTEMBER 30,								SEPTEMBER 30,
						2000				1999				2000				1999
INTEREST INCOME
	Interest and fees on loans					$	4,468			$	4,168			$	13,207			$	12,482
	Interest and dividends on investment securities:
		Taxable interest income					1,346				966				3,899				2,763
		Nontaxable interest income					439				434				1,331				1,257
		Dividends					75				63				227				192
	Interest on mortgage-backed securities						1,400				1,482				4,175				4,116
	Other interest income						17				64				39				167
			Total interest income				7,745				7,177				22,878				20,977
INTEREST EXPENSE
	Deposits						2,931				2,613				8,294				7,718
	Borrowed funds						685				535				2,060				1,435
			Total interest expense				3,616				3,148				10,354				9,153
				Net interest income			4,129				4,029				12,524				11,824
				Provision for loan losses			45				50				250				150
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES							4,084				3,979				12,274				11,674
OTHER INCOME
	Fees for other customer services						394				330				1,084				944
	Investment securities gains — net						1				—				6				9
	Gain on sale of loans — net						23				31				104				126
	Other non-interest income						35				28				98				125
			Total other income				453				389				1,292				1,204
OTHER EXPENSES
	Salaries and employee benefits						1,462				1,478				4,384				4,285
	Net occupancy expense						207				208				617				606
	Equipment expense						268				298				782				858
	State and local taxes						131				149				427				426
	Office supplies						102				111				349				342
	Marketing expense						98				65				273				191
	Legal and litigation expense						95				10				345				59
	Other operating expenses						363				409				1,227				1,166
				Total other expenses			2,726				2,728				8,404				7,933
INCOME BEFORE FEDERAL INCOME TAXES							1,811				1,640				5,162				4,945
Federal income taxes							482				416				1,341				1,272
NET INCOME						$	1,329			$	1,224			$	3,821			$	3,673
BASIC EARNINGS PER COMMON SHARE (NOTE 6)						$	0.36			$	0.33			$	1.03			$	0.99
DILUTED EARNINGS PER COMMON SHARE (NOTE 6)						$	0.36			$	0.33			$	1.03			$	0.99

See accompanying notes to consolidated financial statements

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CORTLAND BANCORP AND SUBSIDIARIES

(Amounts in thousands)

																ACCUMULATED								TOTAL
								ADDITIONAL								OTHER								SHARE-
				COMMON				PAID-IN				RETAINED				COMPREHENSIVE				TREASURY				HOLDERS’
				STOCK				CAPITAL				EARNINGS				INCOME				STOCK				EQUITY
BALANCE AT JANUARY 1, 2000					$18,657			$	7,373			$	20,251			($	1,834	)		($	222	)		$	44,225
Comprehensive income:
	Net income												3,821												3,821
	Other comprehensive income, net of tax:
		Unrealized gains or (losses) on available-for-sale securities, net of reclassification adjustment															843								843
Total comprehensive income																									4,664
Common stock transactions:
	Shares sold				216				601																817
	Treasury shares purchased																				(1,333	)			(1,333	)
	Cash dividends declared												(2,011	)											(2,011	)
BALANCE AT SEPTEMBER 30, 2000					$18,873			$	7,974			$	22,061			($	991	)		($	1,555	)		$	46,362
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																					847
Less: Reclassification adjustment for net gains realized in net income, net of tax																					4
Net unrealized gains on available-for-sale securities, net of tax																				$	843

See accompanying notes to consolidated financial statements

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CORTLAND BANCORP AND SUBSIDIARIES

