Cortland Bancorp (CLDB) 10-K 2007 FY Annual report

BRIEF DESCRIPTION OF THE BUSINESS

CORTLAND BANCORP

Cortland Bancorp (the “Company”) was incorporated under the laws of the State of Ohio in 1984, as a one bank holding company registered under the Bank Holding Company Act of 1956, as amended. 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 authorized by the Gramm-Leach-Bliley Act of 1999. The principal activity of the Company is to own, manage and supervise the Cortland Savings and Banking Company (“Cortland Banks” or the “Bank”). The Company owns all of the outstanding shares of the Bank.

The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). 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 December 31, 2007, the Company’s bank subsidiary was rated “satisfactory” for CRA purposes, and remained well capitalized and, in management’s opinion, well managed. Cortland Bancorp owns no property. Operations are conducted at 194 West Main Street, Cortland, Ohio.

The business of the Company and the Bank is not seasonal to any significant extent and is not dependent on any single customer or group of customers.

NEW RESOURCES LEASING COMPANY

New Resources Leasing Company was formed in December 1988 as a separate entity to handle the function of commercial and consumer leasing. The wholly owned subsidiary has been inactive since incorporation.

THE CORTLAND SAVINGS

AND BANKING COMPANY

The Cortland Savings and Banking Company is a full service state chartered bank engaged in commercial and retail banking and trust services. The Bank’s services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage and installment loans, night depository, automated teller services, safe deposit boxes and other miscellaneous services normally offered by commercial banks. Cortland Banks also offers a variety of Internet Banking products as well as discount brokerage services.

Business is conducted at a total of thirteen offices, eight of which are located in Trumbull County, Ohio. Two offices are located in the communities of Windham and Mantua, in Portage County, Ohio. One office is located in the community of Williamsfield, Ashtabula County, Ohio, while two are located in the community of Boardman, Mahoning County, Ohio.

Cortland Bank’s main office (as described in its charter) is located at 194 West Main Street, Cortland, Ohio. Administrative offices are located at the main office. The Brookfield, Hubbard, Niles Park Plaza and both Boardman offices are leased, while all of the other offices are owned by Cortland Banks.

The Bank, as a state chartered banking organization and member of the Federal Reserve System, is subject to periodic examination and regulation by both the Federal Reserve Bank of Cleveland and the State of Ohio Division of Financial Institutions. These examinations, which include such areas as capital, liquidity, asset quality, management practices and other aspects of the Bank’s operations, are primarily for the protection of the Bank’s depositors. In addition to these regular examinations, the Bank must furnish periodic reports to regulatory authorities containing a full and accurate statement of its affairs. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the statutory limit of $100,000 per customer. Individual Retirement Account deposits are insured by the FDIC to $250,000 per customer.

COMPETITION

Cortland Banks actively competes with state and national banks located in Northeast Ohio and Western Pennsylvania. It also competes for deposits, loans and other service business with a large number of other financial institutions, such as savings and loan associations, credit unions, insurance companies, consumer finance companies and commercial finance companies. Also, money market mutual funds, brokerage houses and similar institutions provide in a relatively unregulated environment many of the financial services offered by banks. In the opinion of management, the principal methods of competition are the rates of interest charged on loans, the rates of interest paid on deposit funds, the fees charged for services, and the convenience, availability, timeliness and quality of the customer services offered.

EMPLOYEES

As of December 31, 2007 the Company through its subsidiary bank, employed 143 full-time and 34 part-time employees. The Company provides its employees with a full range of benefit plans, and considers its relations with its employees to be satisfactory.

4

REPORT ON MANAGEMENT’S ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING

Cortland Bancorp is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of Cortland Bancorp, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Company’s system of internal control over financial reporting as of December 31, 2007, in relation to criteria for effective internal control over financial reporting as described inInternal Control-Integrated Framework, issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2007, its system of internal control over financial reporting is effective and meets the criteria of theInternal Control-Integrated Framework. Packer Thomas, independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting.

Lawrence A. Fantauzzi President and Chief Executive Officer	James M. Gasior Secretary Chief Financial Officer
Cortland, Ohio February 29, 2008

5

REPORT OF PACKER THOMAS

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

SHAREHOLDERS AND BOARD OF DIRECTORS

Cortland Bancorp

We have audited the accompanying consolidated balance sheets of Cortland Bancorp and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. We also have audited Cortland Bancorp and subsidiaries internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cortland Bancorp’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cortland Bancorp and subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In our opinion, Cortland Bancorp and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Packer Thomas

Youngstown, Ohio

February 29, 2008

6

CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2007, 2006 and 2005

(Amounts in thousands except per share data)

	2007			2006			2005
Interest income
Interest and fees on loans	$	15,784		$	14,291		$	12,941
Interest and dividends on investment securities:
Taxable interest		6,788			5,943			4,387
Nontaxable interest		1,811			2,051			2,162
Dividends		235			202			167
Interest on mortgage-backed securities		4,008			3,795			3,810
Other interest income		366			215			119
Total interest income		28,992			26,497			23,586
Interest expense
Deposits		10,456			8,509			6,159
Borrowed funds		3,375			3,073			2,506
Subordinated debt		154
Total interest expense		13,985			11,582			8,665
Net interest income		15,007			14,915			14,921
Provision for loan losses (Note 4)		40			225			545
Net interest income after provision for loan losses		14,967			14,690			14,376
Other income
Fees for other customer services		2,307			2,239			2,254
Investment securities gains - net		77			18			308
Gain on sale of loans - net		88			106			89
Other real estate losses - net		(1	)		(47	)		(3	)
Earnings on bank owned life insurance		521			433			341
Other non-interest income		97			86			126
Total other income		3,089			2,835			3,115
Other expenses
Salaries and employee benefits		7,199			6,776			7,052
Net occupancy and equipment expense		1,871			1,811			1,870
State and local taxes		580			552			548
Office supplies		396			367			338
Bank exam and audit expense		443			486			427
Other operating expenses		2,106			2,029			1,965
Total other expenses		12,595			12,021			12,200
Income before federal income taxes		5,461			5,504			5,291
Federal income taxes (Note 11)		1,111			928			957
Net income	$	4,350		$	4,576		$	4,334
Net income per share, both basic and diluted (Note 1)	$	0.97		$	1.01		$	0.97
Dividends declared per share	$	0.87		$	0.85		$	1.04

7

See accompanying notes to consolidated financial statements

CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2007 and 2006

(Amounts in thousands except per share data)

	2007			2006
ASSETS
Cash and due from banks	$	9,441		$	10,100
Federal funds sold					4,275
Total cash and cash equivalents		9,441			14,375
Investment securities available for sale (Note 2)		126,507			108,484
Investment securities held to maturity (approximate market value of $113,087 in 2007 and $124,136 in 2006) (Note 2)		112,115			124,619
Total loans (Note 3)		223,109			205,208
Less allowance for loan losses (Note 4)		(1,621	)		(2,211	)
Net loans		221,488			202,997
Premises and equipment (Note 5)		6,206			4,780
Other assets		16,937			16,496
Total assets	$	492,694		$	471,751
LIABILITIES
Noninterest-bearing deposits	$	58,224		$	60,983
Interest-bearing deposits (Note 6)		306,564			294,835
Total deposits		364,788			355,818
Federal Home Loan Bank advances and other borrowings (Note 7)		70,413			62,015
Subordinated debt (Note 8)		5,155
Other liabilities		3,514			3,326
Total liabilities		443,870			421,159
Commitments and contingent liabilities (Notes 9 and 17)
SHAREHOLDERS’ EQUITY
Common stock - $5.00 stated value - authorized 20,000,000 shares; issued 4,639,973 shares in 2007 and 4,594,344 shares in 2006 (Note 1)		23,200			22,972
Additional paid-in capital (Note 1)		20,976			20,835
Retained earnings		9,386			9,553
Accumulated other comprehensive (loss) income (Note 1)		(94	)		(455	)
Treasury stock, at cost, 250,545 shares in 2007 and 95,809 shares in 2006		(4,644	)		(2,313	)
Total shareholders’ equity (Note 16)		48,824			50,592
Total liabilities and shareholders’ equity	$	492,694		$	471,751

8

See accompanying notes to consolidated financial statements

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years ended December 31, 2007, 2006 and 2005

(Amounts in thousands except per share data)

									Accumulated						Total
			Additional						Other						Share-
	Common		Paid-In			Retained			Comprehensive			Treasury			holders
	Stock		Capital			Earnings			Income (Loss)			Stock			Equity
Balance at December 31, 2004	$	21,869	$	18,531		$	13,131		$	1,061		$	(5,194	)	$	49,398
Comprehensive Income:
Net income							4,334									4,334
Other comprehensive income, net of tax:
Unrealized gains on available for sale securities, net of reclassification adjustment										(1,938	)					(1,938	)
Total comprehensive income																2,396
Common Stock Transactions:
Treasury shares reissued net of shares repurchased				(184	)								1,352			1,168
Cash dividends declared ($0.83 per share)							(3,701	)								(3,701	)
Special cash dividend ($0.21 per share)							(929	)								(929	)
3% stock dividend		654		1,864			(2,518	)
Cash paid in lieu of fractional shares							(7	)								(7	)
Balance at December 31, 2005		22,523		20,211			10,310			(877	)		(3,842	)		48,325
Comprehensive Income:
Net income							4,576									4,576
Other comprehensive income, net of tax:
Unrealized gains on available for sale securities, net of reclassification adjustment										422						422
Total comprehensive income																4,998
Common Stock Transactions:
Treasury shares reissued net of shares repurchased				(390	)								1,529			1,139
Cash dividends declared ($0.85 per share)							(3,865	)								(3,865	)
2% stock dividend		449		1,014			(1,463	)
Cash paid in lieu of fractional shares							(5	)								(5	)
Balance at December 31, 2006		22,972		20,835			9,553			(455	)		(2,313	)		50,592
Comprehensive Income:
Net income							4,350									4,350
Other comprehensive income, net of tax:
Unrealized gains on available for sale securities, net of reclassification adjustment										361						361
Total comprehensive income																4,711
Common Stock Transactions:
Treasury shares reissued				(249	)								1,195			946
Treasury shares purchased													(3,526	)		(3,526	)
Cash dividends declared ($0.87 per share)							(3,895	)								(3,895	)
1% stock dividend		228		390			(618	)
Cash paid in lieu of fractional shares							(4	)								(4	)
Balance at December 31, 2007	$	23,200	$	20,976		$	9,386		$	(94	)	$	(4,644	)	$	48,824

DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE

FOR SALE SECURITY GAINS AND LOSSES:

	2007		2006		2005
Unrealized holding gains (losses) on available for sale securities arising during the period net of tax of $212, $224 and $(894)	$	412	$	434	$	(1,735	)
Less: Reclassification adjustment for gains realized in net income, net of tax of $26, $6 and $105		51		12		203
Net unrealized gains (losses) on available for sale securities, net of tax	$	361	$	422	$	(1,938	)

9

See accompanying notes to consolidated financial statements

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2007, 2006 and 2005

(Amounts in thousands)

	2007			2006			2005
Cash flows from operating activities
Net income	$	4,350		$	4,576		$	4,334
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization and accretion		775			991			1,469
Provision for loan loss		40			225			545
Deferred tax expense (benefit)		189			(205	)		50
Investment securities gains		(77	)		(18	)		(308	)
Gains on sales of loans		(88	)		(106	)		(89	)
Loss on the sale or disposal of fixed assets		4			3
Other real estate losses		1			47			3
Loans originated for sale		(6,199	)		(6,978	)		(6,618	)
Proceeds from sale of loans originated for sale		6,396			6,975			6,707
Changes in:
Interest and fees receivable		(59	)		(245	)		(341	)
Interest payable		174			185			(30	)
Other assets and liabilities		(497	)		(368	)		(1,447	)
Net cash flows from operating activities		5,009			5,082			4,275
Cash flows from investing activities
Purchases of securities available for sale		(13,502	)		(13,339	)		(19,593	)
Purchases of securities held to maturity		(36,283	)		(12,017	)		(47,280	)
Proceeds from sales of securities available for sale					1,006			1,479
Proceeds from call, maturity and principal payments on securities		44,692			26,050			53,082
Net (increase) decrease in loans made to customers		(18,922	)		(17,223	)		2,462
Proceeds from disposition of other real estate		34			143			22
Purchases of premises and equipment		(2,006	)		(1,180	)		(316	)
Net cash flows from investing activities		(25,987	)		(16,560	)		(10,144	)
Cash flows from financing activities
Net increase in deposit accounts		8,970			5,443			5,456
Net increase in borrowings		8,398			3,904			10,222
Proceeds from subordinated debt issuance		5,155
Dividends paid		(3,899	)		(3,870	)		(4,637	)
Purchases of treasury stock		(3,526	)					(3	)
Treasury shares reissued		946			1,139			1,171
Net cash flows from financing activities		16,044			6,616			12,209
Net change in cash and cash equivalents		(4,934	)		(4,862	)		6,340
Cash and cash equivalents
Beginning of year		14,375			19,237			12,897
End of year	$	9,441		$	14,375		$	19,237

10

See accompanying notes to consolidated financial statements

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Cortland Bancorp, and its bank subsidiary, Cortland Savings and Banking Co., reflect banking industry practices and conform to U.S. generally accepted accounting principles. A summary of the significant accounting policies followed by the Company in the preparation of the accompanying consolidated financial statements is set forth below.

Principles of Consolidation: The consolidated financial statements include the accounts of Cortland Bancorp (the Company) and its wholly-owned subsidiaries, Cortland Savings and Banking Company (the Bank) and New Resources Leasing Co. All significant intercompany balances and transactions have been eliminated.

Industry Segment Information: The Company and its subsidiaries operate in the domestic banking industry which accounts for substantially all of the Company’s assets, revenues and operating income. The Company, through its subsidiary bank, grants residential, consumer, and commercial loans and offers a variety of saving plans to customers located primarily in the Northeastern Ohio and Western Pennsylvania area.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash Flow: Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions and deposits made with other financial institutions.

The Company paid interest of $13,810,000, $11,397,000 and $8,695,000 in 2007, 2006 and 2005, respectively. Cash paid for income taxes was $950,000 in 2007, $1,120,000 in 2006 and $993,000 in 2005. Transfers of loans to other real estate were $282,000 in 2007, $144,000 in 2006 and $107,000 in 2005.

Investment Securities: Investments in debt and equity securities are classified as held to maturity, trading or available for sale. Securities classified as held to maturity are those that management has the positive intent and ability to hold to maturity. 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 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 available for sale are carried at fair value with unrealized gains and losses recorded as a separate component of shareholders’ equity, net of tax effects. Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. Interest on securities is accrued and credited to operations based on the principal balance outstanding, adjusted for amortization of premiums and accretion of discounts.

Unrealized losses on corporate bonds have not been recognized into income. Management has the intent and ability to hold these securities for the foreseeable future. The fair value is expected to recover as the bonds approach their maturity date and/or market conditions become more favorable to the bonds’ intrinsic value.

Trading Securities:  Trading securities are principally held with the intention of selling in the near term and are carried at market value. Realized and unrealized gains and losses on trading account securities are recognized in the Statement of Income as they occur. The Company did not hold any trading securities at December 31, 2007, 2006 or 2005. There was no trading activity in 2007, 2006 or 2005.

Loans: Loans are stated at the principal amount outstanding net of the unamortized balance of deferred loan origination fees and costs. Deferred loan origination fees and costs are amortized as an adjustment to the related

11

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

loan yield over the contractual life using the level yield method. Interest income on loans is accrued over the term of the loans based on the amount of principal outstanding. The accrual of interest is discontinued on a loan when management determines that the collection of interest is doubtful. Generally a loan is placed on nonaccrual status once the borrower is 90 days past due on payments, or whenever sufficient information is received to question the collectability of the loan or any time legal proceedings are initiated involving a loan. Interest income accrued up to the date a loan is placed on nonaccrual is reversed through interest income. 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 judgment as to the collectibility of principal. A loan is returned to accrual status when either all of the principal and interest amounts contractually due are brought current and future payments are, in management’s judgment, collectable, or when it otherwise becomes well secured and in the process of collection. When a loan is charged-off, any interest accrued but not collected on the loan is charged against earnings.

Loans Held for Sale: The Company originates certain residential mortgage loans for sale in the secondary mortgage loan market. For the majority of loan sales, the Company concurrently sells the rights to service the related loans. In addition, the Company may periodically identify other loans which may be sold. These loans are classified as loans held for sale, and carried, in the aggregate, at the lower of cost or estimated market value based on secondary market prices. To mitigate interest rate risk, the Company may obtain fixed commitments to sell such loans at the time loans are originated or identified as being held for sale. Such a commitment would be referred to as a derivative loan commitment if the loan that will result from exercise of the commitment will be held for sale upon funding under Statement of Financial Accounting Standards No. 133 (“SFAS 133”),Accounting for Derivative Instruments and Hedging Activities,as amended by Statement of Financial Accounting Standards No. 149 (“SFAS 149”),Amendment of Statement 133 on Derivative Instruments and Hedging Activities.Loans held for sale was $109,000 at December 31, 2006, and none at December 31, 2007.

Allowance for Loan Losses and Allowance for Losses on Lending Related Commitments: Because some loans may not be repaid in full, an allowance for loan losses is recorded. Increases to the allowance consist of provisions for loan losses charged to expense and recoveries of previously charged-off loans. Reductions to the allowance result from the charge-off of loans deemed uncollectable by management. After a loan is charged-off, collection efforts continue and future recoveries may occur.

