Cortland Bancorp (CLDB) 10-Q 2001 Q3 Quarterly report

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements (Unaudited)
		CONSOLIDATED BALANCE SHEETS (UNAUDITED)
		CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
		CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
		CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		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
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

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 September 30, 2001

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 Number)

194 West Main Street, Cortland, Ohio	44410
(Address of principal executive offices)	(Zip Code)

(330) 637-8040(Registrant’s telephone number, including area code)

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 08, 2001
Common Stock, No Par Value	3,814,678 Shares

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

	Cortland Bancorp and Subsidiaries:
		Consolidated Balance Sheets — September 30, 2001 and December 31, 2000	2
		Consolidated Statements of Income — Nine months ended September 30, 2001 and 2000	3
		Consolidated Statement of Shareholders’ Equity — Nine months ended September 30, 2001	4
		Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2000	5
		Notes to Consolidated Financial Statements September 30, 2001	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	27
Signatures			28

1

CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)

			SEPTEMBER 30			DECEMBER 31,
			2001			2000
ASSETS
Cash and due from banks			$	10,680		$	13,437
Federal funds sold				8,200			1,450
	Total cash and cash equivalents			18,880			14,887
Investment securities available for sale (Note 3)				129,472			132,906
Investment securities held to maturity (approximate market value of $61,467 in 2001 and $62,958 in 2000) (Note 3)				60,445			63,058
Total loans (Note 4)				213,146			204,968
	Less allowance for loan losses (Note 4)			(3,054	)		(2,974	)
	Net loans			210,092			201,994
Premises and equipment				5,825			6,002
Other assets				11,237			10,619
		Total assets	$	435,951		$	429,466
LIABILITIES
Noninterest-bearing deposits			$	52,354		$	50,079
Interest-bearing deposits				278,794			279,870
	Total deposits			331,148			329,949
Federal Home Loan Bank advances and other borrowings				50,796			49,468
Other liabilities				2,687			2,313
		Total liabilities		384,631			381,730
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS’ EQUITY
Common stock — $5.00 stated value — authorized 20,000,000 shares; issued 3,887,484 shares in 2001 and 3,887,484 in 2000 (Note 6)				19,437			19,437
Additional paid-in capital (Note 6)				9,271			9,271
Retained earnings				21,451			19,789
Accumulated other comprehensive income				2,571			896
Treasury stock, at cost, 79,544 shares in 2001 and 95,573 shares in 2000				(1,410	)		(1,657	)
		Total shareholders’ equity		51,320			47,736
		Total liabilities and shareholders’ equity	$	435,951		$	429,466

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

2

CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except per share data)

					THREE				NINE
					MONTHS ENDED				MONTHS ENDED
					SEPTEMBER 30,				SEPTEMBER 30,
					2001		2000		2001		2000
INTEREST INCOME
	Interest and fees on loans				$	4,485	$	4,468	$	13,352	$	13,207
	Interest and dividends on investment securities:
		Taxable interest income				874		1,346		3,043		3,899
		Nontaxable interest income				515		439		1,455		1,331
		Dividends				62		75		215		227
	Interest on mortgage-backed securities					1,484		1,400		4,249		4,175
	Other interest income					83		17		270		39
			Total interest income			7,503		7,745		22,584		22,878
INTEREST EXPENSE
	Deposits					2,783		2,931		8,779		8,294
	Borrowed funds					656		685		2,000		2,060
			Total interest expense			3,439		3,616		10,779		10,354
				Net interest income		4,064		4,129		11,805		12,524
				Provision for loan losses		75		45		175		250
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES						3,989		4,084		11,630		12,274
OTHER INCOME
	Fees for other customer services					386		394		1,139		1,084
	Investment securities gains — net					125		1		299		6
	Gain on sale of loans — net					47		23		139		104
	Other non-interest income					150		35		418		98
				Total other income		708		453		1,995		1,292
OTHER EXPENSES
	Salaries and employee benefits					1,460		1,462		4,443		4,384
	Net occupancy expense					211		207		630		617
	Equipment expense					333		268		959		782
	State and local taxes					156		131		466		427
	Office supplies					98		102		307		349
	Marketing expense					37		98		88		273
	Legal and litigation expense					28		95		107		345
	Other operating expenses					360		363		1,109		1,227
				Total other expenses		2,683		2,726		8,109		8,404
INCOME BEFORE FEDERAL INCOME TAXES						2,014		1,811		5,516		5,162
Federal income taxes						498		482		1,338		1,341
NET INCOME					$	1,516	$	1,329	$	4,178	$	3,821
BASIC EARNINGS PER COMMON SHARE (NOTE 6)					$	0.40	$	0.35	$	1.10	$	1.00
DILUTED EARNINGS PER COMMON SHARE (NOTE 6)					$	0.40	$	0.35	$	1.10	$	1.00