			FOR THE
			NINE MONTHS ENDED
			SEPTEMBER 30,
			2000				1999
NET CASH FLOWS FROM OPERATING ACTIVITIES			$	3,542			$	8,393
CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of securities held to maturity			(5,350	)			(36,905	)
	Purchases of securities available for sale			(19,297	)			(34,385	)
	Proceeds from sales of securities available for sale			3,016
	Proceeds from call, maturity and principal payments on securities			21,295				37,697
	Net (increase) decrease in loans made to customers			(7,903	)			3,080
	Proceeds from disposition of other real estate			320
	Proceeds from sale of fixed assets			29
	Purchase of premises and equipment			(799	)			(310	)
	Net cash flows from investing activities			(8,689	)			(30,823	)
CASH FLOWS FROM FINANCING ACTIVITIES
	Net increase in deposit accounts			8,238				12,423
	Net (decrease) increase in borrowings			(6,866	)			13,118
	Proceeds from sale of common stock			817				1,281
	Dividends paid on common stock			(2,011	)			(791	)
	Purchase of treasury stock			(1,333	)			(124	)
	Net cash flows from financing activities			(1,155	)			25,907
	NET CHANGE IN CASH AND CASH EQUIVALENTS			(6,302	)			3,477
CASH AND CASH EQUIVALENTS
	Beginning of period			16,568				15,020
	End of period		$	10,266			$	18,497
SUPPLEMENTAL DISCLOSURES
	Interest paid		$	10,284			$	9,149
	Income taxes paid		$	1,265			$	1,180

See accompanying notes to consolidated financial statements

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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 nine months ended September 30, 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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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:

		NINE MONTHS				THREE MONTHS
		September 30, 2000				September 30, 2000
Proceeds on securities sold		$	3,016			$	0
Gross realized gains			5				0
Gross realized losses			0				0
Proceeds on securities called		$	1,250			$	1,200
Gross realized gains			1				1
Gross realized losses			0				0

      Securities available for sale, carried at fair value, totalled $113,611 at September 30, 2000 and $113,804 at December 31, 1999 representing 55.9% 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 $53,267 at September 30, 2000 and $96,527 at December 31, 1999 were pledged to secure deposits and for other purposes. Approximately 60% of the securities pledged at December 31, 1999 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.

      As of September 30, 2000, pledged securities include investment securities with an approximate market value of $15,281, which were pledged to facilitate a $13,752 line of credit with the Federal Reserve to accommodate any extraordinary liquidity needs that may arise from any unforeseen or unforeseeable circumstances.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      The amortized cost and estimated market value of debt securities at September 30, 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.

Investment securities		AMORTIZED				ESTIMATED
available for sale		COST				FAIR VALUE
Due in one year or less		$	1,242			$	1,243
Due after one year through five years			10,761				10,711
Due after five years through ten years			16,397				16,292
Due after ten years			9,816				9,567
			38,216				37,813
Mortgage-backed Securities			72,036				71,265
		$	110,252			$	109,078

Investment securities		AMORTIZED				ESTIMATED
held to maturity		COST				FAIR VALUE
Due in one year or less		$	2,889			$	2,890
Due after one year through five years			8,249				8,187
Due after five years through ten years			29,879				28,986
Due after ten years			35,305				34,466
			76,322				74,529
Mortgage-backed Securities			13,242				13,020
		$	89,564			$	87,549

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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 September 30, 2000, are as follows:

Investment							GROSS				GROSS				ESTIMATED
securities available			AMORTIZED				UNREALIZED				UNREALIZED				FAIR
for sale			COST				GAINS				LOSSES				VALUE
U.S. Treasury Securities			$	5,799			$	49			$	4			$	5,844
U.S. Government agencies and corporations				23,597				169				349				23,417
Obligations of states and political subdivisions				8,820				9				277				8,552
Mortgage-backed and related securities				72,036				158				929				71,265
	Total			110,252				385				1,559				109,078
Marketable equity Securities				2,171				87				389				1,869
Other securities				2,664												2,664
	Total available for sale		$	115,087			$	472			$	1,948			$	113,611

Investment							GROSS				GROSS				ESTIMATED
securities held			AMORTIZED				UNREALIZED				UNREALIZED				FAIR
to maturity			COST				GAINS				LOSSES				VALUE
U.S. Treasury Securities			$	5,635			$	269			$				$	5,904
U.S. Government agencies and corporations				43,568				15				1,197				42,386
Obligations of states and political subdivisions				27,119				102				982				26,239
Mortgage-backed and related securities				13,242				75				297				13,020
	Total held to maturity		$	89,564			$	461			$	2,476			$	87,549