A loan is considered impaired when it appears probable that all principal and interest amounts will not be collected according to the loan contract. Allowances for loan losses on impaired loans are determined using the estimated future cash flows of the loan, discounted to their present value using the loan’s effective interest rate. Allowances for loan losses for impaired loans that are collateral dependent are generally determined based on the estimated fair value of the underlying collateral. Smaller balance homogeneous loans are evaluated for impairment in the aggregate. Such loans include one-to-four family residential, home equity and consumer loans. Commercial loans and commercial mortgage loans are evaluated individually for impairment. Impaired loans are generally classified as nonaccrual loans.

Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover possible losses that are currently anticipated. 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 loss experience; the status of past due interest and principal payments; the quality of financial information supplied by customers; the cash flow coverage and trends evidenced by financial information supplied by customers; the nature and estimated value of any collateral supporting specific loan credits; risk classifications determined by the Company’s loan review systems or as the result of regulatory examination process; and general economic conditions in the lending area of the Company’s bank subsidiary. Key risk factors and assumptions are dynamically updated to reflect actual

12

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

experience and changing circumstances. While management may periodically allocate portions of the allowance for specific problem loans, the entire allowance is available for any charge-offs that occur.

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

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

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

Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally on the straight-line method over the estimated useful lives of the various assets. Maintenance and repairs are expensed and major improvements are capitalized.

Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other assets. Such real estate is carried at the lower of cost or fair value less estimated costs to sell. Any reduction from the carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair market value is reflected as a valuation allowance through a charge to income. Costs of significant property improvements are capitalized, whereas costs relating to holding and maintaining the property are charged to expense.

Intangible Asset: A core deposit intangible asset resulting from a branch acquisition is being amortized over a 15 year period. The intangible asset, net of accumulated amortization, was $98,000 and $134,000 at December 31, 2007 and 2006, respectively, and is included in other assets. The annual expense was $37,000 at December 31, 2007, 2006 and 2005. The estimated aggregate amortization expense for the next two years is $37,000 per year, and $24,000 in the third year.

Cash Surrender Value of Life Insurance: Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain Company employees, officers and directors who have provided positive consent allowing the Company to be the co-beneficiary of such policies. Since the Company is the owner of the insurance policies, increases in the cash value of the policies, as well as its share of insurance proceeds received, are recorded in other noninterest income, and are not subject to income taxes. The cash value of the policies is included in other assets. The Company reviews the financial strength of the insurance carriers prior to the purchase of BOLI and quarterly thereafter. The amount of BOLI with any individual carrier is limited to 15% of Tier I Capital. The Company has purchased BOLI to provide a long-term asset to offset long-term benefit liabilities, while generating competitive investment yields.

Advertising: The Company expenses advertising costs as incurred.

13

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes: A deferred tax liability or asset is determined at each balance sheet date. It is measured by applying currently enacted tax laws to future amounts that result from differences in the financial statement and tax bases of assets and liabilities.

Other Comprehensive Income: Accumulated other comprehensive income for the Company is comprised solely of unrealized holding gains (losses) on available for sale securities, net of tax.

Per Share Amounts: The Board of Directors declared 1% common stock dividends payable as of January 1, 2008, 2% common stock dividends payable January 1, 2007 and 3% payable January 1, 2006. The common stock dividend issued on January 1, 2008 resulted in the issuance of 45,628 shares of common stock, which have been included in the 4,639,973 shares reported as issued at December 31, 2007.

Basic and diluted earnings per share are based on weighted average shares outstanding. Average shares outstanding and per share amounts have been restated to give retroactive effect to the 1% common stock dividend of January 1, 2008. Average shares outstanding and per share amounts similarly reflect the impact of the Company’s stock repurchase program.

The following table sets forth the computation of basic earnings per common share and diluted earnings per common share:

	Years Ended December 31,
	2007		2006		2005
Net income ($000 omitted)	$	4,350	$	4,576	$	4,334
Weighted average common shares outstanding		4,494,216		4,522,683		4,460,685
Basic earnings per share	$	0.97	$	1.01	$	0.97
Diluted earnings per share	$	0.97	$	1.01	$	0.97

Off Balance Sheet Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Reclassifications: Certain items in the financial statements for 2005 and 2006 have been reclassified to conform to the 2007 presentation.

New Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company believes that the adoption of SFAS No. 157 will not have a material impact on the financial statements.

In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires an employer to recognize the funded status of each of its defined pension and postretirement benefit plans in the balance sheet, to recognize changes in the funded status in the year in which changes occur through comprehensive income, and to measure the funded status as of the balance sheet date. The requirement to recognize the funded status of benefit plans and the disclosure requirements are effective for fiscal years ending after December 15, 2006. The requirement to measure the

14

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

funded status as of the date of the balance sheet is effective for fiscal years ending after December 15, 2008. The Company has determined that its adoption of SFAS No. 158 will not have a material impact on its earnings, cash flows and financial position.

In September 2006, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 (postretirement benefit plans) or APB No. 12 (deferred compensation plan). The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement, therefore, a liability should be recognized for future benefits. Issue 06-4 is effective for years beginning after December 15, 2007. The Company has determined that its adoption will not have a material impact on its earnings, cash flow and financial position.

In September 2006, the Emerging Issues Task Force (EITF) ratified the consensus on Issue 06-5, “Accounting for Purchases of Life Insurance — Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin No. 85-4”. The consensus stipulates that the policy owner should consider the cash surrender value as well as any additional amounts included in the contractual terms of the policy in determining the amount recognized as an asset pursuant to FASB Technical Bulletin No. 85-4. The consensus in this Issue is effective for fiscal years beginning after December 15, 2006. The Company’s adoption of this consensus did not have an impact on its earnings, cash flow or financial position.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 would allow the Company an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after November 15, 2007. The Company is currently evaluating this statement and has not yet determined the financial assets and liabilities, if any, for which the fair value option would be elected or the potential impact on the consolidated financial statements, if such election were made.

15

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 2 - INVESTMENT SECURITIES

The following is a summary of investment securities:

(Amounts in thousands)

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2007 Investment securities available for sale
U.S. Government agencies and corporations	$	12,365	$	314	$	2	$	12,677
Obligations of states and political subdivisions		8,428		344				8,772
Mortgage-backed and related securities		66,508		607		268		66,847
Corporate securities		35,769		36		1,175		34,630
Total debt securities		123,070		1,301		1,445		122,926
Other securities		3,581						3,581
Total available for sale	$	126,651	$	1,301	$	1,445	$	126,507
Investment securities held to maturity
U.S. Treasury securities	$	139	$	7	$		$	146
U.S. Government agencies and corporations		71,179		361		24		71,516
Obligations of states and political subdivisions		23,990		886		7		24,869
Mortgage-backed and related securities		16,807		63		314		16,556
Total held to maturity	$	112,115	$	1,317	$	345	$	113,087
December 31, 2006 Investment securities available for sale
U.S. Government agencies and corporations	$	12,919	$	13	$	136	$	12,796
Obligations of states and political subdivisions		9,451		348		1		9,798
Mortgage-backed and related securities		55,062		192		1,057		54,197
Corporate securities		28,160		101		149		28,112
Total debt securities		105,592		654		1,343		104,903
Other securities		3,581						3,581
Total available for sale	$	109,173	$	654	$	1,343	$	108,484
Investment securities held to maturity
U.S. Treasury securities	$	143	$		$		$	143
U.S. Government agencies and corporations		73,743				1,239		72,504
Obligations of states and political subdivisions		31,009		1,067		13		32,063
Mortgage-backed and related securities		19,724				298		19,426
Total held to maturity	$	124,619	$	1,067	$	1,550	$	124,136

At December 31, 2007 and 2006, other securities consisted of $3,355,000 in Federal Home Loan Bank (FHLB) stock and $226,000 in Federal Reserve Bank (FED) stock. Each investment is carried at cost, and the Company is required to hold such investments as a condition of membership in order to transact business with the FHLB and the FED.

16

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 2 - INVESTMENT SECURITIES (Continued)

The amortized cost and estimated market value of debt securities at December 31, 2007, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Amounts in thousands)

	December 31, 2007
	Amortized		Estimated
	Cost		Fair Value
Investment securities available for sale
Due in one year or less	$	3,447	$	3,459
Due after one year through five years		4,048		4,110
Due after five years through ten years		4,506		4,282
Due after ten years		44,561		44,228
Subtotal		56,562		56,079
Mortgage-backed securities		66,508		66,847
Total	$	123,070	$	122,926
Investment securities held to maturity
Due in one year or less	$	17,780	$	17,784
Due after one year through five years		4,443		4,473
Due after five years through ten years		22,048		22,213
Due after ten years		51,037		52,061
Subtotal		95,308		96,531
Mortgage-backed securities		16,807		16,556
Total	$	112,115	$	113,087

The following table sets forth the proceeds, gains and losses realized on securities sold or called for each of the years ended December 31:

(Amounts in thousands)

	2007		2006		2005
Proceeds	$	9,991	$	1,526	$	13,563
Gross realized gains		77		18		308
Gross realized losses

Investment securities with a carrying value of approximately $95,137,000 at December 31, 2007 and $75,489,000 at December 31, 2006 were pledged to secure deposits and for other purposes.

17

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 2 - INVESTMENT SECURITIES (Continued)

The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at December 31, 2007:

(Amounts in thousands)

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies and corporations	$	3,466	$	23	$	2,741	$	3	$	6,207	$	26
Obligations of states and political subdivisions						391		7		391		7
Mortgage-backed and related securities		105		1		29,695		581		29,800		582
Corporate securities		24,930		761		5,949		414		30,879		1,175
	$	28,501	$	785	$	38,776	$	1,005	$	67,277	$	1,790

The above table represents 123 investment securities where the current value is less than the related amortized cost.

The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at December 31, 2006:

(Amounts in thousands)

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies and corporations	$	11,716	$	125	$	69,233	$	1,250	$	80,949	$	1,375
Obligations of states and political subdivisions						1,043		14		1,043		14
Mortgage-backed and related securities		10,812		159		52,351		1,196		63,163		1,355
Corporate securities		2,012		6		4,215		143		6,227		149
	$	24,540	$	290	$	126,842	$	2,603	$	151,382	$	2,893

The above table represents 201 investment securities where the current value is less than the related amortized cost.

The unrealized losses on the Bank’s investment in U.S. Government agencies and corporations, obligations of states and political subdivisions, and mortgage-backed and related securities were caused by interest rate increases. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Bank’s investment because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity. The Bank does not consider those investments to be other than temporarily impaired at December 31, 2007.

The Bank’s unrealized loss on investments in corporate securities relates to a $2,350,000 investment in the General Motors Corporation. The unrealized loss was primarily caused by (a) the decrease in profitability and

18

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 2 - INVESTMENT SECURITIES (Continued)

profit forecasts by industry analysts resulting from intense competitive pressure in the automotive industry and (b) a sector downgrade by industry analysts. The contractual terms of those investments do not permit General Motors Corporation to settle the security at a price less than the amortized cost of the investment. While the General Motors Corporation credit rating has decreased from A3 to Caa1 (Moodys), the Bank believes it is probable that it will be able to collect all amounts due according to the contractual terms of the investment. Therefore, it is expected that the bonds would not be settled at a price less than the amortized cost of the investment. Because the Bank has the ability and intent to hold the investments until a recovery of fair value, which may be maturity, it does not consider the investment in the General Motors Corporate notes to be other-than-temporarily impaired at December 31, 2007.

The remaining loss on investments in corporate securities relates to a $31,410,000 investment at December 31, 2007, in Collateralized Debt Obligations, (CDO’s), representing pools of trust preferred debt. The credit ratings on the securities range from Aa3 to Baa3 at Moody’s, with none of the securities experiencing downgrades at December 31, 2007.

NOTE 3 - LOANS RECEIVABLE

The following is a summary of loans:

(Amounts in thousands)

	December 31,
	2007		2006
1-4 family residential mortgage loans	$	68,135	$	62,882
1-4 family residential mortgage loans held for sale				109
Commercial mortgage loans		120,950		106,160
Consumer loans		8,484		7,745
Commercial loans		14,981		17,505
Home equity loans		10,559		10,807
Total loans	$	223,109	$	205,208

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

The following is an analysis of changes in the allowance for loan losses for the year ended:

(Amounts in thousands)

	December 31,
	2007			2006			2005
Balance at beginning of year	$	2,211		$	2,168			$2,629
Loan charge-offs		(728	)		(288	)		(1,119	)
Recoveries		98			106			113
Net loan charge-offs		(630	)		(182	)		(1,006	)
Provision charged to operations		40			225			545
Balance at end of year	$	1,621		$	2,211			$2,168

Loans on which the accrual of interest has been discontinued because circumstances indicate that collection is questionable amounted to $2,285,000, $3,923,000 and $3,746,000 at December 31, 2007, 2006 and 2005,

19

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)

respectively. Interest income on these loans, if accrued, would have increased pretax income by approximately $188,000, $315,000 and $266,000 for 2007, 2006 and 2005, respectively.

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 generally include 1-4 family, consumer and home equity loans. Impaired loans are generally evaluated using the fair value of collateral as the measurement method. At December 31, 2007, December 31, 2006 and December 31, 2005, the recorded investment in impaired loans was $2,274,000, $1,939,000 and $1,857,000 while the allocated portion of the allowance for loan losses for such loans was $716,000, $815,000 and $714,000, respectively. Interest income recognized on impaired loans using the cash basis was $68,000 for 2007, $44,000 for 2006 and $51,000 for 2005.

There were $546,000 in renegotiated loans at December 31, 2007 and none at December 31, 2006 and 2005. The total interest recognized on these loans was $12,000 at December 31, 2007.

There were no renegotiated loans for which interest has been reduced at December 31, 2007, December 31, 2006 and December 31, 2005.

As of December 31, 2007, 2006 and 2005, there were $14,691,000, $13,765,000 and $5,304,000 in loans that were neither classified as nonaccrual nor 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.

NOTE 5 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment:

(Amounts in thousands)

	December 31,
	2007		2006
Land	$	1,384	$	877
Premises		6,522		5,720
Equipment		7,789		7,488
Leasehold improvements		275		291
Construction in progress		280		349
		16,250		14,725
Less accumulated depreciation		10,044		9,945
Net book value	$	6,206	$	4,780

Depreciation expense was $576,000 in 2007, $485,000 in 2006 and $597,000 for 2005.

20

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 6 - DEPOSITS

The following is a summary of interest-bearing deposits:

(Amounts in thousands)

	December 31,
	2007		2006
Demand	$	23,460	$	27,136
Money Market		19,698		19,117
Savings		74,024		79,585
Time:
In denominations under $100,000		120,864		114,052
In denominations of $100,000 or more		68,518		54,945
Total	$	306,564	$	294,835

The following is a summary of time deposits of $100,000 or more by remaining maturities:

(Amounts in thousands)

	December 31,
	2007						2006
	Certificates		Other Time				Certificates		Other Time
	of Deposit		Deposits		Total		of Deposit		Deposits		Total
Three months or less	$	17,572	$	435	$	18,007	$	17,997	$		$	17,997
Three to six months		12,811		288		13,099		7,775		543		8,318
Six to twelve months		24,193		340		24,533		11,786		749		12,535
One through five years		4,668		5,316		9,984		8,219		2,087		10,306
Over five years		1,381		1,514		2,895		1,529		4,260		5,789
Total	$	60,625	$	7,893	$	68,518	$	47,306	$	7,639	$	54,945

21

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 6 - DEPOSITS (Continued)

NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

The following is a summary of total Federal Home Loan Bank advances and other borrowings:

(Amounts in thousands)

	Weighted
	Average
	Interest			December 31,
	Rate			2007		2006
Federal Home Loan Bank advances
Variable rate Prime based Federal Home Loan Bank advances, with monthly interest payments:
Due in 2007				$		$	5,000
Variable rate LIBOR based Federal Home Loan Bank advances, with monthly interest payments:
Due 2009		4.9838	%		2,500		5,000
Due 2011		5.2475	%		3,000		3,000
Fixed rate payable and convertible fixed rate Federal Home Loan Bank advances, with monthly interest payments:
Due in 2007							11,500
Due in 2008		5.2442	%		6,000		5,000
Due in 2009		5.3033	%		6,000		5,000
Due in 2010		5.6635	%		15,500		13,500
Due in 2011		5.1850	%		5,000		5,000
Due in 2012		4.4500	%		1,500
Due in 2014		4.1585	%		6,500
Due in 2016		4.0700	%		2,000		2,000
Due in 2017		4.1216	%		16,000
Total Federal Home Loan Bank advances		4.8904	%		64,000		55,000
Other borrowings
Securities sold under repurchase agreements		3.6248	%		4,644		5,862
U.S. Treasury interest-bearing demand note		3.5880	%		594		1,153
Federal Funds Purchased		4.5000	%		1,175
Total other borrowings		3.7818	%		6,413		7,015
Total Federal Home Loan Bank advances and other borrowings		4.7895	%	$	70,413	$	62,015

Securities sold under repurchase agreements represent arrangements that the Bank has entered into with certain deposit customers within its local market areas. These borrowings are collateralized with securities. There are $11.3 million in securities, allocated for this purpose, owned by the Bank and held in safekeeping accounts at independent correspondent banks.