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

3

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

(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, 2001			$	19,437	$	9,271	$	19,789		$	896		($1,657	)	$	47,736
Comprehensive income:
	Net income							4,178								4,178
	Other comprehensive income, net of tax:
		Unrealized gains or (losses) on available-for-sale securities, net of reclassification adjustment									1,675					1,675
Total comprehensive income																5,853
Common stock transactions:
	Shares sold
	Treasury shares reissued net of shares repurchased												247			247
	Cash dividends declared							(2,516	)							(2,516	)
BALANCE AT SEPTEMBER 30, 2001			$	19,437	$	9,271	$	21,451		$	2,571		($1,410	)	$	51,320
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										$	1,872
Less: Reclassification adjustment for net gains realized in net income, net of tax											197
Net unrealized gains on available-for-sale securities, net of tax										$	1,675

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

4

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

		FOR THE
		NINE MONTHS ENDED
		SEPTEMBER 30,
		2001			2000
NET CASH FLOWS FROM OPERATING ACTIVITIES		$	3,849		$	3,542
CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of securities held to maturity		(18,465	)		(5,350	)
	Purchases of securities available for sale		(30,891	)		(19,297	)
	Proceeds from sales of securities available for sale		3,998			3,016
	Proceeds from call, maturity and principal payments on securities		53,990			21,295
	Net (increase) decrease in loans made to customers		(8,273	)		(7,903	)
	Proceeds from disposition of other real estate		0			320
	Proceeds from sale of fixed assets		78			29
	Purchase of premises and equipment		(551	)		(799	)
	Net cash flows from investing activities		(114	)		(8,689	)
CASH FLOWS FROM FINANCING ACTIVITIES
	Net increase in deposit accounts		1,199			8,238
	Net (decrease) increase in borrowings		1,328			(6,866	)
	Proceeds from sale of common stock		0			817
	Dividends paid on common stock		(2,516	)		(2,011	)
	Purchase of treasury stock					(1,333	)
	Treasury shares reissued net of shares repurchased		247
	Net cash flows from financing activities		258			(1,155	)
	NET CHANGE IN CASH AND CASH EQUIVALENTS		3,993			(6,302	)
CASH AND CASH EQUIVALENTS
	Beginning of period		14,887			16,568
	End of period	$	18,880		$	10,266
SUPPLEMENTAL DISCLOSURES
	Interest paid	$	10,876		$	10,284
	Income taxes paid	$	1,300		$	1,265

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

5

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, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000.

     2.) Reclassifications:

     Certain items contained in the 2000 financial statements have been reclassified to conform with the presentation for 2001. 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.

6

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:

		NINE MONTHS		NINE MONTHS		THREE MONTHS		THREE MONTHS
		Sept 30, 2001		Sept 30, 2000		Sept 30 2001		Sept 30, 2000
Proceeds on securities sold		$	3,998	$	3,016	$	3,998	$	0
	Gross realized gains		230		5		230		0
	Gross realized losses		155		0		155		0
	Proceeds on securities called by issues		14,901		1,250		6,241		1,200
	Gross realized gains		224		1		50		1
	Gross realized losses		0		0		0		0

     Securities available for sale, carried at fair value, totalled $129,472 at September 30, 2001 and $132,906 at December 31, 2000 representing 68.2% and 67.8%, 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 $36,726 at September 30, 2001 and $52,670 at December 31, 2000 were pledged to secure deposits and for other purposes.