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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:

Investment							GROSS				GROSS				ESTIMATED
securities available			AMORTIZED				UNREALIZED				UNREALIZED				FAIR
for sale			COST				GAINS				LOSSES				VALUE
U.S. Treasury Securities			$	12,286			$	46			$	25			$	12,307
U.S. Government agencies and corporations				17,580				3				615				16,968
Obligations of states and political subdivisions				10,137				8				465				9,680
Mortgage-backed and related securities				71,841				74				1,479				70,436
	Total			111,844				131				2,584				109,391
Marketable equity securities				2,171				102				396				1,877
Other securities				2,536												2,536
	Total available for sale		$	116,551			$	233			$	2,980			$	113,804

Investment							GROSS				GROSS				ESTIMATED
securities held			AMORTIZED				UNREALIZED				UNREALIZED				FAIR
to maturity			COST				GAINS				LOSSES				VALUE
U.S. Treasury Securities			$	5,659			$				$	125			$	5,534
U.S. Government agencies and corporations				39,549								1,784				37,765
Obligations of states and political subdivisions				26,932				65				1,636				25,361
Mortgage-backed and related securities				15,913				40				444				15,509
	Total held to maturity		$	88,053			$	105			$	3,989			$	84,169

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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.

				CONTRACT OR
				NOTIONAL AMOUNT
				September 30,				December 31,
				2000				1999
Financial instruments whose contract amount represents credit risk:
	Commitments to extend credit:
		Fixed rate		$	1,154			$	2,049
		Variable			36,518				28,152
	Standby letters of credit				277				268

      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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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:

		September 30,				December 31,
		2000				1999
1-4 family residential mortgages			41.9	%			42.2	%
Commercial mortgages			33.5	%			33.2	%
Consumer loans			8.7	%			8.2	%
Commercial loans			12.2	%			12.3	%
Home equity loans			3.7	%			4.1	%

      There are no mortgage loans held for sale included in 1-4 family residential mortgages as of September 30, 2000, or at December 31, 1999.

      The following table sets forth the aggregate balance of underperforming loans for each of the following categories at September 30, 2000 and December 31, 1999:

		September 30,				December 31,
		2000				1999
Loans accounted for on a nonaccrual basis		$	1,681			$	2,277
Loans contractually past due 90 days or more as to interest or principal payments (not included in nonaccrual loans above)			None				None
Loans considered troubled debt restructurings (not included in nonaccrual loans or loans contractually past due above)			145				484

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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 September 30, 2000.

Gross interest income that would have been recorded if the loans had been current in accordance with their original terms		$191
Interest income actually included in income on the loans		147

      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 September 30, 2000, the recorded investment in impaired loans was $376 while the related portion of the allowance for loan losses was $10.

      As of September 30, 2000, there were $1,520 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      The following is an analysis of the allowance for loan losses for the nine month periods ended September 30, 2000 and September 30, 1999:

			2000				1999
Balance at beginning of period			$	2,956			$	3,055
Loan charge-offs:
	1-4 family residential mortgages							3
	Commercial mortgages			198				99
	Consumer loans			133				107
	Commercial loans			40				107
	Home equity loans			7				4
				378				320
Recoveries on previous loan losses:
	1 - 4 family residential mortgages							6
	Commercial mortgages			44
	Consumer loans			59				42
	Commercial loans			13				31
	Home equity loans			1				1
				117				80
Net charge-offs				(261	)			(240	)
Provision charged to operations				250				150
Balance at end of period			$	2,945			$	2,965
Ratio of annualized net charge-offs to average net loans outstanding				0.17	%			0.16	%

      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 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

      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.

      In a similar case filed in 1990 regarding campground loans in Pennsylvania, the subsidiary bank’s board of directors has agreed to accept a settlement offer proposed by plaintiffs’ attorney during the second quarter of 2000 as it does not materially exceed the anticipated cost of continuing to defend against the complainant. The Bank recorded an additional expense provision of $190 during the second quarter, bringing the litigation accrual to the proposed settlement of $325. The court must yet approve the settlement.