Federal Home Loan Bank (FHLB) advances are collateralized by the FHLB stock owned by the Bank, which had a carrying value of $3,355,000 at December 31, 2007, and a blanket lien against the Bank’s qualified mortgage loan portfolio, $9,135,000 in collateralized mortgage obligations $20,670,000 in Federal Agency Securities and $4,082,000 in mortgage-backed securities. Maximum borrowing capacity from the FHLB totaled $73,669,082 at December 31, 2007.

As of December 31, 2007 and 2006, $27,000,000 and $28,500,000 of the FHLB fixed rate advances are convertible to quarterly LIBOR floating rate advances on or after certain specified dates at the option of the FHLB. Should the FHLB elect to convert, the Company acquires the right to prepay any or all of the borrowing at the time of conversion and on any interest payment due date, thereafter, without penalty.

22

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (Continued)

As of December 31, 2007 and 2006, $26,000,000 and $2,000,000 of the FHLB fixed rate advances are putable on or after certain specified dates at the option of the FHLB. Should the FHLB elect to exercise the put, the Company is required to pay the advance off on that date without penalty.

NOTE 8 - SUBORDINATED DEBT

In July 2007 a trust formed by the Company issued $5,000,000 of floating rate trust preferred securities as part of a pooled offering of such securities due December 2037. The Bancorp owns all $155,000 of the common securities. The securities bear interest at the 3-month LIBOR rate plus 1.45%. The Company issued subordinated debentures to the trust in exchange for the proceeds of the trust preferred offering. The $5.155 million in debentures represent the sole assets of this trust. The Company may redeem the subordinated debentures, in whole or in part, at a premium declining ratably to par in September 2012.

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

NOTE 9 - COMMITMENTS

The Bank occupies office facilities under operating leases extending to 2011. Most of these leases contain an option to renew at the then fair rental value for periods of five and ten years. These options enable the Bank to retain use of facilities in desirable operating areas. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. Rental and lease expense was $265,000 for 2007, $299,000 for 2006 and $295,000 for 2005. The following is a summary of remaining future minimum lease payments under current noncancelable operating leases for office facilities:

(Amounts in thousands)

Years ending:
December 31, 2008	$	131
December 31, 2009		84
December 31, 2010		84
December 31, 2011		45
Total	$	344

At December 31, 2007, the Bank was required to maintain aggregate cash reserves amounting to $4,771,000 in order to satisfy federal regulatory requirements. These amounts do not earn interest.

The Bank grants commercial and industrial loans, commercial and residential mortgages, and consumer loans to customers in Northeast Ohio and Western Pennsylvania. Although the Bank has a diversified portfolio, exposure to credit loss can be adversely impacted by downturns in local economic and employment conditions. Approximately 1.04% of total loans are unsecured at December 31, 2007, compared to 1.94% at December 31, 2006.

The Company currently does not enter into derivative financial instruments including futures, forwards, interest rate risk swaps, option contracts, or other financial instruments with similar characteristics. The Company also

23

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 9 - COMMITMENTS(Continued)

does not participate in any partnerships or other special purpose entities that might give rise to off-balance sheet liabilities.

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

The following is a summary of such contractual commitments:

(Amounts in thousands)

	December 31,
	2007		2006
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Fixed rate	$	2,125	$	3,102
Variable rate		36,576		44,422
Standby letters of credit		1,179		1,810

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. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

The Company’s subsidiary bank also offers limited overdraft protection as a non-contractual courtesy which is available to businesses as well as individually/jointly owned accounts in good standing for personal or household use. The Company reserves the right to discontinue this service without prior notice. The available amount of overdraft protection on depositors’ accounts at December 31, 2007, totaled $11,698,000. The total average daily balance of overdrafts used in 2007 was $153,000, or less than 2% of the total aggregate overdraft protection available to depositors.

24

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 10 - BENEFIT PLANS

The Bank has a contributory defined contribution retirement plan (a 401(k) plan) which covers substantially all employees. Total expense under the plan was $244,000 for 2007, $229,000 for 2006 and $224,000 for 2005. The Bank matches participants’ voluntary contributions up to 5% of gross pay. Participants may make voluntary contributions to the plan up to a maximum of $15,500 with an additional $5,000 catchup deferral for plan participants over the age of 50. The Bank makes monthly contributions to this plan equal to amounts accrued for plan expense.

The Bank and Bancorp provide supplemental retirement benefit plans for the benefit of certain officers and non officer directors. The plan for officers is designed to provide post-retirement benefits to supplement other sources of retirement income such as social security and 401(k) benefits. The benefits will be paid for a period of 15 years after retirement. The amount of each officer’s benefit is determined by their salary at retirement as well as their other sources of retirement income. Director Retirement Agreements provide for a benefit of $10,000 annually on or after the director reaches normal retirement age, which is based on a combination of age and years of service. Director retirement benefits are paid over a period of 10 years following retirement. The Bank and Bancorp accrue the cost of these post-retirement benefits during the working careers of the officers and directors. At December 31, 2007, the cumulative expense accrued for these benefits totaled $1,689,000, with $1,386,000 accrued for the officers’ plan and $303,000 for the directors’ plan.

The following table reconciles the accumulated liability for the benefit obligation of these agreements:

(Amounts in thousands)

	Years Ended
	December 31,
	2007			2006
Beginning balance	$	1,484		$	1,283
Benefit expense		275			263
Benefit payments		(70	)		(62	)
Ending balance	$	1,689		$	1,484

Supplemental executive retirement agreements are unfunded plans and have no plan assets. The benefit obligation represents the vested net present value of future payments to individuals under the agreements. The benefit expense, as specified in the agreements for the entire year 2007, is expected to be under $300,000. The benefits expected to be paid in the next year is $70,000.

The Bank has purchased insurance contracts on the lives of the participants in the supplemental retirement benefit plan and has named the Bank as the beneficiary. Similarly, the Bancorp has purchased insurance contracts on the lives of the directors with the Bancorp as beneficiary. While no direct linkage exists between the supplemental retirement benefit plan and the life insurance contracts, it is management’s current intent that the revenue from the insurance contracts be used as a funding source for the plan. At December 31, 2007, the cumulative income accrued on these contracts totaled $2,542,000 on a tax equivalent basis, with $1,750,000 accrued on the officers’ contracts and $792,000 on the directors’ contracts.

In accordance with the Emerging Issues Task Force issue 06-04 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” the Bank and the Bancorp will begin to accrue for the monthly benefit expense of postretirement cost of insurance for split-dollar life insurance coverage. The accrual for the year ended December 31, 2008 is expected to be under $50,000. Also,

25

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 10 - BENEFIT PLANS(Continued)

as of January 1, 2008, the Bank and Bancorp will record the cumulative effect of a change in accounting principle for recognizing a liability for the death benefit promised under a split-dollar life insurance arrangement. The total liability will be $539,000 with the offset to retained earnings.

NOTE 11 - FEDERAL INCOME TAXES

The composition of income tax expense is as follows:

(Amounts in thousands)

	Years Ended December 31,
	2007		2006			2005
Current	$	922	$	1,133		$	907
Deferred		189		(205	)		50
Total	$	1,111	$	928		$	957

The following is a summary of net deferred taxes included in other assets:

(Amounts in thousands)

	December 31,
	2007			2006			2005
Gross deferred tax assets:
Provision for loan and other real estate losses	$	227		$	428		$	413
AMT credit*					47			29
Other items		776			764			641
Loan origination cost - net		141			103			28
Unrealized loss (gain) on available for sale securities		49			235			452
Gross deferred tax liabilities:
Depreciation		(330	)		(350	)		(387	)
Other items		(572	)		(561	)		(498	)
Net deferred tax asset (liability)	$	291		$	666		$	678

*  Represents the Company’s cumulative alternative minimum tax credit which was used in 2007.

The following is a reconciliation between tax expense using the statutory tax rate of 34% and the income tax provision:

(Amounts in thousands)

	Years Ended December 31,
	2007			2006			2005
Statutory tax	$	1,857		$	1,871		$	1,798
Tax effect of non-taxable income		(846	)		(909	)		(921	)
Tax effect of non-deductible expense		100			111			80
Tax effect of change in estimate*					(145	)
Total income taxes	$	1,111		$	928		$	957

*  A one time adjustment to tax accrual estimate was recorded in the first quarter of 2006.

The related income tax expense on investment securities gains and losses amounted to $26,000 for 2007, $6,000 for 2006 and $105,000 for 2005, and is included in the total federal income tax provision.

26

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

(Amounts in thousands)

	December 31, 2007				December 31, 2006
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
ASSETS:
Cash and cash equivalents	$	9,441	$	9,441	$	10,100	$	10,100
Federal Funds sold						4,275		4,275
Investment securities		238,766		239,594		233,792		232,620
Loans, net of allowance for loan losses		221,488		220,692		202,997		201,269
LIABILITIES:
Demand and savings deposits	$	175,406	$	175,406	$	186,821	$	186,821
Time deposits		189,382		190,656		168,997		169,113
FHLB advances		64,000		64,952		55,000		54,917
Other borrowings		6,413		6,413		7,015		7,015
Subordinated Debt		5,155		5,155

For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 2007 and 2006. The estimated fair value for cash and cash equivalents is considered to approximate cost. The estimated fair value for securities is based on quoted market values for individual securities or for equivalent securities when specific quoted prices are not available. Carrying value is considered to approximate fair value for loans, FHLB advances and other borrowings that reprice frequently and for deposit liabilities subject to immediate withdrawal. The fair values of loans, FHLB advances and other borrowings and time deposits that reprice less frequently are approximated by a discount rate valuation technique utilizing estimated market interest rates as of December 31, 2007 and 2006. The fair value of unrecorded commitments at December 31, 2007 and 2006, is not material.

In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core deposit accounts, the trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

NOTE 13 - REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

27

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 13 - REGULATORY MATTERS(Continued)

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain: (1) a minimum ratio of 4% both for total Tier I risk-based capital to risk-weighted assets and for Tier I risk-based capital to average assets, and (2) a minimum ratio of 8% for total risk-based capital to risk-weighted assets.

Under the regulatory framework for prompt corrective action, the Company is categorized as well capitalized, which requires minimum capital ratios of 10% for total risk-based capital to risk-weighted assets, 6% for Tier I risk-based capital to risk-weighted assets, and 5% for Tier I risk-based capital to average assets (also known as the leverage ratio). There are no conditions or events since the most recent communication from regulators that management believes would change the Company’s capital classification.

	(Amounts in thousands)
	December 31,					December 31,
	2007					2006
	Amount		Ratio			Amount		Ratio
Total Risk-Based Capital	$	55,455				$	53,151
Ratio to Risk-Weighted Assets				19.18	%				19.93	%
Tier I Risk-Based Capital	$	53,820				$	50,913
Ratio to Risk-Weighted Assets				18.62	%				19.09	%
Ratio to Average Assets				10.99	%				11.04	%

Tier I risk-based capital is shareholders’ equity, noncumulative and cumulative perpetual preferred stock, qualifying trust preferred securities and minority interests less intangibles and the unrealized market value adjustment of investment securities available for sale. Total risk-based capital is Tier I risk-based capital plus the qualifying portion of the allowance for loan losses. Assets and certain off balance sheet items adjusted in accordance with risk classification comprise risk-weighted assets of $289,081,000 and $266,686,000 as of December 31, 2007 and 2006, respectively. Assets less intangibles and the net unrealized market value adjustment of investment securities available for sale averaged $489,443,000 and $461,215,000 for the years ended December 31, 2007 and 2006, respectively.

NOTE 14 - RELATED PARTY TRANSACTIONS

Certain directors, executive officers and companies with which they are affiliated were loan customers during 2007. The following is an analysis of such loans:

(Amounts in thousands)

Total related-party loans at December 31, 2006	$	1,648
New related-party loans		858
Repayments or other		121
Total related-party loans at December 31, 2007	$	2,385

28

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 15 - CONDENSED FINANCIAL INFORMATION

Below is condensed financial information of Cortland Bancorp (parent company only). In this information, the parent’s investment in subsidiaries is stated at cost, including equity in the undistributed earnings of the subsidiaries since inception, adjusted for any unrealized gains or losses on available for sale securities.

BALANCE SHEETS

(Amounts in thousands)

	December 31,
	2007			2006
Assets:
Cash	$	2,293		$	2,949
Investment securities available for sale		650			684
Investment in bank subsidiary		42,500			44,638
Investment in non-bank subsidiary		15			15
Subordinated note from subsidiary bank		6,000
Other assets		2,837			2,507
	$	54,295		$	50,793
Liabilities:
Other liabilities	$	316		$	201
Subordinated debt		5,155
Shareholders’ equity:
Common stock (Note 1)		23,200			22,972
Additional paid-in capital (Note 1)		20,976			20,835
Retained earnings		9,386			9,553
Accumulated other comprehensive income		(94	)		(455	)
Treasury stock		(4,644	)		(2,313	)
Total shareholders’ equity		48,824			50,592
	$	54,295		$	50,793

STATEMENTS OF INCOME

(Amounts in thousands)

	Years ended December 31,
	2007			2006			2005
Dividends from bank subsidiary	$	7,000		$	2,800		$	3,500
Interest and dividend income		51			46			56
Other income		110			89			70
Interest on subordinated debt		(154	)
Other expenses		(257	)		(283	)		(270	)
Income before income tax and equity in undistributed net income of subsidiaries		6,750			2,652			3,356
Income tax benefit (expense)		120			78			72
Equity in undistributed net income of subsidiaries		(2,520	)		1,846			906
Net income	$	4,350		$	4,576		$	4,334

29

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 15 - CONDENSED FINANCIAL INFORMATION(Continued)

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Years ended December 31,
	2007			2006			2005
Cash flows from operating activities
Net income	$	4,350		$	4,576		$	4,334
Adjustments to reconcile net income to net cash flows from operating activities:
Equity in undistributed net income of subsidiaries		2,520			(1,846	)		(906	)
Accretion on securities		2			2			3
Deferred tax benefit		(12	)		(13	)		(7	)
Change in other assets and liabilities		(192	)		(141	)		(148	)
Net cash flows from operating activities		6,668			2,578			3,276
Cash flows from investing activities
Purchases of investment securities available for sale								(356	)
Purchases of investment securities held to maturity
Proceeds from sales of securities available for sale
Proceeds from call, maturity and principal payments on securities								450
Purchase of subordinated note from subsidiary bank		(6,000	)
Net cash flows from investing activities		(6,000	)					94
Cash flows from financing activities
Proceeds from subordinated debt		5,155
Dividends paid		(3,899	)		(3,870	)		(4,637	)
Net treasury shares (repurchased) reissued		(2,580	)		1,139			1,168
Net cash flows from financing activities		(1,324	)		(2,731	)		(3,469	)
Net change in cash		(656	)		(153	)		(99	)
Cash
Beginning of year		2,949			3,102			3,201
End of year	$	2,293		$	2,949		$	3,102

NOTE 16 - DIVIDEND RESTRICTIONS

The Bank is subject to regulations of the Ohio Division of Banks which restrict dividends to retained earnings (as defined by statute) of the current and prior two years. Under this restriction, at December 31, 2007, approximately $232,000 is available for the payment of dividends by the Bank without seeking prior regulatory approval. In addition, regulations specify that dividend payments may not reduce capital levels below minimum regulatory guidelines.

NOTE 17 - LITIGATION

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

30

(Continued)

CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005

NOTE 18 - STOCK REPURCHASE PROGRAM

On February 27, 2007, the Company’s Board of Directors approved a Stock Repurchase Program which permitted the Company to repurchase up to 100,000 shares of its outstanding common shares in the over-the-counter market or in privately negotiated transactions in accordance with applicable regulations of the Securities and Exchange Commission. Based on the value of the Company’s stock on February 27, 2007, the commitment to repurchase the stock over the program was approximately $1,715,000. Subsequently, on August 14, 2007, the Company’s Board of Directors authorized the repurchase of up to an additional 100,000 shares of its outstanding common shares in over-the-counter market or in privately negotiated transactions. Based on the value of the Company’s stock on August 14, 2007, the commitment to repurchase these additional shares over the program was approximately $1,635,000. Once again, on November 27, 2007, the Company’s Board of Directors increased to 300,000 shares the size of its current stock buyback program by authorizing the repurchase of up to an additional 100,000 of its outstanding common shares in the over-the-counter market or in privately negotiated transactions. Based on the value of the Company’s stock on November 27, 2007, the commitment to repurchase these additional shares over the program was approximately $1,375,000. The repurchase program will terminate on February 28, 2009 or upon the purchase of 300,000 shares, if earlier. Repurchased shares are designated as treasury shares, available for general corporate purposes, including possible use in connection with the Company’s dividend reinvestment program, employee benefit plans, acquisitions or other distributions. Under the program the Company has repurchased 205,986 shares. The Company has also reissued 53,670 shares to existing shareholders through its dividend reinvestment program during 2007, net of repurchased fractional shares. The 1% common stock dividend paid January 1, 2008 increased treasury shares by an additional 2,420 shares. Based on the price of the Company’s stock at December 31, 2007, the remaining commitment to repurchase the 94,014 remaining shares of stock was approximately $1,170,000.

The following table shows information relating to the repurchase of shares of the Company’s common stock during 2007:

					Total Number		Maximum
					of Shares		Number
					Purchased as		of Shares
					Part of Publicly		That May Yet Be
	Total Number		Average		Announced		Purchased Under
	of Shares		Price Paid		Plans or		the Plans or
	Purchased		Per Share		Programs		Programs
October		22,000	$	15.40		22,000		25,857
November		25,843		15.12		25,843		100,014
December		6,000		15.00		6,000		94,014
Fourth Quarter		53,843	$	15.22		53,843		94,014
Third Quarter		66,929	$	16.90		66,929		47,857
Second Quarter		85,214	$	18.47		85,214		14,786
First Quarter		NONE		NONE		NONE		NONE
TOTAL		205,986	$	17.11		205,986		94,014

31

FIVE YEAR SUMMARY
AVERAGE BALANCE SHEET, YIELDS AND RATES

The following schedules show average balances of interest-earning and non interest-earning assets and liabilities, and Shareholders’ equity for the years indicated. Also shown are the related amounts of interest earned or paid and the related average yields or interest rates paid for the years indicated. The averages are based on daily balances.