7

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

     The amortized cost and estimated market value of debt securities at September 30, 2001, 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	$	4,186	$	4,271
Due after one year through five years		5,120		5,339
Due after five years through ten years		11,984		12,721
Due after ten years		20,121		20,784
		41,411		43,115
Mortgage-backed Securities		80,614		82,785
	$	122,025	$	125,900

Investment securities	AMORTIZED		ESTIMATED
held to maturity	COST		FAIR VALUE
Due in one year or less	$	2,634	$	2,659
Due after one year through five years		303		310
Due after five years through ten years		13,713		14,122
Due after ten years		29,437		29,746
		46,087		46,837
Mortgage-backed Securities		14,358		14,630
	$	60,445	$	61,467

8

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 September 30, 2001, are as follows:

Investment				GROSS		GROSS		ESTIMATED
securities available		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
for sale		COST		GAINS		LOSSES		VALUE
U.S. Treasury Securities		$	5,813	$	588	$		$	6,401
U.S. Government agencies and corporations			14,781		892		1		15,672
Obligations of states and political subdivisions			20,817		327		102		21,042
Mortgage-backed and related securities			80,614		2,184		13		82,785
	Total		122,025		3,991		116		125,900
Marketable equity Securities			714		113		100		727
Other securities			2,845						2,845
	Total available for sale	$	125,584	$	4,104	$	216	$	129,472

Investment				GROSS		GROSS		ESTIMATED
securities held		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
to maturity		COST		GAINS		LOSSES		VALUE
U.S. Government agencies and corporations		$	21,472	$	612	$		$	22,084
Obligations of states and political subdivisions			24,615		345		207		24,753
Mortgage-backed and related securities			14,358		272				14,630
	Total held to maturity	$	60,445	$	1,229	$	207	$	61,467

9

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, 2000:

Investment				GROSS		GROSS		ESTIMATED
securities available		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
for sale		COST		GAINS		LOSSES		VALUE
U.S. Treasury Securities		$	8,413	$	689	$	1	$	9,101
U.S. Government agencies and corporations			28,656		611		67		29,200
Obligations of states and political subdivisions			16,638		138		80		16,696
Mortgage-backed and related securities			73,029		521		274		73,276
	Total		126,736		1,959		422		128,273
Marketable equity securities			2,111		91		279		1,923
Other securities			2,710						2,710
Total available for sale		$	131,557	$	2,050	$	701	$	132,906

Investment				GROSS		GROSS		ESTIMATED
securities held		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
to maturity		COST		GAINS		LOSSES		VALUE
U.S. Government agencies and corporations		$	34,429	$	150	$	198	$	34,381
Obligations of states and political subdivisions			19,848		184		219		19,813
Mortgage-backed and related securities			8,781		104		121		8,764
	Total held to maturity	$	63,058	$	438	$	538	$	62,958

10

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.

	CONTRACT OR
	NOTIONAL AMOUNT
	September 30,		December 31,
	2001		2000
Financial instruments whose contract amount represents credit risk:
Commitments to extend credit:
Fixed rate	$	4,744	$	1,280
Variable		32,723		30,221
Standby letters of credit		175		237

     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.

11

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:

	September 30,			December 31,
	2001			2000
1-4 family residential mortgages		38.8	%		41.2	%
Commercial mortgages		38.6	%		34.9	%
Consumer loans		7.8	%		8.7	%
Commercial loans		11.2	%		11.6	%
Home equity loans		3.6	%		3.6	%

     There are no mortgage loans held for sale included in 1-4 family residential mortgages as of September 30, 2001, or at December 31, 2000.