      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.

		THREE MONTHS ENDED								NINE MONTHS ENDED
		September 30,								September 30,
		2000				1999				2000				1999
Net Income		$	1,329			$	1,224			$	3,821			$	3,673
Weighted average common shares outstanding *			3,699,932				3,720,098				3,722,100				3,710,476
Basic earnings per share *		$	0.36			$	0.33			$	1.03			$	0.99
Diluted earnings per share *		$	0.36			$	0.33			$	1.03			$	0.99

	*	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 the Company’s dividend reinvestment program, employee benefit plans, acquisitions or other distributions such as stock dividends or stock splits.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

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. At September 30, 2000 the remaining commitment to repurchase the stock is approximately $1,222. As of September 30, 2000 the Company had repurchased 113,108 shares. The Company also reissued 32,724 shares to existing shareholders under it’s dividend reinvestment program, and another 1,752 shares to employees under the subsidiary bank’s 401-k retirement benefit program.

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CORTLAND BANCORP AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

(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, political, 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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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

(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 $3,542 and $8,393 during the nine months ended September 30, 2000 and 1999, respectively. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for September 30, 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 6.6% for the nine months ended September 30, 2000, as compared to 8.6% 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) registered an annual rate of 6.4%.

      Prior to adopting the stock repurchase program in the first quarter of 2000, 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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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

(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 September 30, 2000 and December 31, 1999.

			September 30, 2000				December 31, 1999
Tier 1 Capital			$	46,789			$	45,695
Tier 2 Capital				2,694				2,544
TOTAL QUALIFYING CAPITAL			$	49,483			$	48,239
Risk Adjusted Total Assets (*)			$	215,297			$	203,090
	Tier 1 Risk-Based Capital Ratio			21.73	%			22.50	%
	Total Risk-Based Capital Ratio			22.98	%			23.75	%
	Tier 1 Risk-Based Capital to Average Assets (Leverage Capital Ratio)			11.09	%			11.21	%

(*)	Includes off-balance sheet exposures.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

(Dollars in thousands)

      Assets, less intangibles and the net unrealized market value adjustment of investment securities available for sale, averaged $421,866 for the nine months ended September 30, 2000 and $407,637 for the year ended December 31, 1999.

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

      During the first nine months of 2000, net interest income after provision for loan losses increased by $600 compared to the first nine months of 1999. Total interest income increased by $1,901 or 9.1%, from the level recorded in 1999. This was accompanied by an increase in interest expense of $1,201 or 13.1%, and a $100 increase in the provision for loan loss.

      The average rate paid on interest sensitive liabilities increased by 31 basis points year-over-year. The average balance of interest sensitive liabilities increased by $14,438 or 4.7%. Compared to the first nine months of last year, average borrowings, primarily with the Federal Home Loan Bank, increased by $11,004 while the average rate paid on borrowings increased by 48 basis points, from 5.22% to 5.70%. Average interest bearing demand deposits increased by $414 while savings and money market accounts declined by $2,722 and $177 respectively. The average rate paid on these products declined by 5 basis points in the aggregate. The average balance on time deposit products increased by $5,919 as the average rate paid increased by 40 basis points, from 5.23% to 5.63%.

      Interest and dividend income on securities registered an increase of $1,304 or 15.7%, during the first nine months of 2000 when compared to 1999, while on a fully tax equivalent basis income on securities increased by $1,327 or 14.9%. The average invested balances increased by 8.3%, increasing by $15,498 over the levels of a year ago. The increase in the average balance of investment securities was accompanied by a 39 basis point increase in the tax equivalent yield of the portfolio.

      Interest and fees on loans increased by $725 for the first nine months of 2000 compared to 1999. A $5,734 increase in the average balance of the loan portfolio, or 2.9%, was accompanied by a 22 basis point increase in the portfolio’s tax equivalent yield.