(Fully taxable equivalent basis in thousands of dollars)

	2007							2006
	Average		Interest		Yield			Average		Interest		Yield
	Balance		Earned		or			Balance		Earned		or
	Outstanding		or Paid		Rate			Outstanding		or Paid		Rate
Interest-earning assets:
Federal funds sold and other money markets	$	6,950	$	366		5.3	%	$	4,228	$	215		5.1	%
Investment securities:
U.S. Treasury and other U.S. Government agencies and corporations		87,867		4,772		5.4	%		83,615		4,257		5.1	%
U.S. Government mortgage-backed pass through certificates		80,689		4,008		5.0	%		79,317		3,795		4.8	%
States of the U.S. and political subdivisions (Note 1, 2, 3)		37,488		2,633		7.0	%		42,409		2,995		7.1	%
Other securities		32,860		2,251		6.9	%		29,628		1,888		6.4	%
TOTAL INVESTMENT SECURITIES		238,904		13,664		5.7	%		234,969		12,935		5.5	%
Loans (Note 2, 3, 4)		215,496		15,856		7.4	%		195,838		14,381		7.4	%
Trading account securities
TOTAL INTEREST-EARNING ASSETS		461,350	$	29,886		6.5	%		435,035	$	27,531		6.3	%
Non interest-earning assets:
Cash and due from banks		8,220							8,733
Premises and equipment		5,374							4,226
Other		14,103							12,365
TOTAL ASSETS	$	489,047						$	460,359
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	46,508	$	888		1.9	%	$	47,415	$	752		1.6	%
Savings		78,072		799		1.0	%		82,845		850		1.0	%
Time		184,586		8,769		4.8	%		161,050		6,907		4.3	%
TOTAL INTEREST-BEARING DEPOSITS		309,166		10,456		3.4	%		291,310		8,509		2.9	%
Borrowings:
Federal funds purchased		605		29		4.8	%		478		25		5.3	%
Securities sold under agreement to repurchase		5,764		243		4.2	%		3,991		158		4.0	%
Subordinated debt		2,175		154		7.1	%
Other borrowings under one year		13,963		715		5.1	%		7,924		365		4.6	%
Other borrowings over one year		45,843		2,388		5.2	%		46,858		2,525		5.4	%
TOTAL BORROWINGS		68,350		3,529		5.2	%		59,251		3,073		5.2	%
TOTAL INTEREST-BEARING LIABILITIES		377,516	$	13,985		3.7	%		350,561	$	11,582		3.3	%
Non interest-bearing liabilities:
Demand deposits		57,668							57,271
Other liabilities		3,775							3,214
Shareholders equity		50,088							49,313
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY	$	489,047						$	460,359
Net interest income			$	15,901						$	15,949
Net interest rate spread (Note 5)						2.8	%						3.0	%
Net interest margin (Note 6)						3.5	%						3.7	%

Note 1 –	Includes both taxable and tax exempt securities.
Note 2 –	The amounts are presented on a fully taxable equivalent basis using the statutory tax rate of 34% in 2007, 2006, 2005, 2004 and 2003, and have been adjusted to reflect the effect of disallowed interest expense related to carrying tax exempt assets. Tax-free income from states of the U.S. and political subdivisions, and loans amounted to $1,809 and $155 for 2007, $2,045 and $192 for 2006, $2,156 and $209 for 2005, $2,545 and $193 for 2004 and $2,466 and $214 for 2003, respectively.
Note 3 –	Average balance outstanding includes the average amount outstanding of all nonaccrual investment securities and loans. States and political subdivisions consist of average total principal adjusted for amortization of premium and accretion of discount less average allowance for estimated losses, and include both taxable and tax exempt securities. Loans consist of average total loans less average unearned income.

32

(Fully taxable equivalent basis in thousands of dollars)

2005						2004						2003
Average		Interest		Yield		Average		Interest		Yield		Average		Interest		Yield
Balance		Earned		or		Balance		Earned		or		Balance		Earned		or
Outstanding		or Paid		Rate		Outstanding		or Paid		Rate		Outstanding		or Paid		Rate
$	3,619	$	119		3.3%	$	5,623	$	83		1.5%	$	10,338	$	118		1.1%
	67,402		3,259		4.8%		62,418		2,920		4.7%		52,587		2,640		5.0%
	84,928		3,810		4.5%		85,357		3,634		4.3%		89,652		4,009		4.5%
	44,756		3,184		7.1%		53,832		3,764		7.0%		51,363		3,649		7.1%
	24,758		1,294		5.2%		14,953		716		4.8%		10,997		559		5.1%
	221,844		11,547		5.2%		216,560		11,034		5.1%		204,599		10,857		5.3%
	192,873		13,040		6.8%		193,927		12,474		6.4%		191,392		13,141		6.9%
													1,190		68		5.7%
	418,336	$	24,706		5.9%		416,110	$	23,591		5.7%		407,519	$	24,184		5.9%
	9,417						9,276						10,140
	4,316						4,637						5,119
	12,418						14,252						13,461
$	444,487					$	444,275					$	436,239
$	49,355	$	389		0.8%	$	48,945	$	263		0.5%	$	50,714	$	249		0.5%
	89,107		647		0.7%		90,584		501		0.6%		88,953		540		0.6%
	144,793		5,123		3.5%		147,662		5,023		3.4%		139,568		5,030		3.6%
	283,255		6,159		2.2%		287,191		5,787		2.0%		279,235		5,819		2.1%
	428		15		3.5%		289		4		1.4%		57		1		1.8%
	2,540		59		2.3%		2,698		26		1.0%		1,999		17		0.9%
	599		21		3.5%		2,781		37		1.3%		3,671		160		4.4%
	46,365		2,411		5.2%		40,325		2,156		5.3%		39,178		2,135		5.4%
	49,932		2,506		5.0%		46,093		2,223		4.8%		44,905		2,313		5.2%
	333,187	$	8,665		2.6%		333,284	$	8,010		2.4%		324,140	$	8,132		2.5%
	58,320						56,778						55,898
	3,315						4,385						4,394
	49,665						49,828						51,807
$	444,487					$	444,275					$	436,239
		$	16,041					$	15,581					$	16,052
					3.3%						3.3%						3.4%
					3.8%						3.7%						3.9%

Note 4 –	Interest earned on loans includes net loan fees of $219 in 2007, $291 in 2006, $242 in 2005, $203 in 2004 and $241 in 2003.
Note 5 –	Net interest rate spread represents the difference between the yield on earning assets and the rate paid oninterest-bearing liabilities.
Note 6 –	Net interest margin is calculated by dividing the difference between total interest earned and total interest expensed by total interest-earning assets.

33

CORTLAND BANCORP AND SUBSIDIARIES
SELECTED FINANCIAL DATA

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

	Years Ended December 31,
SUMMARY OF OPERATIONS	2007			2006			2005			2004			2003
Total Interest Income	$	28,992		$	26,497		$	23,586		$	22,288		$	22,907
Total Interest Expense		13,985			11,582			8,665			8,010			8,132
NET INTEREST INCOME (NII)		15,007			14,915			14,921			14,278			14,775
Provision for Loan Losses		40			225			545			415			240
NII After Loss Provision		14,967			14,690			14,376			13,863			14,535
Security Gains (losses)		77			18			308			1,052			946
Gain on Sale of Loans		88			106			89			54			470
Total Other Income		2,924			2,711			2,718			2,725			2,433
INCOME BEFORE EXPENSE		18,056			17,525			17,491			17,694			18,384
Total Other Expenses		12,595			12,021			12,200			11,861			11,529
INCOME BEFORE TAX		5,461			5,504			5,291			5,833			6,855
Federal Income Tax		1,111			928			957			990			1,371
NET INCOME	$	4,350		$	4,576		$	4,334		$	4,843		$	5,484
BALANCE SHEET DATA
Assets	$	492,694		$	471,751		$	459,701		$	446,393		$	438,392
Investments		238,622			233,103			234,652			225,841			222,775
Total Loans		223,109			205,208			188,202			191,777			189,262
Allowance for Loan losses		1,621			2,211			2,168			2,629			2,408
Deposits		364,788			355,818			350,375			344,919			337,556
Borrowings		70,413			62,015			58,111			47,889			47,886
Subordinated Debt		5,155
Shareholders’ Equity		48,824			50,592			48,325			49,398			49,881
AVERAGE BALANCES
Assets	$	489,047		$	460,359		$	444,487		$	444,275		$	436,239
Investments		238,904			234,969			221,844			216,560			204,599
Net Loans		213,568			193,648			190,329			191,428			188,360
Deposits		366,834			348,581			341,575			343,969			335,133
Subordinated Debt		2,175
Borrowings		66,175			59,251			49,932			46,093			44,905
Shareholders’ Equity		50,088			49,313			49,665			49,828			51,807
PER COMMON SHARE DATA (1)
Net Income, both Basic and Diluted	$	0.97		$	1.01		$	0.97		$	1.10		$	1.23
Cash Dividends Declared		0.87			0.85			1.04			1.01			0.98
Book Value		11.12			11.14			10.78			11.17			11.31
ASSET QUALITY RATIOS
Loans 30 days or more beyond their contractual due date as a percent of total loans		1.32	%		2.26	%		2.95	%		2.45	%		1.77	%
Underperforming Assets as a Percentage of:
Total Assets		0.63			0.84			0.83			0.76			0.70
Equity plus Allowance for Loan Losses		6.17			7.50			7.58			6.52			5.84
Tier I Capital		6.38			7.78			7.81			7.05			6.44
FINANCIAL RATIOS
Return on Average Equity		8.68	%		9.28	%		8.73	%		9.72	%		10.59	%
Return on Average Assets		0.89			0.99			0.98			1.09			1.26
Effective Tax Rate		20.34			16.86			18.09			16.97			20.00
Average Equity to Average Assets		10.24			10.71			11.17			11.22			11.88
Equity to Asset Ratio		9.91			10.72			10.51			11.07			11.38
Tangible Equity to Tangible Asset Ratio		9.89			10.70			10.48			11.02			11.33
Cash Dividend Payout Ratio		89.69			84.31			107.00			91.45			79.85
Net Interest Margin Ratio		3.45			3.67			3.83			3.74			3.94

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

34

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

FINANCIAL REVIEW

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” forforward-looking statements. In addition to historical information, certain information included in this discussion and other material filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) may containforward-looking statements that involve risks and uncertainties. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or similar terminology identify forward-looking statements. These statements reflect management’s beliefs and assumptions, and are based on information currently available to management.

Economic circumstances, the Company’s operations and actual results could differ significantly from those discussed in any forward-looking statements. Some of the factors that could cause or contribute to such differences are changes in the economy and interest rates either nationally or in the Company’s market area; changes in customer preferences and consumer behavior; increased competitive pressures or changes in either the nature or composition of competitors; changes in the legal and regulatory environment; changes in factors influencing liquidity such as expectations regarding the rate of inflation or deflation, currency exchange rates, and other factors influencing market volatility; unforeseen risks associated with other global economic, political and financial factors.

While actual results may differ significantly from the results discussed in the forward-looking statements, the Company undertakes no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

CERTAIN NON GAAP MEASURES

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

OVERVIEW and OUTLOOK

Net income for 2007 was $4,350. The performance represented a decrease of $226 from the $4,576 earned in 2006. Earnings per share measured $0.97, down $0.04 or 4.0% from $1.01 in 2006.

Core earnings, which exclude the net gains on loans sold and investment securities either sold or called, loss on other real estate, and certain other non recurring items, were $4.244 million in 2007, compared to the $4.382 million earned in 2006. Core earnings per share were $0.94 in 2007 and $0.97 in 2006, down $0.03 or 3.0%.

35

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

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

	Years Ended
	December 31,
	2007			2006			2005			2004			2003
GAAP earnings	$	4,350		$	4,576		$	4,334		$	4,843		$	5,484
Investment security gains		(77	)		(18	)		(308	)		(1,052	)		(946	)
Gain on sale of loans		(88	)		(106	)		(89	)		(54	)		(470	)
Other real estate loss		1			47			3			171
Other non-recurring items*		4			(142	)		243			19			43
Tax effect of adjustments		54			25			51			311			467
Core earnings	$	4,244		$	4,382		$	4,234		$	4,238		$	4,578

*  Includes a one-time change in tax accrual estimate made in the first quarter of 2006, and a one-time cash bonus declared in the third quarter of 2005 paid to the retiring C.E.O.

The Company’s net interest margin continues to be affected by a sustained flattening and subsequent inversion of the yield curve as represented by the difference between long and short term interest rates. The Company’s net interest margin, on a fully taxable equivalent basis, decreased by $48 from the preceding year, with the net interest margin ratio declining from 3.67% to 3.45%.

Financial results also reflect an increase in expenses associated with the Company’s strategic growth plans. These expenses include costs for professional consulting, information system software licensing and maintenance, personnel and educational training program for the Company’s employees. While these strategic outlays can be expected to contribute to performance over the long term, they represent a drag on current period profitability.

As of December 31, 2007, the ratio of equity capital to total assets remained well above regulatory minimums at 9.91%, down from 10.72% a year ago. Risk-based capital measured 19.18% compared to 19.93% at December 31, 2006. All capital ratios continue to register well in excess of required regulatory minimums.

Return on average equity was 8.68% in 2007 compared to 9.28% in 2006, while the year-over-year return on average assets measured 0.89% compared to 0.99% in 2006. Book value per share decreased by $0.02 to $11.12. The price of the Company’s common stock traded in a range between a low of $11.20 and a high of $19.06, closing the year at $12.05 per share. Although a special cash dividend was not paid in 2007 or 2006, as it had been in prior years, the Company’s dividend payout remained aggressive as 89.7% of 2007 earnings were paid as cash dividends compared to 84.3% in the prior year. Dividends per share were $0.87 compared to $0.85 per share in 2006.

The Company is committed to an on-going investment in technology, assuring an infrastructure that effectively delivers to consumers and small-to-medium-sized business owners leading edge financial products and services. The Company’s integrated approach to technology includes internet banking services; an Integrated Voice Response system that provides customers with remote access to banking services; platform products that enhance both productivity and customer service; and check and document-imaging products, which further capitalize on the Company’s Internet banking cash management initiative. Technology is a core ingredient for the Company, enabling it to extend services to customers beyond geographic boundaries, while increasing employee productivity. These flexible and robust product solutions also offer customers capabilities which enable them to streamline their own operations and to bank around the clock.

The Company’s Internet based banking solution, NetTeller, delivers interactive information by providing customers the following capabilities: access to account information, statement information and check imaging; on-line bill payment and electronic loan payments; and the ability to remotely transfer money between accounts and to initiate wire transfers and ACH transactions. Consumers, retail and commercial customers, alike, are offered such services 24 hours a day, 365 days a year with a high level of functionality, security and ease of operation.

36

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

To accommodate growing demand, while preserving responsive and personalized service, a customer relationship management (CRM) platform was installed in late 2007. Selected was an internet-based “relationship management” solution, enabling personnel to better match customer needs with products and services, facilitate opportunities to extend or increase credit for business-related accounts, monitor financial covenants, and process applications and underwrite credit in an efficient manner.

As an internet-based solution, an account officer can access account information (including property appraisals, notes and loan documents, insurance policies and account history) at any location having internet capability. This affords the account officer great flexibility in meeting with customers: from branch office, to place of business or even internet cafe. The Bank’s core processing systems update the CRM daily, so when officer and customer meet account information is always the most currently available.

Remote Merchant Capture is another of the Bank’s strategic infrastructure investments. During 2007 a pilot program was developed, with plans for broad-scale introduction in the second quarter of 2008. Merchant capture is a relatively new technology enabling Bank customers to scan checks and remit deposits electronically. This technology will be particularly beneficial to commercial customers, providing both operational efficiency and convenience, especially for those who lack a Cortland Banks’ facility in close proximity. Cortland Banks uses this same technology for its own account, transmitting and receiving all Federal Reserve items electronically. During 2007, Cortland Banks converted all branches to electronic delivery, eliminating the need to physically transport paper checks.

During 2007, the Company completed construction and opened a new 2,500 square foot full service office, located at the intersection of Maple Grove Road and East Center Street, in the village of Windham.

This spring a fourteenth office will open in Middlefield, Ohio. The Brookfield office will relocate to a newly-built facility early this summer just across the street from its current location. The Bank will also relocate an office to North Lima, Ohio by early fall.

BALANCE SHEET COMPOSITION

The following table illustrates, during the years presented, the mix of the Company’s funding sources and the assets in which those funds are invested as a percentage of the Company’s average total assets for the period indicated. Average assets totaled $489,047 in 2007 compared to $460,359 in 2006 and $444,487 in 2005.