     The following table sets forth the aggregate balance of underperforming loans for each of the following categories at September 30, 2001 and December 31, 2000:

	September 30,		December 31,
	2001		2000
Loans accounted for on a nonaccrual basis	$	1,900	$	1,648
Loans contractually past due 90 days or more as to interest or principal payments (not included in nonaccrual loans above)		0		9
Loans considered troubled debt restructurings (not included in nonaccrual loans or loans contractually past due above)		136		143

12

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 September 30, 2001.

	Sept 30,		Sept 30,
	2001		2000
Gross interest income that would have been recorded if the loans had been current in accordance with their original terms	$	221	$	191
Interest income actually included in income on the loan		159		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, 2001, there were no loans considered impaired.

     As of September 30, 2001, there were $1,527 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.

13

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 nine month periods ended September 30, 2001 and September 30, 2000:

		2001			2000
Balance at beginning of period		$	2,974		$	2,956
Loan charge-offs:
	1-4 family residential mortgages
	Commercial mortgages					198
	Consumer loans		123			133
	Commercial loans		26			40
	Home equity loans		3			7
			152			378
Recoveries on previous loan losses:
	1-4 family residential mortgages		5
	Commercial mortgages					44
	Consumer loans		47			59
	Commercial loans		3			13
	Home equity loans		2			1
			57			117
Net charge-offs			(95	)		(261	)
Provision charged to operations			175			250
Balance at end of period		$	3,054		$	2,945
Ratio of annualized net charge-offs to average net loans outstanding			0.06	%		0.17	%

     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 and the general economic conditions 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 lawsuitFrank Slentz, et al. v. Cortland Savings and Banking Company, involving purchased interests in two campgrounds.

14

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. Plaintiffs have refiled 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 case filed in 1990 regarding campground loans in Pennsylvania, the subsidiary bank’s board of directors agreed to a negotiated settlement proposed by plaintiffs’ attorney during the second quarter of 2000 as it did not materially exceed the anticipated cost of continuing to defend against the complainant. The Bank recorded an additional expense provision of $240,000 during 2000, bringing the litigation accrual to the agreed upon settlement amount of $375,000, which was fully disbursed in the first quarter of 2001.

     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,
	2001		2000		2001		2000
Net Income	$	1,516	$	1,329	$	4,178	$	3,821
Weighted average common shares outstanding *		3,811,632		3,810,521		3,813,591		3,833,352
Basic earnings per share *	$	0.40	$	0.35	$	1.10	$	1.00
Diluted earnings per share *	$	0.40	$	0.35	$	1.10	$	1.00

*Average shares outstanding and resultant per share amounts have been restated to give retroactive effect to the 3% stock dividend of January 1, 2001.

15

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share data)

     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 could 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 expired on February 3, 2001. On January 23, 2001 the Company’s Board of Directors approved a new Program which allows the Company to repurchase up to 187,000 shares (or approximately 4.9% of the 3,815,125 shares outstanding as of January 31, 2001) of the Company’s outstanding common stock. This program will expire not later than February 6, 2002, 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.

     Repurchase amounts are effected through open market transactions or in privately negotiated agreements in accordance with applicable regulations of the Securities and Exchange Commission. Under the 2000 program 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 $2,636,000. The Company repurchased 7,529 shares between January 1 and February 3, 2001, bringing the total repurchased shares to 138,218 under this plan. The Company also reissued 30,742 shares to existing shareholders under it’s dividend reinvestment program in January of 2001.

     Under the 2001 program, based on the value of the Company’s stock on January 31, 2001, the commitment to repurchase the stock over the next year was $3,179,000. At September 30, 2001, the remaining commitment to repurchase the stock was approximately $3,073,000. As of September 30, 2001 the Company had repurchased 33,374 shares under the new program. The company also reissued 26,190 shares to existing shareholders under its 2001 dividend reinvestment program, bringing the total number of shares reissued during 2001 to 56,932.

16

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.