      Other interest income decreased by $128 from the same period a year ago. The average balance of Federal Funds sold and other money market funds decreased by $3,584. The yield on federal funds sold increased by 129 basis points reflecting the change in Federal Reserve policy initiated at the mid point of 1999. The Federal Reserve is expected to hold the targeted Federal Funds rate at 6.50% during the remainder of 2000.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

(Dollars in thousands)

      Other income from all sources increased by $88 from the same period a year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage market decreased by $22 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 $3 from year ago levels. Fees for other customer services increased by $140 while other sources of non-recurring non-interest income decreased by $27 from the same period a year ago.

      Loan charge-offs during the first nine months were $378 in 2000 and $320 in 1999, while the recovery of previously charged-off loans amounted to $117 in 2000 compared to $80 in 1999. A provision for loan loss of $250 was charged to operations in 2000, compared to $150 charged in 1999. At September 30, 2000, the loan loss allowance of $2,945 represented 1.4% of outstanding loans. Non accrual loans at September 30, 2000 represented 0.8% of the loan portfolio compared to 1.2% at both December 31, 1999 and September 30, 1999.

      Total other expenses in the first nine months were $8,404 compared to $7,933 in 1999, an increase of $471 or 5.9%. Full time equivalent employment during the first nine months averaged 171 employees in 2000, a 5.5% decline from the 181 employed during the same period of 1999. Salaries and benefits increased by $99 or 2.3% compared to the similar period a year ago, primarily due to the increased cost of benefits.

      For the first nine months of 2000, state and local taxes increased by only $1 or 0.2%. Occupancy and equipment expense decreased by $65 or 4.4%, as two branch offices were combined during the second quarter of 2000 and 1999 included the cost of Y2K readiness preparation. The Company also recognized one-time charges of $48 to reflect the expense associated with consolidating the two office locations during the first half of 2000. Legal and litigation expense increased by $286 from the similar period a year ago, primarily due to an additional expense accrual in the second quarter of 2000 for the probable settlement of a consumer class action lawsuit, filed in Pennsylvania in 1990. Marketing expense increased by $82 from year ago levels, as the Company conducted market research and launched a new advertising campaign. All other expense categories increased by 4.5% or $68 as a group.

      Income before income tax expense amounted to $5,162 for the first nine months of 2000 compared to $4,945 for the similar period of 1999. The effective tax rate for the first nine months was 26.0% in 2000 compared to 25.7% in 1999, resulting in income tax expense of $1,341 and $1,272 respectively. Net income for the first nine months registered $3,821 in 2000 compared to $3,673 in 1999, representing per share amounts of $1.03 in 2000 and $0.99 in 1999. The expense provisions for the office consolidation and the probable settlement of the Pennsylvania class action lawsuit, both non-recurring items, reduced earnings per share by $0.04 in 2000.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

(Dollars in thousands)

Third Quarter of 2000 as compared to Third Quarter 1999

      During the third quarter of 2000 net interest income after provision for loan losses increased by $105 as compared to third quarter 1999. Average earning assets increased by 3.1% while average interest-bearing liabilities increased by 2.6%. Average loans exhibited growth of 4.7%, while average investments increased by 3.5%.

      The tax equivalent yield on earning assets increased by 33 basis points from the same quarter a year ago. The tax equivalent yield of the investment portfolio measured 6.80%, a 40 basis point pickup from the same quarter a year ago, while the loan portfolio yielded 8.83%, up 20 basis points from last year’s rate. Meanwhile, the rate paid on interest-bearing liabilities increased 47 basis points compared to a year ago. The net effect of these changes was that the tax equivalent net interest margin declined slightly to 4.28%, a decrease of 3 basis points from that achieved during last year’s third quarter.

      Loans increased by $580 during the period. Loans as a percentage of earning assets stood at 50.0% as of September 30, 2000 as compared to 47.7% on September 30, 1999. The loan to deposit ratio at the end of the first nine months of 2000 was 61.9% compared to 58.4% at the end of the same period a year ago. The investment portfolio represented 61.8% of each deposit dollar, up from 61.6% a year ago.