	2007			2006			2005			2004			2003
Sources of Funds:
Deposits:
Non-interest-bearing		11.8	%		12.4	%		13.1	%		12.8	%		12.8	%
Interest-bearing		63.2			63.3			63.7			64.6			64.0
Federal funds purchased and repurchase agreements		1.3			1.0			0.7			0.7			0.5
Long-term debt and other borrowings		12.2			11.9			10.6			9.7			9.8
Subordinated debt		0.5
Other non-interest-bearing liabilities		0.8			0.7			0.7			1.0			1.0
Equity capital		10.2			10.7			11.2			11.2			11.9
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Uses of Funds:
Loans		44.1	%		42.6	%		43.4	%		43.7	%		43.9	%
Securities		48.9			51.0			49.9			48.7			47.1
Federal funds sold, and other money market instruments		1.4			0.9			0.8			1.3			2.4
Bank owned life insurance		2.4			2.5			2.5			2.3			1.9
Other non-interest-earning assets		3.2			3.0			3.4			4.0			4.7
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Deposits continue to be the Company’s primary source of funding. During 2007, the relative mix of deposits has remained steady with interest-bearing being the main source. Average non-interest bearing deposits totaled 15.7% of total average deposits in 2007 compared to 16.4% in 2006 and 17.1% in 2005. (Also see section captioned “Deposits” included elsewhere in this discussion.)

The Company primarily invests funds in loans and securities. Securities have been the largest

37

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

component of the Company’s mix of invested assets. During 2007 average securities increased by $3,935 or 1.7%, while average loans increased by $19,658 or 10.0%.

The Company has also purchased bank owned life insurance policies on the lives of directors, certain employees and key members of management in conjunction with the Company’s benefit plans. The average balance increased from $11,145 in 2005 to $12,024 in 2007, reflecting the purchase of additional policies and the buildup of cash surrender value. (See additional information regarding the Company’s loan and securities portfolio in the sections captioned “Loan Portfolio” and “Investment Securities” included elsewhere in this discussion.)

ASSET QUALITY

The Company’s management regularly monitors and evaluates trends and developments in asset quality. Loan review systems require detailed monthly analysis of delinquencies, nonperforming assets and other sensitive credits. Mortgage, commercial and consumer loans are moved to nonaccrual status once they reach 90 days past due or when analysis of a borrower’s creditworthiness indicates the collection of interest and principal is in doubt.

Additionally, as part of the Company’s loan review process, management routinely evaluates risks which could potentially affect the ability to collect loan balances in their entirety. Reviews of individual credits as well as any concentration of credits in particular industries are subject to a detailed loan review.

In addition to nonperforming loans, total nonperforming assets include nonperforming investment securities and real estate acquired in satisfaction of debts previously contracted. Total underperforming assets add to this amount loans which have been restructured to provide for a reduction of interest or principal because of a deterioration in the financial condition of the borrower. Also included as underperforming assets are loans which are more than 89 days past due that continue to accrue interest income. The following table depicts the trend in these potentially problematic asset categories.

	2007		2006		2005		2004		2003
Nonaccrual loans:
1-4 residential mortgages	$	499	$	887	$	719	$	661	$	529
Commercial mortgages		1,572		2,497		2,472		2,734		1,538
Commercial loans		146		188		210
Consumer loans		17		129		41
Home equity loans		51		222		304
Total Nonaccrual Loans		2,285		3,923		3,746		3,395		2,067
Other real estate owned		282		35		82				986
Nonperforming Assets		2,567		3,958		3,828		3,395		3,053
Restructured loans		546
Underperforming Assets	$	3,113	$	3,958	$	3,828	$	3,395	$	3,053

The following table provides a number of asset quality ratios based on this data. Overall, asset quality reflected the cumulative effects of a general economic weakness evidenced since 2003 in the local area markets where the Company operates, but remained within limits that management considers acceptable.

	2007		2006		2005		2004		2003
Nonperforming loans as a percentage of total loans		1.02%		1.91%		1.99%		1.77%		1.09%
Nonperforming assets as a percentage of total assets		0.52%		0.84%		0.83%		0.76%		0.70%
Underperforming assets as a percentage of total assets		0.63%		0.84%		0.83%		0.76%		0.70%
Underperforming assets as a percentage of equity capital plus allowance for loan losses		6.17%		7.50%		7.58%		6.52%		5.84%

Gross income that would have been recorded in 2007 on these loans, had they been in compliance with their original terms, was $267. Interest income that actually was included in income on these loans amounted to $79.

RESULTS OF OPERATIONS

  Analysis of Net Interest Income Years Ended December 31, 2007 and 2006

Net interest income, the principal source of the Company’s earnings, is the amount by which interest and fees generated by interest-earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. During the recent reporting period the net interest margin ratio registered 3.45% in 2007, 3.67% in 2006, and 3.83% in 2005.

The narrowing of the company’s net interest margin ratio can be attributed in part, to the Federal Reserve’s monetary policy efforts directed at containing inflation.

38

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

	NET INTEREST MARGIN FOR YEAR ENDED
	December 31, 2007						December 31, 2006
	Average				Average		Average				Average
	Balance(1)		Interest		Rate		Balance(1)		Interest		Rate
INTEREST-EARNING ASSETS
Federal funds sold and other money market funds	$	6,950	$	366		5.3%	$	4,228	$	215		5.1%
Investment securities(1)(2)		238,904		13,664		5.7%		234,969		12,935		5.5%
Loans(2)(3)		215,496		15,856		7.4%		195,838		14,381		7.4%
Total interest-earning assets	$	461,350	$	29,886		6.5%	$	435,035	$	27,531		6.3%
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits	$	46,508	$	888		1.9%	$	47,415	$	752		1.6%
Savings		78,072		799		1.0%		82,845		850		1.0%
Time		184,586		8,769		4.8%		161,050		6,907		4.3%
Total interest-bearing deposits		309,166		10,456		3.4%		291,310		8,509		2.9%
Federal funds purchased		605		29		4.8%		478		25		5.3%
Other borrowings		65,570		3,346		5.1%		58,773		3,048		5.2%
Subordinated debt		2,175		154		7.1%
Total interest-bearing liabilities	$	377,516	$	13,985		3.7%	$	350,561	$	11,582		3.3%
Net interest income			$	15,901					$	15,949
Net interest rate spread(4)						2.8%						3.0%
Net interest margin(5)						3.5%						3.7%

(1) Includes both taxable and tax exempt securities.

(2)	Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%.
(3)	Includes loan origination and commitment fees.
(4)	Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing liabilities.

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

The increase in fully tax equivalent interest income was the product of a 6.0% year-over-year increase in average earning assets and a 14 basis point increase in interest rates earned, while the increase in interest expense was a product of a 7.7% increase in interest-bearing liabilities and a 40 basis point increase in rates paid. The net result was a 0.3% decrease in net interest income on a fully tax equivalent basis and a 22 basis point decrease in the net interest margin.

Interest and dividend income on securities registered an increase of $851, or 7.1%, during the year ended December 31, 2007 when compared to 2006. On a fully tax equivalent basis, income on investment securities increased by $729, or 5.6%. The average invested balances increased by $3,935 from the levels of a year ago. The increase in the average balance of investment securities was accompanied by a 21 basis point increase in the tax equivalent yield of the portfolio.

Interest and fees on loans increased by $1,475 on a fully tax equivalent basis, or 10.3%, for the twelve months of 2007 compared to 2006. A $19,658 increase in the average balance of the loan portfolio, or 10.0%, was accompanied by no basis point change in the portfolio’s tax equivalent yield. This increase in the average loan portfolio balance is a direct result of strategic initiatives designed to increase the company’s market share.

Other interest income increased by $151 from the same period a year ago. The average balance of federal funds sold and other money market funds increased by $2,722, or 64.4%. The yield increased by 18 basis points during 2007 compared to 2006.

Average interest-bearing demand deposits and money market accounts decreased by $907, and savings decreased by $4,773. The average rate paid on these products increased by 12 basis points in the aggregate. The average balance on time deposit products increased by $23,536, as the average rate paid increased by 46 basis points, from 4.3% to 4.8%.

Compared to last year, average borrowings, federal funds purchased and subordinated debt increased by $9,099 while the average rate paid on borrowings decreased by 2 basis points. (See Notes 7 and 8 for information regarding borrowings and subordinated debt.)

39

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

  Analysis of Net Interest Income — Years Ended December 31, 2006 and 2005

	NET INTEREST MARGIN FOR YEAR ENDED
	December 31, 2006						December 31, 2005
	Average				Average		Average				Average
	Balance(1)		Interest		Rate		Balance(1)		Interest		Rate
INTEREST-EARNING ASSETS
Federal funds sold and other money market funds	$	4,228	$	215		5.1%	$	3,619	$	119		3.3%
Investment securities(1)(2)		234,969		12,935		5.5%		221,844		11,547		5.2%
Loans(2)(3)		195,838		14,381		7.4%		192,873		13,040		6.8%
Total interest-earning assets	$	435,035	$	27,531		6.3%	$	418,336	$	24,706		5.9%
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits	$	47,415	$	752		1.6%	$	49,355	$	389		0.8%
Savings		82,845		850		1.0%		89,107		647		0.7%
Time		161,050		6,907		4.3%		144,793		5,123		3.5%
Total interest-bearing deposits		291,310		8,509		2.9%		283,255		6,159		2.2%
Federal funds purchased		478		25		5.3%		428		15		3.5%
Other borrowings		58,773		3,048		5.2%		49,504		2,491		5.0%
Total interest-bearing liabilities	$	350,561	$	11,582		3.3%	$	333,187	$	8,665		2.6%
Net interest income			$	15,949					$	16,041
Net interest rate spread(4)						3.0%						3.3%
Net interest margin(5)						3.7%						3.8%

(1) Includes both taxable and tax exempt securities.

(2)	Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%.
(3)	Includes loan origination and commitment fees.
(4)	Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing liabilities.

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

The increase in interest income was the product of a 4.0% year-over-year increase in average earning assets and a 43 basis point increase in interest rates earned, while the increase in interest expense was a product of a 5.2% increase in interest-bearing liabilities and a 70 basis point increase in rates paid. The net result was a 0.6% decrease in net interest income on a fully tax equivalent basis and a 16 basis point decrease in the net interest margin.

Interest and dividend income on securities registered an increase of $1,465, or 13.9%, during the year ended December 31, 2006 when compared to 2005. On a fully tax equivalent basis, income on investment securities increased by $1,388, or 12.0%. The average invested balances increased by $13,125 from the levels of a year ago. The increase in the average balance of investment securities was accompanied by a 30 basis point increase in the tax equivalent yield of the portfolio.

Interest and fees on loans increased by $1,341 on a fully tax equivalent basis, or 10.3%, for the twelve months of 2006 compared to 2005. A $2,965 increase in the average balance of the loan portfolio, or 1.5%, was accompanied by a 60 basis point increase in the portfolio’s tax equivalent yield. Also contributing to the increase in loan income in 2006 was $185 in back interest and loan fees collected on three loans which had been in foreclosure.

Other interest income increased by $96 from the same period a year ago. The average balance of federal funds sold and other money market funds increased by $609, or 16.8%. The yield increased by 180 basis points during 2006 compared to 2005.

Average interest-bearing demand deposits and money market accounts decreased by $1,940, and savings decreased by $6,262. The average rate paid on these products increased by 48 basis points in the aggregate. The average balance on time deposit products increased by $16,257, as the average rate paid increased by 75 basis points, from 3.5% to 4.3%.

Compared to last year, average borrowings and federal funds purchased increased by $9,319 while the average rate paid on borrowings increased by 17 basis points.

40

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

The following table provides a detailed analysis of changes in net interest income, identifying that portion of the change that is due to a change in the volume of average assets and liabilities outstanding versus that portion which is due to a change in the average yields on earning assets and average rates on interest-bearing liabilities. Changes in interest due to both rate and volume which cannot be segregated have been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Analysis of Net Interest Income Changes (Taxable Equivalent Basis)

	2007 Compared to 2006									2006 Compared to 2005
	Volume			Rate			Total			Volume			Rate			Total
Increase (Decrease) in Interest Income:
Federal funds sold and other money markets	$	143		$	8		$	151		$	23		$	73		$	96
Investment Securities
U.S. Treasury and other U.S. Government agencies and corporations		223			292			515			818			180			998
U.S. Government mortgage-backed pass-through certificates		66			147			213			(260	)		245			(15	)
States of the U.S. and political subdivisions		(346	)		(16	)		(362	)		(166	)		(23	)		(189	)
Other securities		215			148			363			281			313			594
Loans		1,446			29			1,475			203			1,138			1,341
Total Interest Income Change		1,747			608			2,355			899			1,926			2,825
Increase (Decrease) in Interest Expense:
Interest-bearing demand deposits		(14	)		150			136			(16	)		379			363
Savings deposits		(49	)		(2	)		(51	)		(48	)		251			203
Time deposits		1,072			790			1,862			617			1,167			1,784
Federal funds purchased		6			(2	)		4			2			8			10
Securities sold under agreements to repurchase		74			11			85			44			55			99
Other borrowings under one year		305			45			350			335			9			344
Other borrowings over one year		(54	)		(83	)		(137	)		26			88			114
Subordinated debt		154						154
Total Interest Expense Change		1,494			909			2,403			960			1,957			2,917
Increase (Decrease) in Net Interest Income on a Taxable Equivalent Basis	$	253		$	(301	)	$	(48	)	$	(61	)	$	(31	)	$	(92	)

41

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

Analysis of Other Income, Other Expense and Federal Income Tax

Total other income for 2007 increased $254, or 9.0% compared to a decrease of $280, or 9.0% in 2006. Fees for customer services increased by $68, or 3.0%, compared to a decrease of $15 or 0.7% in the prior year. The increase is primarily due to an increase in service charge income.

Loans originated for sale in the secondary market showed gains of $88 in 2007, compared to $106 and $89 in 2006 and 2005, respectively. The early call of held to maturity securities, and transactions involving available for sale securities, combined to produce net gains of $77 in 2007, $18 in 2006 and $308 in 2005.

Other real estate losses amounted to $1 in 2007, $47 in 2006 and $3 in 2005. Earnings on bank owned life insurance showed an increase of $88 in 2007 compared to an increase of $92 in 2006. Other non-interest income increased by $11 during 2007 following a $40 decrease in 2006. This income category is subject to fluctuation due to nonrecurring items.

Other Income

	2007			2006			2005			2004			2003
Fees for other customer services	$	2,307		$	2,239		$	2,254		$	2,327		$	1,636
Gain on sale of loans		88			106			89			54			470
Other real estate losses		(1	)		(47	)		(3	)		(171	)
Gain on sale of trading Securities														265
Earnings on bank owned life insurance		521			433			341			444			409
Other operating income		97			86			126			125			123
		3,012			2,817			2,807			2,779			2,903
Investment securities net gains		77			18			308			1,052			946
Total other income	$	3,089		$	2,835		$	3,115		$	3,831		$	3,849

Total other expenses increased by $574 or 4.8% in 2007. This compares to a decrease of $179 or 1.5% in 2006. During 2007, expenditures for salaries and employee benefits increased by $423 or 6.2%. This increase is a combination of regular staff salary and benefit increases. In 2006 these expenditures decreased by $276 or 3.9%. This is due mainly to a one time cash bonus of $243 awarded to the retiring President and CEO in 2005. Occupancy and equipment expense increased by $60, or 3.3%, during 2007 and decreased by $59, or 3.2%, in 2006. The increase in 2007 is due in part to construction of a banking facility to replace an existing leased bank location. The decrease in 2006 is due mainly to a $112 decrease in depreciation expense as some assets became fully depreciated, and a $36 increase in equipment and building maintenance.

State and local taxes stayed fairly consistent from 2005 to 2007. Bank exam and audit expense decreased by $43 or 8.8% in 2007 following an increase of $59 or 13.8% in 2006 primarily due to expenses associated with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. All other categories of non-interest expense increased by $106 in 2007 following an increase of $93 in 2006. This expense category is subject to fluctuation due to non-recurring items. The increase in 2007 is due in part to expenses associated with the Company’s Strategic Growth Plan. These expenses include costs for professional consulting, information system software licensing and maintenance and educational programs for the Company’s employees. The increase in 2006 is due partly to an increase in collection and foreclosure expense of $41, a one-time sundry charge-off of $22, and a $29 increase in office supplies expense.

Non-Interest Expense

	2007		2006		2005		2004		2003
Salaries and benefits	$	7,199	$	6,776	$	7,052	$	6,722	$	6,586
Net occupancy and equipment expense		1,871		1,811		1,870		1853		1,963
State and local taxes		580		552		548		544		524
Office supplies		396		367		338		346		347
Bank exam and audit		443		486		427		515		349
Other operating expense		2,106		2,029		1,965		1,881		1,760
Total other expenses	$	12,595	$	12,021	$	12,200	$	11,861	$	11,529

42

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

Salaries and employee benefits represented 57.2% of all non-interest expenses in 2007, 56.4% in 2006 and 57.8% in 2005. Salaries and employee benefits decreased by $276 in 2006 followed by an increase of $423 in 2007. The following details components of these increases:

	Analysis of Changes in Salaries & Benefits
	Amounts														Percent
	2007		2006			2005			2004			2003			2007			2006			2005			2004			2003
Salaries	$	252	$	(176	)	$	317		$	(28	)	$	67			4.7	%		(3.2	)%		6.1	%		(1.14	)%		1.3	%
Benefits		145		(77	)		(29	)		85			112			9.0			(4.6	)		(1.7	)		5.2			7.3
Profit Sharing													(336	)														(100.0	)
		397		(253	)		288			57			(157	)		5.7			(3.5	)		4.2			0.8			(2.2	)
Def’d Loan Origination		26		(23	)		42			79			(55	)		16.1			(16.7	)		23.3			30.5			(27.0	)
	$	423	$	(276	)	$	330		$	136		($	212	)		6.2	%		(3.9	)%		4.9	%		2.1	%		(3.1	%)

Wage and salary expense per employee averaged $33,994 in 2007, $33,063 in 2006, and $33,942 in 2005. Excluding the one-time retirement bonus, the average per employee would have been $32,444 in 2005. Full-time equivalent employment averaged 164 employees in 2007, 161 employees in 2006 and 162 employees in 2005. Average earning assets per employee measured $2,813 in 2007, $2,702 in 2006 and $2,582 in 2005.