17

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 increased compared to year end 2000. Operating activities provided cash of $3,849 and $3,542 during the nine months ended September 30, 2001 and 2000, respectively. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for September 30, 2001 and 2000.

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 slowed to 4.6% for the nine months ended September 30, 2001, as compared to 5.2% for the like period during 2000. The decrease primarily reflects the Company’s increase in the dividend payout ratio. Overall capital growth (a figure which reflects 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) was at an annual rate of 10.0%.

     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 do 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) 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.

18

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

     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 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, 2001 and December 31, 2000.

		September 30,			December 31,
		2001			2000
Tier 1 Capital		$	48,422		$	46,361
Tier 2 Capital			2,881			2,756
TOTAL QUALIFYING CAPITAL		$	51,303		$	49,117
Risk Adjusted Total Assets (*)		$	229,851		$	220,263
	Tier 1 Risk-Based Capital Ratio		21.07	%		21.05	%
	Total Risk-Based Capital Ratio		22.32	%		22.30	%
	Tier 1 Risk-Based Capital to Average Assets (Leverage Capital Ratio)		11.26	%		10.94	%

(*) Includes off-balance sheet exposures.

     Assets, less intangibles and the net unrealized market value adjustment of investment securities available for sale, averaged $430,106 for the nine months ended September 30, 2001 and $423,933 for the year ended December 31, 2000.

19

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

First Nine Months of 2001 as Compared to First Nine Months of 2000

     During the first nine months of 2001, net interest income after provision for loan losses decreased by $644 compared to the first nine months of 2000. Total interest income decreased slightly by $294 or 1.3%, from the level recorded in 2000. This was accompanied by an increase in interest expense of $425 or 4.1%, and a $75 decrease in the provision for loan loss.

     The average rate paid on interest sensitive liabilities increased by 8 basis points year-over-year. The average balance of interest sensitive liabilities increased by $7,549 or 2.3%. Compared to the first nine months of last year, average borrowings, primarily with the Federal Home Loan Bank, increased by $1,643 while the average rate paid on borrowings decreased by 31 basis points, from 5.7% to 5.4%. Average interest bearing demand deposits decreased by $204, while savings and money market accounts declined by $3,540 and $354 respectively. The average rate paid on these products decreased by 1 basis point in the aggregate. The average balance on time deposit products increased by $10,004, as the average rate paid increased by 14 basis points, from 5.6% to 5.8%, as this portfolio continued to reflect the impact of the rising rate environment of 1999 and 2000. This effect has now peaked and the trend is now reversing.

     Interest and dividend income on securities registered a decrease of $670, or 7.0%, during the first nine months of 2001 when compared to 2000, while on a fully tax equivalent basis income on securities decreased by $610 or 6.0%. The average invested balances decreased by 6.1%, decreasing by $12,336 over the levels of a year ago. The decrease in the average balance of investment securities was accompanied by a 1 basis point increase in the tax equivalent yield of the portfolio.

     Interest and fees on loans increased by $145 for the first nine months of 2001 compared to 2000. A $7,229 increase in the average balance of the loan portfolio, or 3.6%, was accompanied by a 22 basis point decrease in the portfolio’s tax equivalent yield.

     Other interest income increased by $231 from the same period a year ago. The average balance of Federal Funds sold and other money market funds increased by $7,456. The yield on federal funds decreased by 192 basis points reflecting the change in Federal Reserve policy initiated early in 2001. The yield on Federal Funds sold is anticipated to decrease further during the fourth quarter of 2001 as the Federal Reserve is expected to lower the targeted Federal Funds rate by another 100 to 150 basis points.

20

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

     Other income from all sources increased by $703 from the same period a year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage market increased by $35 from the same period a year ago. Gains on securities called and gains on the sale of available for sale investment securities increased by $293 from year ago levels. Fees for other customer services increased by $55. Other sources of non-interest income increased by $320 from the same period a year ago, due primarily to a $280 increase in the cash surrender value of life insurance purchased at the end of 2000 upon the adoption of new benefit plans.