      Loan charge-offs during the third quarter were $155 in 2000 and $125 in 1999, while the recovery of previously charged-off loans amounted to $53 during the third quarter of 2000 compared to $41 in the same period of 1999.

      Other income for the quarter increased by $64 or 16.5% compared to the same period a year ago. The net gain on loans sold during the quarter amounted to $23 compared to $31 a year ago. There were no gains on investment and trading securities transactions in 1999, while a $1 gain was recorded in 2000. Fees for other customer services increased by $64 reflecting pricing revisions implemented during the second quarter of 2000. Income from non-recurring items increased by $7 from the levels of a year ago.

      Total other expenses in the third quarter were $2,726 in 2000 and $2,728 in 1999, a slight decrease of $2 or 0.1%. Employee salaries and benefits decreased by $16 or 1.1%. Occupancy and equipment expense showed a $31 decrease. Legal and litigation expense increased by $85, as activity in this area had been relatively dormant during 1999.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

(Dollars in thousands)

Marketing expenses increased by $33. Other expenses as a group decreased by $73 or 10.9% compared to the same period last year.

      Income before tax for the quarter increased by 10.4% to $1,811 in 2000 from the $1,640 recorded in 1999. Net income for the quarter of $1,329 represented an 8.6% increase from the $1,224 earned a year ago. Earnings per share amounted to $0.36 in 2000 as compared to $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 was delayed by SFAS No. 137 and additionally it was amended by SFAS No. 138. The Company will adopt the standard effective for the fiscal quarter beginning October 1, 2000. Adoption will result in the reclassification of certain securities from Held-to-Maturity to Available-for-Sale. These securities, representing a book value of $23,933, have a market value of $24,139, resulting in a $136 addition to comprehensive income. 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 June 30, 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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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 9 to 90 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 and by 50 basis points at the May meeting of the Federal Open Market Committee. Intermediate interest rates, as measured by U. S. Treasury securities with maturities of two to three years, actually decreased by approximately 26 to 38 basis points. Meanwhile, longer term interest rates, as measured by U.S. Treasury securities with maturities of five years or more declined even more, dropping by 51 to 65 basis points, reflecting the U.S. Government’s repurchase of 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 3.8% in its’ loan portfolio funded primarily by an $8,238 increase in deposits. Meanwhile, $6,866 in borrowings, primarily 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 $361 increase in net interest income for the twelve month horizon subsequent to September 30, 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 decreased by $147, while the Company’s sensitivity to an increasing rate environment increased by $268.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(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 September 30, 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 September 30, 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 fifteen months, the Federal Reserve has increased its target rate for overnight federal funds by 175 basis points. During the quarter ended September 30, 2000, the difference between the yield on the ten year Treasury and the three month Treasury inverted, with the ten year Treasury now 43 basis points below the yield of the three month Treasury, a sharp reversal from the positive spread of 112 basis points at December 31, 1999. Interest rates are now peaking in the area of 6 month maturities resulting in a condition known as an “inverted yield curve.”

Simulated Net Interest Income (NII) Scenarios

		Net Interest Income								$ Change in NII								% Change in NII
Changes in		Sept. 30,				Dec. 31,				Sept. 30,				Dec. 31,				Sept. 30,				Dec. 31,
Interest Rates		2001				2000				2001				2000				2001				2000
Graduated increase of +300 basis points			16,342				16,249				(1,184	)			(916	)			(6.8	)%			(5.3	)%
Short term rates unchanged			17,526				17,165
Graduated decrease of -300 basis points			17,498				16,990				(28	)			(175	)			(0.2	)%			(1.0	)%

      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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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

      Not applicable

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.

				Cortland Bancorp
				---------------------------------------- (Registrant)
DATED:		November 8, 2000		Lawrence A. Fantauzzi
				Secretary/Treasurer
				(Chief Financial Officer)
DATED:		November 8, 2000		Rodger W. Platt
				Chairman and President
				(Duly Authorized Officer)

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