Income before income tax expense amounted to $5,461 for the year ended 2007 compared to $5,504 and $5,291 for the similar periods of 2006 and 2005, respectively. The effective tax rate was 20.3% in 2007, 16.9% in 2006 and 18.1% in 2005, resulting in income tax of $1,111, $928 and $957, respectively. The decrease in the effective tax rate in 2006 reflects a one time adjustment to tax expense of $145 due to a change in tax accrual estimate. The effective tax rate before the $145 adjustment was 19.5%. The increase in 2007 is an increase from prior years because of a reduction in tax free income. The provision for income taxes differs from the amount of income tax determined applying the applicable U.S. statutory federal income tax rate to pre-tax income as a result of the following differences:

	December 31,
	2007			2006			2005			2004			2003
Provision at statutory rate	$	1,857		$	1,871		$	1,798		$	1,983		$	2,331
Add (Deduct):
Tax effect of non-taxable income		(846	)		(909	)		(921	)		(1,084	)		(1,052	)
Tax effect of non-deductible expense		100			111			80			91			92
Tax effect of change in estimate*					(145	)
Federal income taxes	$	1,111		$	928		$	957		$	990		$	1,371

*  One time adjustment to tax accrual estimate

43

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

Net income registered $4,350 in 2007, $4,576 in 2006 and $4,334 in 2005 representing per share amounts of $0.97 in 2007, $1.01 in 2006 and $0.97 in 2005. Dividends declared per share were $0.87 in 2007, $0.85 in 2006 and $1.04 in 2005. The decrease in 2007 and 2006 is due to elimination of the special dividend. Per share amounts have been restated to give retroactive effect to the 1% common stock dividend of January 1, 2008.

FOURTH QUARTER 2007 AS
COMPARED TO FOURTH QUARTER 2006

	NET INTEREST MARGIN FOR QUARTER ENDED
	December 31, 2007							December 31, 2006
	Average					Average		Average				Average
(Unaudited)	Balance(1)			Interest		Rate		Balance(1)		Interest		Rate
INTEREST-EARNING ASSETS
Federal funds sold and other money market funds	$	951		$	13		5.2%	$	9,882	$	132		5.3%
Investment securities(1)(2)		242,596			3,541		5.8%		231,009		3,231		5.6%
Loans(2)(3)		222,208			4,125		7.4%		202,709		3,773		7.3%
Total interest-earning assets	$	465,755		$	7,679		6.6%	$	443,600	$	7,136		6.4%
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits	$	47,497		$	235		2.0%	$	48,286	$	225		1.9%
Savings		75,332			197		1.0%		80,207		207		1.0%
Time		185,152			2,220		4.8%		169,222		1,942		4.6%
Total interest-bearing deposits		307,981			2,652		3.4%		297,715		2,374		3.2%
Federal funds purchased		2,374			29		4.8%
Other borrowings		68,589			849		4.9%		59,795		792		5.2%
Subordinated debt		5,155			93		7.0%
Total interest-bearing liabilities	$	384,099		$	3,623		3.7%	$	357,510	$	3,166		3.5%
Net interest income				$	4,056					$	3,970
Net interest rate spread(4)			��				2.9%						2.9%
Net interest margin(5)							3.5%						3.5%

(1)	Includes both taxable and tax exempt securities.
(2)	Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%.
(3)	Includes loan origination and commitment fees.
(4)	Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing liabilities.
(5)	Interest margin is calculated by dividing the difference between total interest earned and total interest expensed by total interest-earning assets.

Tax equivalent net interest income for the Company during the fourth quarter of 2007 increased by $86, a 2.2% increase from the fourth quarter of 2006. The yield on earning assets increased by 19 basis points while fourth quarter average earning assets increased by 5.0%, or $22,155, when compared to a year ago. The result was an increase in tax equivalent interest income of $543. The rate paid on interest-bearing liabilities increased by 23 basis points, while fourth quarter average interest-bearing liabilities increased by $26,589 when compared to a year ago, resulting in an increase in total interest expense of $457. The net interest margin for the quarter registered 3.49%, down 6 basis points from the same quarter a year ago.

44

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

The following table shows financial results by quarter for the years ending December 31, 2007 and 2006:

FINANCIAL RESULTS BY QUARTER
(Unaudited)

	2007												2006
	For the Quarter Ended												For the Quarter Ended
	Dec. 31			Sept. 30			June 30			March 31			Dec. 31			Sept. 30			June 30			March 31
Interest Income	$	7,467		$	7,344		$	7,251		$	6,930		$	6,889		$	6,796		$	6,493		$	6,319
Interest Expense		3,623			3,651			3,495			3,216			3,166			2,980			2,783			2,653
Net Interest Income		3,844			3,693			3,756			3,714			3,723			3,816			3,710			3,666
Loan Loss Provision		(40	)											(50	)		(45	)		(64	)		(66	)
Net Security Gains		40			5			20			12									18
Net Gain on Loans		10			35			27			16			37			13			42			14
Other real estate losses								(1	)					(12	)		(7	)		(28	)
Other Income		761			749			719			696			747			703			700			608
Other Expenses		(3,194	)		(3,132	)		(3,206	)		(3,063	)		(2,962	)		(3,041	)		(3,049	)		(2,969	)
Income Before Tax		1,421			1,350			1,315			1,375			1,483			1,439			1,329			1,253
Federal Income Tax		305			275			258			273			301			296			253			78
Net Income	$	1,116		$	1,075		$	1,057		$	1,102		$	1,182		$	1,143		$	1,076		$	1,175
Net Income Per Share	$	0.25		$	0.24		$	0.24		$	0.24		$	0.26		$	0.25		$	0.24		$	0.26
Net Core Income	$	1,083		$	1,048		$	1,027		$	1,086		$	1,166		$	1,139		$	1,057		$	1,020
Net Core Income Per Share	$	0.24		$	0.23		$	0.23		$	0.24		$	0.26		$	0.25		$	0.24		$	0.23
Net Interest Income (fully taxable equivalent basis)	$	4,056		$	3,911		$	3,984		$	3,950		$	3,970		$	4,067		$	3,973		$	3,939
Net Interest Rate Spread		2.9%			2.7%			2.7%			2.8%			2.9%			3.1%			3.0%			3.1%
Net Interest Margin		3.5%			3.4%			3.5%			3.5%			3.5%			3.7%			3.7%			3.7%

Loan charge-offs during the quarter were $191 in 2007 compared to $67 in 2006, while the recovery of previously charged-off loans amounted to $28 during the fourth quarter of 2007 compared to $19 in the same period of 2006. The Company’s provision for loan losses during the quarter was $40 compared to $50 a year ago.

Other income increased by $14 or 1.9% from a year ago. The net gain on loans sold during the quarter amounted to $10, compared to $37 a year ago. Loss on the sale of other real estate decreased from $12 in 2006 to none in 2007. The early call of held to maturity securities, and transactions involving available for sale securities produced gains of $40 in the fourth quarter of 2007 compared to none in the same quarter of 2006.

Total other non-interest expenses in the fourth quarter were $3,194 in 2007 compared to $2,962 in 2006, an increase of $232 or 7.8%. Salaries and benefits constituted a $72 increase, or 4.3%. Bank exam and audit fees increased by $14 or 11.6% mainly due to the timing of expenses associated with the implementation of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Other expenses increased by $146 or 12.7%. The increase is due in part to expenses associated with the Company’s Strategic Growth Plan. These expenses include costs for professional consulting, information system software licensing and maintenance and educational programs for Company’s employees.

Income before income tax during the fourth quarter amounted to $1,421 in 2007 compared to $1,483 in 2006. Income tax expense for the fourth quarter of 2007 was $305 as compared to $301 in 2006. Fourth quarter net income was $1,116 in 2007 compared to $1,182 in 2006, representing a decrease of $66, or 5.6%.

Earnings per share for the fourth quarter, adjusted for the 1% stock dividend paid January 1, 2008, were $0.25 in 2007 and $0.26 in 2006.

Core earnings (earnings before gains on loans sold, investment securities sold or called and certain other non recurring items) decreased by 7.1% in the fourth quarter of 2007 compared to 2006. Core earnings for the fourth quarter of 2007 were $1,083 compared to

45

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

last year’s $1,166. Core earnings per share were $0.25 in 2007 and $0.26 in 2006. The following is a reconciliation between core earnings and earnings under generally accepted accounting principles in the United States (GAAP earnings):

	Three Months Ended
	December 31,
	2007			2006			2005			2004			2003
GAAP earnings	$	1,116		$	1,182		$	1,093		$	1,305		$	1,340
Gain on sale of loans		(10	)		(37	)		(30	)		(13	)		(21	)
Investment gains		(40	)								(378	)		(259	)
Other real estate loss					12			3
Tax effect of adjustments		17			9			9			133			95
Core earnings	$	1,083		$	1,166		$	1,075		$	1,047		$	1,155

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

	Three		Twelve
	Months		Months
	December 31,		December 31,
	2007		2007
Proceeds on securities sold or called		$6,990		$9,991
Gross realized gains		40		77
Gross realized losses

LOAN LOSS EXPERIENCE

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

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

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

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

46

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

	2007			2006			2005			2004			2003
Balance at beginning of year	$	2,211		$	2,168		$	2,629		$	2,408		$	3,134
Loan losses:
1-4 family residential mortgages		(92	)		(29	)		(87	)		(80	)		(101	)
Commercial mortgages		(395	)		(20	)		(734	)		(108	)		(589	)
Consumer and other loans		(232	)		(199	)		(203	)		(66	)		(160	)
Commercial loans		(1	)		(40	)		(89	)		(10	)		(270	)
Home equity loans		(8	)					(6	)
		(728	)		(288	)		(1,119	)		(264	)		(1,120	)
Recoveries on previous loan losses:
1-4 family residential mortgages
Commercial mortgages		5												40
Consumer and other loans		92			99			100			65			108
Commercial loans		1			7			13			5			6
Home equity loans
		98			106			113			70			154
Net loan losses		(630	)		(182	)		(1,006	)		(194	)		(966	)
Provision charged to operations		40			225			545			415			240
Balance at end of year	$	1,621		$	2,211		$	2,168		$	2,629		$	2,408
Ratio of net loan losses to average net loans outstanding		0.29%			0.09%			0.53%			0.10%			0.51%
Ratio of loan loss allowance to total loans		0.73%			1.08%			1.15%			1.37%			1.27%

The spike in charge-offs during 2005 and 2003 primarily reflected certain impaired commercial loan credits for which specific loss reserves had previously been established. Based on its analysis and review of all known factors, management has determined the current level of the allowance to be adequate.

The following is an allocation of the allowance for loan losses. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of December 31, for the years indicated:

	2007		2006		2005		2004		2003
Types of Loans
1-4 family residential mortgages	$	258	$	209	$	243	$	265	$	241
Commercial mortgages		954		1,441		1,397		1,808		1,932
Consumer loans		214		183		160		50		58
Commercial loans		194		376		364		505		176
Home equity loans		1		2		4		1		1
	$	1,621	$	2,211	$	2,168	$	2,629	$	2,408

The allocations of the allowance as shown in the table above should not be interpreted as an indication that future loan losses will occur in the same proportions or that the allocations indicate future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is applicable to the entire portfolio.

47

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

LOAN PORTFOLIO

The following table represents the composition of the loan portfolio as of December 31, for the years indicated:

	2007			2006			2005			2004			2003
Types of Loans
1-4 family residential mortgages	$	68,135	30.5	$	62,882	30.6	$	59,910	31.8	$	61,238	31.9	$	57,854	30.6
Commercial mortgages		120,950	54.3		106,160	51.7		90,983	48.3		94,019	49.0		92,822	49.0
Consumer loans		8,484	3.8		7,745	3.8		6,714	3.6		6,087	3.2		7,231	3.8
Commercial loans		14,981	6.7		17,505	8.5		19,767	10.5		19,188	10.0		21,711	11.5
Home equity loans		10,559	4.7		10,807	5.3		10,828	5.8		11,245	5.9		9,541	5.0
1-4 family residential loans held for sale					109	0.1								103	0.1
Total loans	$	223,109		$	205,208		$	188,202		$	191,777		$	189,262

The following schedule sets forth maturities based on remaining scheduled repayments of principal or next repricing opportunity for loans (excluding mortgage and consumer loans) as of December 31, 2007:

	1 Year		1 to		Over
	or Less		5 Years		5 Years		Total
Types of Loans
Commercial loans	$	4,737	$	4,560	$	5,684	$	14,981
Home equity		10,559						10,559
Total loans (excluding mortgage and consumer loans)	$	15,296	$	4,560	$	5,684	$	25,540

The following schedule sets forth loans as of December 31, 2007 based on next repricing opportunity for floating and adjustable interest rate products, and by remaining scheduled principal payments for loan products with fixed rates of interest. Mortgage and consumer loans have again been excluded.

	1 Year		Over
	or Less		1 Year		Total
Types of Loans
Floating or adjustable rates of interest	$	14,962	$	1,243	$	16,205
Fixed rates of interest		334		9,001		9,335
Total loans (excluding mortgage and consumer loans)	$	15,296	$	10,244	$	25,540

48

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

The Company recorded an increase of $17,901 in the loan portfolio from the level of $205,208 recorded at December 31, 2006.

Between 2006 and 2007, the balance of residential mortgage loans remained relatively unchanged. 1-4 family residential mortgages represent 30.5% of total loans in the loan portfolio compared to 30.7% in 2006. The portion of the loan portfolio represented by commercial loans (including commercial real estate) increased from 60.2% in 2006 to 61.0% in 2007. Consumer loans (including home equity loans) decreased from 9.1% in 2006 to 8.5% in 2007.

Real estate loans which include residential loans and commercial loans continue to comprise the largest share of the Company’s loan portfolio. At the end of 2007, residential loans and commercial loans comprised a combined 91.5% of the portfolio, compared to 90.5% five years ago. Home equity loans at 4.7% and consumer installment at 3.8% comprise the remainder of the portfolio in 2007.

During 2007, approximately $16,300 in new mortgage loans were originated by the Company, an increase of approximately $1,100 from 2006.

The following shows the disposition of mortgage loans originated during 2003 to 2007 (in millions):

	2007		2006		2005		2004		2003
Retained in Portfolio	$	10.1	$	8.3	$	7.6	$	8.0	$	11.6
Loans Sold to Investors with Servicing Rights Released	$	6.2	$	6.9	$	6.6	$	4.0	$	27.3

The Company’s product offerings continue to include a service release sales program, which permits the Company to offer competitive long-term fixed interest rates without incurring additional credit or interest rate risk.

During 2007, the Company sold fewer residential mortgage loans under the service release sales program but originated and retained approximately $1.5 million more in portfolio loans in comparision to 2006 totals. Mortgage loan originations are typically qualified for sale to investors in the secondary market, but are occasionally retained in portfolio when requested by a customer or to enhance account relationship for certain customers. The mix of portfolio retained to those sold to investors will vary from year to year.

The Bank is also active in home equity financing. Home Equity term loans and credit lines remain popular with consumers wishing to finance home improvements, educational costs, vacations and consumer goods purchased at favorable interest rates.

In order to improve customer retention and provide better overall balance, management also will continue to revamp and reposition the Company’s In-Portfolio product offerings during 2008.

The balance of the commercial loan portfolio as of December 31, 2007 was $135,931, an increase of $12,266 from the balance of $123,665 recorded at December 31, 2006. Short term, asset based commercial loans including lines of credit decreased by $2,524. Commercial real estate loans increased by $14,790 during the same period. The increase in these loans has primarily resulted from a marketing campaign and an aggressive calling program designed to increase market share for commercial and small business loans secured by real estate.

Management in recent years has offered longer term fixed rate commercial real estate products to qualifying customers in an effort to establish new business relationships and capture additional market share. Loan personnel will continue to aggressively pursue both commercial and small business opportunities supported by product incentives and

49

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

marketing efforts. The Bank’s lending function continues to provide business services to a wide array of medium and small businesses, including but not limited to commercial and residential real estate builders, automobile dealers, manufacturers, trucking companies, nursing homes, physicians and medical groups, funeral homes, general contractors, service contractors, restaurants, hotels/motels, retailers, wholesalers, as well as area educational institutions and other political subdivisions.

Small business loans are originated by loan personnel assigned to the Community Bank offices. These loans are processed in accordance with established business loan underwriting standards and practices.

The following table provides an overview of commercial loans by various business sectors reflecting the areas of largest concentration. It should be noted that these are open balances and do not reflect existing commitments that may be currently outstanding but unfunded.

Commercial Loan Concentrations

	2007				2006
			% of				% of
Sector	Balances		Portfolio		Balances		Portfolio
Non Residential Building/ Apartment Building	$	25,879		19.36%	$	17.963		14.82%
Hotels/Motels		23,608		17.66%		12,374		10.21%
Real Property Lessors		7.175		5.37%		8,315		6.86%
Eating Places		6,925		5.18%		7,575		6.25%
Steel Related Industries		5,268		3.94%		5,200		4.29%

The single largest customer balance at year end had a balance of $7,047 in 2007 compared to $4,900 in 2006. This balance represented approximately 5.2% of the total commercial portfolio, compared to 4.0% in 2006.