     Loan charge-offs during the first nine months were $152 in 2001 and $378 in 2000, while the recovery of previously charged-off loans amounted to $57 in 2001 compared to $117 in 2000. A provision for loan loss of $175 was charged to operations in 2001, compared to $250 charged in 2000. At September 30, 2001, the loan loss allowance of $3,054 represented 1.4% of outstanding loans. Non accrual loans at September 30, 2001 represented 0.9% of the loan portfolio compared to 0.8% at both December 31, 2000, and a year ago.

     Total other expenses in the first nine months were $8,109 in 2001 compared to $8,404 in 2000, a decrease of $295 or 3.5%. Full time equivalent employment during the first nine months averaged 166 employees in 2001, a 2.9% decline from the 171 employed during the same period of 2000. Salaries and benefits increased by $59 or 1.3% compared to the similar period a year ago, primarily due to the increased cost of benefits.

     For the first nine months of 2001, state and local taxes increased by $39 or 9.1%. Occupancy and equipment expense increased by $190 or 13.6%, primarily reflecting higher depreciation charges for capital expenditures required for new customer services. Legal and litigation expense decreased by $238 from the similar period a year ago, due to an expense in 2000 for the settlement of a consumer class action lawsuit filed in Pennsylvania in 1990. Marketing expense decreased by $185 from year ago levels, when the Company incurred additional costs for market research and design of a new advertising campaign. All other expense categories decreased by 10.2% or $160 as a group.

     Income before income tax expense amounted to $5,516 for the first nine months of 2001 compared to $5,162 for the similar period of 2000. The effective tax rate for the first nine months was 24.3% in 2001 compared to 26.0% in 2000, resulting in income tax expense of $1,338 and $1,341 respectively. Net income for the first nine months registered $4,178 in 2001 compared to $3,821 in 2000, representing per share amounts of $1.10 in 2001 and $1.00 in 2000.

21

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

Third Quarter of 2001 as compared to Third Quarter 2000

     During the third quarter of 2001 net interest income after provision for loan losses decreased by $95 as compared to third quarter 2000. Average earning assets increased by 0.8% while average interest-bearing liabilities decreased by 1.8%. Average loans exhibited growth of 4.1%, while average investments decreased by 6.6%.

     The tax equivalent yield on earning assets decreased by 28 basis points from the same quarter a year ago. The tax equivalent yield of the investment portfolio measured 6.7%, a 13 basis point decrease from the same quarter a year ago, while the loan portfolio yielded 8.4%, down 41 basis points from last year’s rate. Meanwhile, the rate paid on interest-bearing liabilities decreased 29 basis points compared to a year ago. The net effect of these changes was that the tax equivalent net interest margin declined to 4.2%, a decrease of 8 basis points from that achieved during last year’s third quarter.

     Loans net of the allowance for losses increased by $9,519 during the period. Gross loans as a percentage of earning assets stood at 51.8% as of September 30, 2001 as compared to 50.0% on September 30, 2000. The loan to deposit ratio at the end of the first nine months of 2001 was 64.4% compared to 61.9% at the end of the same period a year ago. The investment portfolio represented 57.4% of each deposit dollar, down from 61.8% a year ago.

     Loan charge-offs during the third quarter were $53 in 2001 and $155 in 2000, while the recovery of previously charged-off loans amounted to $16 during the third quarter of 2001 compared to $53 in the same period of 2000.

     Other income for the quarter increased by $255 or 56.3% compared to the same period a year ago. The net gain on loans sold during the quarter amounted to $47 compared to $23 a year ago. There was a $1 gain on investment securities in the third quarter of 2000, while a $125 gain was realized in 2001. Fees from other customer services decreased by $8. Income from other items increased by $115 from the level of a year ago, primarily due to an $87 increase in the cash surrender value of bank owned life insurance.