In the consumer lending area, the Company provides financing for a variety of consumer purchases: fixed rate amortizing mortgage products that consumers utilize for home improvements; the purchase of consumer goods of all types; education, travel and other personal expenditures. The consolidation of credit card and other existing debt into term payout continues to remain a popular financing option among consumers.

Additional information regarding the loan portfolio can be found in the Notes to the Consolidated Financial Statements (NOTES 1, 3, 9, 12 and 14).

INVESTMENT SECURITIES

In accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115), “Accounting for Certain Investments in Debt and Equity Securities,” investment securities are segregated into three separate portfolios: held to maturity, available for sale, and trading. Each portfolio type has its own method of accounting.

Held to maturity securities are recorded at historical cost, adjusted for amortization of premiums and accretion of discounts. Trading securities are marked-to-market, with any gain or loss reflected in the determination of income. Securities designated as available for sale are similarly carried at their fair market value. However, any unrealized gain or loss (net of tax) is recorded as an adjustment to shareholders’ equity as a component of Other Comprehensive Income.

One effect of SFAS 115 is to expose shareholders’ equity to fluctuations resulting from market volatility related to the available for sale portfolio. The potential adverse impact of this volatility is somewhat mitigated as bank regulatory agencies measure capital adequacy for regulatory purposes without regard to the effects of SFAS 115.

Securities designated by the Company as held to maturity tend to be higher yielding but less liquid either due to maturity, size or other characteristics of the issue. The Company must have both the intent and the ability to hold such securities to maturity.

Securities the Company has designated as available for sale may be sold prior to maturity in order to fund loan demand, to adjust for interest rate sensitivity, to reallocate bank resources, or to reposition the portfolio to reflect changing economic conditions and shifts in the relative values of market sectors. Available for sale securities tend to be more liquid investments and generally exhibit less price volatility as interest rates fluctuate.

50

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

The following table shows the book value of investment securities by type of obligation at the dates indicated:

	December 31,
	2007		2006		2005		2004		2003
U.S. Treasury and other U.S. Government agencies and corporations	$	83,995	$	86,682	$	80,053	$	69,670	$	62,524
U.S. Government mortgage-backed pass-through certificates		83,654		73,921		82,992		91,226		92,499
States of the U.S. and political subdivisions		32,762		40,807		44,714		45,689		53,503
Other securities		38,211		31,693		26,893		19,256		14,249
	$	238,622	$	233,103	$	234,652	$	225,841	$	222,775

A summary of securities held at December 31, 2007, classified according to the earlier of next repricing or the maturity date and the weighted average yield for each range of maturities, is set forth below. Fixed rate mortgage-backed securities are classified by their estimated contractual cash flow, adjusted for current prepayment assumptions. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2007
	Book		Weighted
Type and Maturity or Repricing Grouping	Value		Average Yield(1)
U.S. Treasury and other U.S. Government agencies and corporations:
Maturing or repricing within one year	$	21,084		5.484	%
Maturing or repricing after one year but within five years		8,108		4.581
Maturing or repricing after five years but within ten years		19,114		5.305
Maturing or repricing after ten years		35,689		6.104
Total U.S. Treasury and other U.S. Government agencies and corporations	$	83,995		5.620	%
U.S. Government mortgage-backed pass-through certificates, REMICS & CMO’s:
Maturing or repricing within one year	$	48,570		5.271	%
Maturing or repricing after one year but within five years		33,670		4.963
Maturing or repricing after five years but within ten years		1,414		4.713
Maturing or repricing after ten years
Total U.S. Government mortgage-backed pass-through certificates, REMICS & CMO’s	$	83,654		5.138	%
States of the U.S. and political subdivisions:
Maturing or repricing within one year	$	155		8.376	%
Maturing or repricing after one year but within five years		445		7.525
Maturing or repricing after five years but within ten years		5,185		6.998
Maturing or repricing after ten years		26,977		7.234
Total States of the U.S. and political subdivisions	$	32,762		7.206	%
Other securities:
Maturing or repricing within one year	$	28,192		6.953	%
Maturing or repricing after one year but within five years		2,403		5.733
Maturing or repricing after five years but within ten years		2,031		7.182
Maturing or repricing after ten years		5,585		7.629
Total other securities	$	38,211		6.987	%

(1)  The weighted average yield has been computed by dividing the total interest income adjusted for amortization of premium or accretion of discount over the life of the security by the amortized cost of the securities outstanding. The weighted average yield of tax-exempt obligations of states of the U.S. and political subdivisions has been calculated on a fully taxable equivalent basis. The amounts of adjustments to interest which are based on the statutory tax rate of 34% were $5, $10, $111 and $585 for the four ranges of maturities.

As of December 31, 2007, there were $42,156 in callable U.S. Government Agencies, $9,591 in callable obligations of states and political subdivisions that given current and expected interest rate

51

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

environments are likely to be called within the one year time horizon. These securities are categorized according to their contractual maturities, with $2,199 classified as maturing after one year but within five years, $20,549 classified as maturing after five years but within ten years and $28,999 classified as maturing after 10 years.

Additionally, as of December 31, 2007, there were $14,506 in callable U.S. Government Agencies, $19,874 in callable obligations of states and political subdivisions and $2,004 in callable other securities that given current and expected interest rate environments are likely to be called within the time frame defined as after one year but within five years. These securities are categorized according to their contractual maturities, with $3,035 maturing after five years but within ten years and $33,349 maturing after 10 years.

As of December 31, 2007, the carrying value of all investment securities, both available for sale and held to maturity, totaled $238,622, an increase of $5,519 or 2.37% from the prior year. The allocation between single maturity investment securities and mortgage-backed securities shifted to a 64/36 split versus the 68/32 division of the previous year, as mortgage-backed securities increased by $9,733, or 13.2%.

Holdings of obligations of states and political subdivisions showed a decrease of $8,045 or 19.7%, as numerous bonds were called during the year.

Amortization of purchase premium resulted in the decrease of holdings of U.S. Treasury securities by approximately $4, or 2.8%. Investments in U.S. government agencies and sponsored corporations decreased by approximately $2,683, or 3.1%. The Company also purchased $10,417 in corporate debt securities during 2007 primarily to take advantage of floating rate repricing characteristics. The purchases were partially offset by $2,794 in debt securities that were called during 2007. Additionally, a $183 increase in unrealized losses on General Motors bonds was reflected at December 31, 2007. The net result was an increase in the corporate portfolio of $6,518.

Holdings of other securities were unchanged in 2007.

The mix of mortgage-backed securities remained weighted in favor of fixed rate securities in 2007. The portion of the mortgage-backed portfolio allocated to fixed rate securities rose to 76% in 2007 versus 67% in 2006. Floating rate and adjustable rate mortgage-backed securities provide some degree of protection against rising interest rates, while fixed rate securities perform better in periods of stable to slightly declining interest rates. Included in the mortgage-backed securities portfolio are investments in collateralized mortgage obligations which totalled $13,792 and $18,184 at December 31, 2007 and 2006, respectively. No collateralized mortgage obligations were sold in 2007.

At December 31, 2007, a net unrealized loss of $94, net of tax, was included in shareholders’ equity as a component of Other Comprehensive Income, as compared to a net unrealized loss of $455, net of tax, as of December 31, 2006. This $361 improvement reflects the increased market value of debt securities resulting from changes in the shape of the yield curve and the level of interest rates that occurred during the year. Lower interest rates generally translate into more favorable market prices for debt securities; conversely rising interest rates generally result in a depreciation in the market value of debt securities.

The Company had $11,222 in investments considered to be structured notes as of December 31, 2007, an increase of $2,507, or 28.8%. The Company had no investments in inverse floating rate securities or other derivative products.

Additional information regarding investments can be found in the Notes to the Consolidated Financial Statements (NOTES 1 and 2).

DEPOSITS

The Company’s deposits are derived from the individuals and businesses located in its primary market area. Total deposits at year-end exhibited an increase of 2.5% to $364,788 at December 31, 2007, as compared to $355,818 at December 31, 2006.

52

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

The Company’s deposit base consists of demand deposits, savings, money market and time deposit accounts. Average noninterest-bearing deposits increased 0.7% during 2007, while average interest-bearing deposits increased by 6.1%.

During 2007, noninterest-bearing deposits averaged $57,668 or 15.7% of total average deposits as compared to $57,271 or 16.4% of total deposits in 2006. Core deposits averaged $301,327 for the year ended December 31, 2007, an increase of $1,578 from the average level of 2006. During 2006, core deposits had averaged $299,749 a decrease of $6,877 from the preceding year.

Historically, the deposit base of the Company has been characterized by a significant aggregate amount of core deposits. Core deposits represented 82.2% of average total deposits in 2007 compared to 86.0% in 2006 and 89.8% in 2005. Non core deposits are represented by Jumbo CD’s, certificates of deposit in the amount of $100 or more.

The Company’s portfolio of Jumbo CD’s are sourced primarily from customers in the subsidiary bank’s immediate market area, and does not include any brokered deposits.

Over the past five years, the Company has decreased the share of deposits represented by noninterest-bearing and interest bearing checking accounts. These products now comprise 22.5% of total deposits compared to 24.6% five years ago. The following depicts how the deposit mix has shifted during this five-year time frame.

Additional information regarding interest-bearing deposits is presented in the Notes to the Consolidated Financial Statements (NOTE 6).

53

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

ASSET-LIABILITY MANAGEMENT

The Company’s executive management and Board of Directors routinely review the Company’s balance sheet structure for stability, liquidity and capital adequacy. The Company has defined a set of key control parameters which provide various measures of the Company’s exposure to changes in interest rates. The Company’s asset-liability management goal is to produce a net interest margin that is relatively stable despite interest rate volatility while maintaining an acceptable level of earnings. Net interest margin is the difference between total interest earned on a fully taxable equivalent basis and total interest expensed. The net interest margin ratio expresses this difference as a percentage of average earning assets. In the past five years, the net interest margin ratio has averaged 3.73% ranging between 3.45% and 3.94%.

Included among the various measurement techniques used by the Company to identify and manage exposure to changing interest rates is the use of computer based simulation models. Computerized simulation techniques enable the Company to explore and measure net interest income volatility under alternative asset deployment strategies, different interest rate environments, various product offerings and changing growth patterns.

GAP TABLE

December 31, 2007

	Maturity or Repricing Interval
										Non Rate
										Sensitive
	3 Months			3 to 12			1 to 5			or >5
	or Less			Months			Years			Years			Total
Interest-Earning Assets
Interest-Bearing Balance from Depository Institution	$	76		$			$			$			$	76
Investments		91,432			58,316			78,811			10,063			238,622
Loans & Leases		65,819			56,225			89,847			11,218			223,109
Investment in Nonconsolidated Subsidiary		155												155
Total Earning Assets		157,482			114,541			168,658			21,281			461,962
Other Assets											30,732			30,732
Total Assets	$	157,482		$	114,541		$	168,658		$	52,013		$	492,694
Interest-Bearing Liabilities
Interest-bearing Checking	$	23,460		$			$			$			$	23,460
Money Market Accounts		19,698												19,698
Passbook Savings		74,024												74,024
Time Deposits ³100,000		18,522			37,527			9,574			2,895			68,518
Time Deposits <100,000		26,729			49,914			32,047			12,174			120,864
Repurchase Agreements		4,644												4,644
U.S. Treasury Demand		594												594
Federal Funds Purchased		1,175												1,175
Subordinated Debt		5,155												5,155
Other Borrowings		5,500			6,000			28,000			24,500			64,000
Total Interest-Bearing Liabilities		179,501			93,441			69,621			39,569			382,132
Demand Deposits											58,224			58,224
Other Liabilities											3,514			3,514
Shareholders’ Equity											48,824			48,824
Total Liabilities & Equity	$	179,501		$	93,441		$	69,621		$	150,131		$	492,694
Rate Sensitivity Gap	$	(22,019	)	$	21,100		$	99,037		($	18,288	)
Cumulative Gap	($	22,019	)	($	919	)	$	98,118		$	79,830
Cumulative Gap to Total Assets		(4.5	)%		(0.2	)%		19.9	%		16.2	%

54

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

The preceding Gap Table presents an analysis of the Company’s earliest repricing opportunity for each of its interest-earning assets and interest-bearing liabilities. Assets are distributed according to the earlier of interest rate repricing opportunity or expected cash flows. Time deposits and liabilities with defined maturities are distributed according to the earlier of the repricing interval or contractual maturity. Other core deposit accounts (Interest-bearing checking, Money Market and Savings accounts) are shown as being available for repricing in the earliest time frame, although management can exert considerable influence over the timing and manner of repricing such core deposits. Therefore, these accounts may reprice in later time intervals and reflect smaller incremental changes than other interest-earning assets and interest-bearing liabilities. Since management may reprice these accounts at its discretion, the impact of changing rates on net interest income is likely to be considerably different than inferred by this table.

During 2007, the effective maturities of earning assets tended to shorten as rates in the credit markets fell sharply. Federal Reserve policy makers decreased short-term interest rates three times during the year, from 5.25% to 4.25% in an attempt to ease strains in the financial market, soften the effects of the housing correction and to help avoid a recession. With rates falling during the year, the volume of investment securities eligible to be called increased, while prepayments on loans andmortgage-backed securities similarly increased, causing the effective maturities of existing earning assets to shorten. Management invested excess overnight funds (federal funds sold balances), with an increased allocation towards adjustable and floating rate corporate bonds, and U.S. Government agencies purchased at a discount that contain alock-out period prior to the first call date and mortgage-backed securities.

While the preceding Gap Table provides a general indication of the potential effect that changing interest rates may have on net interest income, it does not by itself present a complete picture of interest rate sensitivity. Because the repricing of the various categories of assets and liabilities is subject to competitive pressures, customer preferences and other factors, such assets and liabilities may in fact reprice in different time periods and in different increments than assumed.

The computerized simulation techniques utilized by management provide a more sophisticated measure of the degree to which the Company’s interest sensitive assets and liabilities may be impacted by changes in the general level of interest rates. These analyses show the Company’s net interest income remaining relatively neutral within the economic and interest rate scenarios anticipated by management. As previously noted, the Company’s net interest margin has remained in the range of 3.45% to 3.94% over the past five years, a period characterized by significant shifts in the mix of earning assets and the direction and level of interest rates. The targeted federal funds rate during that period ranged from 1.00% to 5.25%, as Federal Reserve monetary policy turned from guarding against deflation to warding off inflationary threats and now back to attempting to avoid a recession.

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

55

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

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.

Anticipated principal repayments on mortgage-backed securities along with investment securities maturing, repricing, or expected to be called in one year or less amounted to $149.748 at December 31, 2007, representing 62.8% of the total combined portfolio, as compared to $77,463 or 33.2% of the portfolio a year ago.

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, and access to the Federal Reserve Discount Window. The Company is also a member of the Federal Home Loan Bank of Cincinnati, which provides yet another source of liquidity.

Cash and cash equivalents decreased from $19,237 in 2005 to $14,375 in 2006, then to $9,441 in 2007. Operating activities provided cash of $5,009 in 2007, $5,082 in 2006 and $4,275 in 2005. Key differences stem mainly from: 1) a decrease in net income of $226 between 2007 and 2006 and a $242 increase between 2005 and 2006; 2) there were no loans held for sale at December 31, 2007 and 2005 and $109 at 2006; 3) gains on the sale of investments, was $308 at December 31, 2005, $18 at December 31, 2006 and $77 in 2007; 4) amortization on securities was $199 in 2007 compared to $506 in 2006 and $872 in 2005 ; 5) loss on the sale of other real estate totaled $47 in 2006 and $3 in 2005 compared to $1 in 2007; 6) the purchase of an additional $128 of insurance contracts on the lives of participants in the supplemental post retirement benefit plan in 2006 and none in 2007 or 2005; 7) a liability for securities purchased yet to settle totaled $1,270 at December 31, 2004, with none at December 31, 2005, 2006 or 2007. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for 2007, 2006 and 2005. The following table details the cash flows from operating activities.

	December 31,
	2007			2006			2005			2004			2003
Net income	$	4,350		$	4,576		$	4,334		$	4,843		$	5,484
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization and accretion		775			991			1,469			2,176			2,382
Provision for loan loss		40			225			545			415			240
Investment securities gains		(77	)		(18	)		(308	)		(1,052	)		(946	)
Other real estate losses		1			47			3			171
Impact of loans held for sale		109			(109	)					103			1,919
Changes in:
Securities to settle and securities sold to settle								(1,270	)		1,270
Purchase of insurance contracts					(128	)					(500	)		(2,500	)
Other assets and liabilities		(189	)		(502	)		(498	)		(44	)		469
Net cash flows from operating activities	$	5,009		$	5,082		$	4,275		$	7,382		$	7,048

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The Corporation has various obligations, including contractual obligations and commitments that may require future cash payments.