     Total other expenses in the third quarter were $2,683 in 2001 and $2,726 in 2000, a decrease of $43 or 1.6%. Employee salaries and benefits decreased by $2 or 0.1%. Occupancy and equipment expense showed a $69 increase, reflecting the cumulative impact of capital expenditures in support of new service and product offerings. Legal and litigation expense decreased by $67, reflecting the settlement in 2000 of a class action suit originally filed in June of 1990 in Pennsylvania. Marketing expenses decreased by $61 reflecting the costs of research and developing a new marketing campaign in 2000. Other expenses as a group increased by $18 or 3.0% compared to the same period last year, primarily due to increases in state and local taxes.

22

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

     Income before tax for the quarter increased by 11.2% to $2,014 in 2001 from the $1,811 recorded in 2000. Net income for the quarter of $1,516 represented a 14.1% increase from the $1,329 earned a year ago. Earnings per share amounted to $0.40 and $0.35 for the third quarter of 2001 and 2000 respectively.

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 September 30, 2001, the Company’s bank subsidiary was rated “satisfactory” for CRA purposes, and remained well capitalized and well managed, in management’s opinion.

23

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, 2000, short term interest rates, as measured by U. S. Treasury securities with maturities of one year or less, have decreased by 283 to 349 basis points, reflecting rapid monetary easing on the part of the Federal Reserve. In response to economic weakness, the Federal Reserve has dropped interest rates on overnight bank borrowings by 350 basis points since December 31, 2000, most recently cutting rates by 50 basis points in an inter-meeting move in response to the financial and economic impact of the tragic events of September 11th. Intermediate interest rates, as measured by U. S. Treasury securities with maturities of two to five years, have decreased at a slower pace, declining by approximately 105 to 225 basis points. Long-term interest rates, as measured by U.S. Treasury Securities with maturities of ten to twenty years have decreased even less dramatically, declining by approximately 6 to 46 basis points. Meanwhile, yields on securities with maturities of greater than twenty years have actually risen by 5 basis points since year-end, as these rates are influenced by the U.S. Government’s plans to repurchase Treasury debt, federal spending plans and taxation policies and expectations of growth and inflation over a much longer and uncertain planning horizon.

     The net effect of these changes have had minimal impact 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 $177 increase in net interest income for the twelve month horizon subsequent to September 30, 2001 compared to the simulated results for a similar twelve month horizon subsequent to December 31, 2000. The Company’s sensitivity to both a declining rate environment and an increasing rate environment improved marginally, reflecting a smaller decline in the Company’s expected net interest income in both cases.

24

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 September 30, 2001 and December 31, 2000. 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, 2001 and December 31, 2000. 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.

     As previously noted, during the first nine months of 2001, the Federal Reserve has decreased its target rate for overnight federal funds by 350 basis points. During the quarter ended September 30, 2001, the difference between the yield on the ten year Treasury and the three month Treasury increased to a positive 220 basis points from the negative 70 basis points that existed at December 31, 2000. The yield curve is no longer inverted, as interest rates now peak at the long-end of the Treasury curve.

	Simulated Net Interest Income (NII) Scenarios
	for the Twelve Months Ending
	Net Interest Income				$Change in NII						% Change in NII
Changes in	Sept 30,		Dec. 31,		Sept 30,			Dec. 31,			Sept 30,			Dec. 31,
Interest Rates	2002		2001		2002			2001			2002			2001
Graduated increase of +300 basis points		16,923		16,580		(770	)		(936	)		(4.4	)%		(5.3	)%
Short term rates unchanged		17,693		17,516
Graduated decrease of - -300 basis points		17,613		17,293		(80	)		(223	)		(0.5	)%		(1.3	)%

     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.

25

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

     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
99.	Not applicable

26

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION

     (b) Reports on Form 8-K

     Form 8-K was filed with the United States Securities and Exchange Commission, dated February 2, 2001. 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.

27

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 08, 2001	Lawrence A. Fantauzzi Secretary/Treasurer (Chief Financial Officer)
DATED:  November 08, 2001	Rodger W. Platt Chairman and President (Duly Authorized Officer)

28