Contractual Obligations: The following table presents, as of December 31, 2007, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

56

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

			Contractual Obligations
			as of December 31, 2007
			Payments Due in
			One			One			Three
			Year			to			to			Over
	See		or			Three			Five			Five
	Note		Less			Years			Years			Years			Total
Non-interest bearing deposits			$	58,224		$			$			$			$	58,224
Interest bearing deposits(a)		6		117,182												117,182
Average Rate(b)				1.33	%											1.33	%
Certificates of deposit(a)		6		124,637			29,772			18,989			15,984			189,382
Average Rate(b)				4.69	%		4.63	%		5.01	%		4.63	%		4.71	%
Federal funds purchased and security repurchase agreements(a)		7		5,819												5,819
Average Rate(b)				3.80	%											3.80	%
U.S. Treasury interest-bearing demand note(a)		7		594												594
Average Rate(b)				3.59	%											3.59	%
Federal Home Loan Bank advances(a)		7		6,000			24,000			9,500			24,500			64,000
Average Rate(b)				5.24	%		5.50	%		5.09	%		4.13	%		4.89	%
Subordinated debt		8											5,155			5,155
Average Rate(b)													6.44	%		6.44	%
Operating leases		9		131			168			45						344

(a)  Excludes present and future accrued interest.

(b)  Variable rate obligations reflect interest rates in effect at December 31, 2007.

The Corporation’s operating lease obligations represent short and long-term lease and rental payments for the subsidiary bank’s branch facilities.

The Corporation also has obligations under its supplemental retirement plans as described in Note 10 to the consolidated financial statements. The postretirement benefit payments represent actuarially determined future benefit payments to eligible plan participants. The Corporation does not have any commitments or obligations to the defined contribution retirement plan (401(k) plan) at December 31, 2007 due to the funded status of the plan. (See further discussion in Note 10.)

Commitments: The following table details the amounts and expected maturities of significant commitments as of December 31, 2007. (Further discussion of these commitments is included in Note 9 to the consolidated financial statements.)

	Expected Maturities of Commitments
	as of December 31, 2007
	One		One		Three
	Year		to		to		Over
	or		Three		Five		Five
	Less		Years		Years		Years		Total
Commitments to extend credit:
Commercial	$	8,672	$	1,522	$	348	$	16,007	$	26,549
Residential real estate		224								224
Revolving home equity		11,468								11,468
Overdraft protection		11,698								11,698
Other		460								460
Standby letters of credit		1,179								1,179

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

57

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

CAPITAL RESOURCES

Regulatory standards for measuring capital adequacy require banks and bank holding companies to maintain capital based on “risk-adjusted” assets so that categories of assets of potentially higher credit risk require more capital backing 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.

The risk-based standards classify capital into two tiers. Tier 1 capital consists of common shareholders’ equity, noncumulative and cumulative perpetual preferred stock, qualifying trust preferred securities and minority interests less intangibles and the unrealized market value adjustment of investment securities available for sale. Tier 2 capital consists of a limited amount of the allowance for loan and lease losses, perpetual preferred stock (not included in Tier 1), hybrid capital instruments, term subordinated debt, and intermediate-term preferred stock.

The following graph, which is not “risk-adjusted,” depicts Tier 1 capital as a percentage of total average assets over the past several years. This measure of capital adequacy is known as the “leverage ratio.” The ratio was 11.04% in 2006 and 10.99% in 2007, and remains well above regulatory minimums.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required banking regulatory agencies to revise risk-based capital standards to ensure that they take adequate account of interest rate risk. 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 following table illustrates the Company’s risk-weighted capital ratios at December 31, 2007 and 2006. Banks are required to maintain a minimum ratio of 8% of qualifying total capital to risk-adjusted total assets. The Tier 1 capital ratio must be at least 4%. Capital qualifying as Tier 2 capital is limited to 100% of Tier 1 capital. As the table indicates, the Company maintains both Tier 1 and total risk-based capital well in excess of the required regulatory minimum ratios.

Risk-Based Capital
	December 31,		December 31,
	2007		2006
Tier 1 Capital		$  53,820		$  50,913
Tier 2 Capital		1,635		2,238
QUALIFYING CAPITAL		$  55,455		$  53,151
Risk-Adjusted Total Assets(*)		$289,081		$266,686
Tier 1 Risk-Based Capital Ratio		18.62%		19.09%
Total Risk-Based Capital Ratio		19.18%		19.93%
Total Leverage Capital Ratio		10.99%		11.04%

(*) Includes off-balance sheet exposures

In management’s opinion, as supported by the data in the following table, the Company met all capital adequacy requirements to which it was subject as of December 31, 2007 and December 31, 2006. As of

58

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

those dates, the Company was “well capitalized”under regulatory prompt corrective action provisions.

	Actual Regulatory Capital Ratios as of:				Regulatory Capital Ratio requirements to be:
	Dec. 31,		Dec. 31,		Well		Adequately
	2007		2006		Capitalized		Capitalized
Total risk-based capital to risk-weighted assets		19.18%		19.93%		10.00%		8.00%
Tier I capital to risk-weighted assets		18.62%		19.09%		6.00%		4.00%
Tier I capital to average assets		10.99%		11.04%		5.00%		4.00%

SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that investments designated as available for sale be marked-to-market with corresponding entries to the deferred tax account and shareholders’ equity. Regulatory agencies, however, exclude these adjustments in computing risk-based capital, as their inclusion would tend to increase the volatility of this important measure of capital adequacy. Additional information regarding regulatory matters can be found in the Notes to the Consolidated Financial Statements (NOTE 13.)

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 December 31, 2007, the Company’s bank subsidiary was rated “satisfactory” for CRA purposes, and remained well capitalized and well managed, in management’s opinion.

MARKET RISK

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

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

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

59

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

and emphasize the acquisition of fixed rate assets over floating rate assets.

Run off rate assumptions are obtained from a service that provides forecasted prepayment speeds based on the median forecast of 11 dealer firms for various mortgage types. Repricing characteristics are based upon actual information obtained from the Bank’s information system data and other related programs. Actual results may differ from simulated results not only due to the timing, magnitude and frequency of interest rate changes, but also due to changes in general economic conditions, changes in customer preferences and behavior, and changes in strategies by both existing and potential competitors.

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

During 2007, the Federal Reserve increased its target rate for overnight federal funds by 100 basis points. At year end December 31, 2007, the difference between the yield on the ten-year Treasury and the three-month Treasury had increased to a positive 68 basis points from the negative 31 basis points that existed at December 31, 2006, indicating that the yield curve had become upward sloping. At December 31, 2007, rates peaked at the20-year point on the Treasury yield curve. The yield curve remains positively sloping as interest rates continue to increase with a lengthening of maturities, with rates peaking at thelong-end of the Treasury yield curve.

The base case against which interest rate sensitivity is measured assumes no change in short term rates. The base case also assumes no growth in assets and liabilities and no change in asset or liability mix. Under these simulated conditions, the base case projects net interest income of $15,231 for the year ending December 31, 2008.

Simulated Net Interest Income Sensitivity
For the Twelve Months Ending December 31, 2008
	Net Interest
Change in Interest Rates	Income		$ Change			% Change
Graduated increase of +300 basis points		$  15,250		$    19			0.1	%
Short term rates unchanged (base case)		15,231
Graduated decrease of –300 basis points		14,952		(279	)		(1.8	%)

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. The most significant accounting policies followed by the Company are presented in “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies.” Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Some of these policies and related methodologies are more critical than others. The Company has identified its policy on the allowance for loan losses as being critical because it

60

CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)

requires management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or by using different assumptions.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of subjective measurements including management’s assessment of the internal risk classifications of loans, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

Accordingly, the Company has developed and maintains a comprehensive, systematic and consistently applied process to determine the appropriate amounts of the allowance for loan losses, and resultant provision for loan losses, necessary to absorb estimated credit losses inherent in the loan portfolio. The allowance for loan losses represents management’s best estimate from within an acceptable range of estimated losses that it considers appropriate and prudent, but not excessive.

While management’s evaluation of the allowance for loan losses as of December 31, 2007 has determined the allowance to be adequate, under adversely different conditions or assumptions, the Company would most likely need to increase the allowance. The assumptions and estimates used by the Company in its internal review of non-performing loans and potential problem loans, as well as the associated evaluation of the related collateral coverage for these loans, can have a significant impact on the overall assessment of the adequacy of the allowance for loan losses. While management has concluded that the current valuation of loan collateral is reasonable under present circumstances, if collateral valuations were significantly reduced due to either new information or other changing circumstances, additional provisions to the allowance for loan losses would most likely be necessary.

All accounting policies are important and the reader of these financial statements is encouraged to review the summary of significant accounting policies described in Note 1 of the Consolidated Financial Statements, in order to gain a better understanding of how the Company’s financial performance is reported.

For additional information regarding the allowance for loan losses, its relation to the provision for loan losses and risk related to asset quality, see sections of the “Notes to the Consolidated Financial Statements” and “Management Discussion and Analysis” related to the allowance for loan losses.

IMPACT OF INFLATION

Consolidated financial information included herein has been prepared in accordance with generally accepted accounting principles, which require the Company to measure financial position and operating results in terms of historical dollars. Changes in the relative value of money due to inflation are generally not considered. Neither the price, timing nor the magnitude of changes directly coincide with changes in interest rates.

61

INFORMATION AS TO STOCK PRICES AND DIVIDENDS OF CORTLAND BANCORP

OTHER INFORMATION

The Company files quarterly reports, (Forms10-Q), an annual report (Form 10-K), current reports onForm 8-K and proxy statements, as well as any amendments to those reports with the Securities and Exchange Commission (SEC) pursuant to section 13(a) or (15)d of the Exchange Act. In 2008, the quarterly reports will be filed within 40 days of the end of each quarter, while the annual report is filed within 75 days of the end of the year. Any individual requesting copies of such reports may obtain these free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC by visiting our web site at www.cortland-banks.com or by writing to:

Deborah L. Eazor

Cortland Bancorp

194 West Main Street

Cortland, Ohio 44410

The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The Company’s stock trades on the NASDAQ OTC market under the symbol CLDB. The following brokerage firms are known to be relatively active in trading the Company’s stock:

Community Banc Investments, Inc.

26 East Main Street

New Concord, Ohio 43762

Telephone: 1-800-224-1013

Ferris Baker Watts, Incorporated

655 Metro Place South

Metro Center V, Suite 330

Dublin Ohio 43017

Telephone: 1-866-313-4803

Hill Thompson Magid and Co., Inc.

15 Exchange Place Suite 800

Jersey City, New Jersey 07302

Telephone: 1-201-434-6900

Smith Barney Citigroup, Inc.

5048 Belmont Ave.

Youngstown, Ohio 44505

Telephone: 1-800-535-0017

Stifel, Nicholas & Co., Inc.

655 Metro Place South

Suite 200

Dublin, Ohio 43017

Telephone: 1-877-875-9352

UBS Financial Services

3701 Boardman Canfield Rd

P.O. Box 100

Canfield, Ohio 44406

Telephone: 330-533-7191

The following table shows the prices at which the common stock of the Company has actually been purchased and sold in market transactions during the periods indicated. The range of market price is compiled from data provided by brokers based on limited trading. Also shown in the table are the dividends per share on the outstanding common stock. All figures shown have been adjusted to give retroactive effect to the 1% stock dividend paid as of January 1, 2008 the 2% stock dividend paid as of January 1, 2007 and the 3% stock dividend paid January 1, 2006. The Company currently has approximately 1,661 shareholders.

HIGH OR LOW TRADING PRICE PER QUARTER
					Cash
	Price Per Share				Dividends
	High		Low		Per Share
2007
Fourth Quarter	$	16.33	$	11.20	$	0.22
Third Quarter		17.77		14.95		0.21
Second Quarter		19.06		17.38		0.22
First Quarter		18.81		16.83		0.21
2006
Fourth Quarter	$	18.07	$	15.59	$	0.22
Third Quarter		17.71		15.59		0.21
Second Quarter		18.20		17.18		0.21
First Quarter		19.17		17.48		0.21
2005
Fourth Quarter	$	19.79	$	16.99	$	0.41
Third Quarter		19.79		17.91		0.21
Second Quarter		21.12		18.85		0.21
First Quarter		21.92		19.98		0.21

For the convenience of shareholders, the Company has established a plan whereby shareholders may have their dividends automatically reinvested in the common stock of Cortland Bancorp. Participation in the plan is completely voluntary and shareholders may withdraw at any time.

For current stock prices you may access our home page at www.cortland-banks.com.

For more information on the dividend reinvestment plan, you may contact Deborah L. Eazor at the following telephone number:(330) 637-8040 Ext. 118 orE-mail address DLEAZOR@cortland-banks.com.

62

CORTLAND BANCORP

BOARD OF DIRECTORS

K. RAY MAHAN

Chairman

JERRY A. CARLETON

DAVID C. COLE

LAWRENCE A. FANTAUZZI

JAMES M. GASIOR

GEORGE E. GESSNER

JAMES E. HOFFMAN III

NEIL J. KABACK

RICHARD B. THOMPSON

TIMOTHY K. WOOFTER

WILLIAM A. HAGOOD

Director Emeritus

RODGER W. PLATT

Director Emeritus

OFFICERS

LAWRENCE A. FANTAUZZI

President and

Chief Executive Officer

JAMES M. GASIOR

Senior Vice President

Chief Financial Officer and

Corporate Secretary

CRAIG M. PHYTHYON

Senior Vice President

Chief Investment Officer

and Treasurer

63

THE CORTLAND SAVINGS AND BANKING COMPANY

BOARD OF DIRECTORS

JERRY A. CARLETON

President, Carleton Enterprises Inc.

DAVID C. COLE

Partner and President

Cole Valley Motor Company

LAWRENCE A. FANTAUZZI

President and Chief Executive Officer

JAMES M. GASIOR

Senior Vice President, Chief Financial Officer

and Secretary

GEORGE E. GESSNER

Attorney

JAMES E. HOFFMAN III

Attorney

NEIL J. KABACK

Partner, Cohen & Company

K. RAY MAHAN

President, Mahan Packing Co.

and Chairman of the Board

RICHARD B. THOMPSON

Executive, Therm-O-Link, Inc.

TIMOTHY K. WOOFTER

President, Stan-Wade Metal Products

*  *  *  *  *

WILLIAM A. HAGOOD

Director Emeritus

RODGER W. PLATT

Director Emeritus

*  *  *  *  *

OFFICERS

LAWRENCE A. FANTAUZZI

President and Chief Executive Officer

JAMES M. GASIOR

Senior Vice President, Chief Financial Officer

and Secretary

STEPHEN A. TELEGO, SR.

Senior Vice President and Director of Human Resources and Corporate Administration

TIMOTHY CARNEY

Senior Vice President & Chief Operations Officer

CRAIG M. PHYTHYON

Senior Vice President, Chief Investment Officer and Treasurer

DANNY L. WHITE

Senior Vice President and Chief Lending Officer

CHARLES J. COMMONS

Vice President

MARLENE LENIO

Vice President

EMMA JEAN WOLLAM

Vice President

ROBERT J. HORVATH

Vice President

JUDY RUSSELL

Vice President

JAMES DUFF

Vice President

KEITH MROZEK

Vice President

DEBORAH L. EAZOR

Vice President

KAREN CLOWER

Vice President

GREG YURCO

Group-Vice President

JOAN M. FRANGIAMORE

Vice President

BARBARA R. SANDROCK

Vice President

WILLIAM J. HOLLAND

Group-Vice President

MICHAEL MATTOCKS

Group-Vice President

DEAN S. EVANS

Vice President

MARCEL P. ARNAL

Assistant Vice President

GRACE J. BACOT

Assistant Vice President

SHIRLEY F. ROOT

Assistant Vice President

DARLENE MACK

Assistant Vice President

and Trust Officer

JANET K. HOUSER

Assistant Vice President

RUSSELL E. TAYLOR

Assistant Vice President

BARBARA McKENZIE

Assistant Vice President

JAMES HUGHES

Assistant Vice President

SHIRLEY A. WADE

Assistant Vice President

CHRISTOPHER MADURA

Assistant Vice President

MICHELE LEE

Assistant Vice President

LANA MUIR

Assistant Secretary-Treasurer

HEATHER J. BOWSER

Assistant Secretary-Treasurer

KAREN MILLER

Assistant Secretary

64

CORTLAND BANKS OFFICES AND LOCATIONS

Thirteen Offices Serving These Fine Communities

BOARDMAN

8580 South Avenue

Youngstown, Ohio 44514

330-758-5884

BOARDMAN

Victor Hills Plaza

6538 South Avenue

Boardman, Ohio 44512

330-629-9151

BRISTOL

6090 State Route 45

Bristolville, Ohio 44402

330-889-3062

BROOKFIELD

7325 Warren-Sharon Road

Brookfield, Ohio 44403

330-448-6814

CORTLAND

194 West Main Street

Cortland, Ohio 44410

330-637-8040

HUBBARD

890 West Liberty Street

Hubbard, Ohio 44425

330-534-2265

MANTUA

11661 State Route 44

Mantua, Ohio 44255

330-274-3111

NILES PARK PLAZA

815 Youngstown-Warren Road

Suite 1

Niles, Ohio 44446

330-652-8700

NORTH BLOOMFIELD

8837 State Route 45

North Bloomfield, Ohio 44450

440-685-4731

VIENNA

4434 Warren-Sharon Road

Vienna, Ohio 44473

330-394-1438

WARREN

2935 Elm Road

Warren, Ohio 44483

330-372-1520

WILLIAMSFIELD

5917 U.S. Route 322

Williamsfield, Ohio 44093

440-293-7502

WINDHAM

8950 Maple Grove Road

Windham, Ohio 44288

330-326-2340

Member

Federal Reserve System

and

Federal Deposit Insurance Corporation

Visit us at our home page on the world wide web at

www.cortland-banks.com

or e-mail us at cbinfo@cortland-banks.com