CORTLAND BANCORP INC - 10-Q Quarterly Report

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

FORM 10-Q

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


For the quarterly period ended		June 30, 2003


Commission file number		0-13814

Cortland Bancorp

(Exact name of registrant as specified in its charter)


Ohio		34-1451118

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

194 West Main Street, Cortland, Ohio 44410

(Address of principal executive offices) (Zip Code)

(330) 637-8040

(Registrant’s telephone number, including area code)

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

Yes X NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X NO

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at August 8, 2003

Common Stock, No Par Value		3,982,606 Shares

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements (Unaudited)
		CONSOLIDATED BALANCE SHEETS (UNAUDITED)
		CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
		CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
		CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about market risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 CEO Certification
EX-31.2 CFO Certification
EX-32 CEO & CFO Certification 906

PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements (Unaudited)

	Cortland Bancorp and Subsidiaries:

		Consolidated Balance Sheets — June 30, 2003 and December 31, 2002	2

		Consolidated Statements of Income — Six months ended June 30, 2003 and 2002	3

		Consolidated Statement of Shareholders’ Equity — Six months ended June 30, 2003	4

		Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002	5

		Notes to Consolidated Financial Statements June 30, 2003	6 — 17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18 — 24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		25 — 26

Item 4.	Controls and Procedures		27

		PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		28

Item 2.	Changes in Securities and Use of Proceeds		28

Item 3.	Defaults Upon Senior Securities		28

Item 4.	Submission of Matters to a Vote of Security Holders		28

Item 5.	Other Information		29

Item 6.	Exhibits and Reports on Form 8-K		29 — 30

Signatures			31

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)


				JUNE 30,			DECEMBER 31,
				2003			2002

ASSETS
Cash and due from banks				$	13,428		$	12,571
Federal funds sold					7,550			20,000

		Total cash and cash equivalents			20,978			32,571
Investment securities available for sale (Note 2)					119,217			115,795
Investment securities held to maturity (approximate market value of $96,218 in 2003 and $85,957 in 2002) (Note 2)					93,283			84,108
Total loans (Note 4)					192,898			191,477
		Less allowance for loan losses (Note 4)			(2,991	)		(3,134	)

		Net loans			189,907			188,343

Premises and equipment					5,124			5,277
Other assets					11,669			11,504

			Total assets	$	440,178		$	437,598

LIABILITIES
Noninterest-bearing deposits				$	57,765		$	55,745
Interest-bearing deposits (Note 6)					280,018			280,013

	Total deposits				337,783			335,758

Federal Home Loan Bank advances and other borrowings					46,390			46,669
Other liabilities					3,244			3,132

			Total liabilities		387,417			385,559

Commitments and contingent liabilities (Notes 8 & 16)

SHAREHOLDERS’ EQUITY
Common stock — $5.00 stated value — authorized 20,000,000 shares; issued 4,123,437 shares in 2003 and 4,123,437 in 2002 (Note 1)					20,617			20,617
Additional paid-in capital (Note 1)					13,431			13,323
Retained earnings					18,884			17,810
Accumulated other comprehensive income (loss) (Note 1)					3,165			3,165
Treasury shares at cost, 143,272 in 2003 and 131,544 in 2002					(3,336	)		(2,876	)

			Total shareholders’ equity (Notes 15 and 17)		52,761			52,039

			Total liabilities and shareholders’ equity	$	440,178		$	437,598

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

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except per share data)


					THREE				SIX
					MONTHS ENDED				MONTHS ENDED
					JUNE 30,				JUNE 30,

					2003		2002		2003		2002

INTEREST INCOME
	Interest and fees on loans				$	3,303	$	3,943	$	6,699	$	7,948
	Interest and dividends on investment securities:
		Taxable interest income				731		878		1,437		1,645
		Nontaxable interest income				613		620		1,267		1,221
		Dividends				36		49		65		89
	Interest on mortgage-backed securities					1,021		1,357		2,108		2,768
	Interest on trading account securities					11				24
	Other interest income					43		54		96		100

			Total interest income			5,758		6,901		11,696		13,771

INTEREST EXPENSE
	Deposits					1,454		1,976		2,970		4,004
	Borrowed funds					587		624		1,168		1,245

			Total interest expense			2,041		2,600		4,138		5,249

				Net interest income		3,717		4,301		7,558		8,522
				Provision for loan losses		25		60		100		175

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES						3,692		4,241		7,458		8,347

OTHER INCOME
	Fees for other customer services					364		338		694		652
	Investment securities gains — net					216		63		484		174
	Trading securities gains — net					5				125
	Gain on sale of loans — net					166		24		302		74
	Other non-interest income					130		180		246		318

				Total other income		881		605		1,851		1,218

OTHER EXPENSES
	Salaries and employee benefits					1,616		1,614		3,281		3,225
	Net occupancy and equipment expense					496		520		982		1,037
	State and local taxes					133		129		265		259
	Office supplies					84		77		170		186
	Marketing expense					47		42		94		86
	Other operating expenses					484		475		962		918

				Total other expenses		2,860		2,857		5,754		5,711

INCOME BEFORE FEDERAL INCOME TAXES						1,713		1,989		3,555		3,854
Federal income taxes						348		450		728		873

NET INCOME					$	1,365	$	1,539	$	2,827	$	2,981

BASIC EARNINGS PER COMMON SHARE (NOTE 6)					$	0.34	$	0.38	$	0.71	$	0.74

DILUTED EARNINGS PER COMMON SHARE (NOTE 6)					$	0.34	$	0.38	$	0.71	$	0.74

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

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands)


										ACCUMULATED					TOTAL
					ADDITIONAL					OTHER					SHARE-
			COMMON		PAID-IN		RETAINED			COMPREHENSIVE		TREASURY			HOLDERS’
			STOCK		CAPITAL		EARNINGS			INCOME		STOCK			EQUITY

BALANCE AT JANUARY 1, 2003			$	20,617	$	13,323	$	17,810		$	3,165		($2,876	)	$	52,039

Comprehensive income:
	Net income							2,827								2,827
	Other comprehensive income, net of tax:
		Unrealized gains or (losses) on available- for-sale securities, net of reclassification adjustment

Total comprehensive income																2,827

Common stock transactions:
	Shares sold
	Treasury shares reissued					108							679			787
	Treasury shares purchased												(1,139	)		(1,139	)
	Cash dividends declared							(1,753	)							(1,753	)

BALANCE AT JUNE 30, 2003			$	20,617	$	13,431	$	18,884		$	3,165		($3,336	)	$	52,761

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

Net unrealized holding gains or (losses) on available-for-sale securities arising during the period, net of tax										$	319

Less: Reclassification adjustment for net gains realized in net income, net of tax											319

Net unrealized gains on available-for-sale securities, net of tax										$	0

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

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)


		FOR THE
		SIX MONTHS ENDED
		JUNE 30,

		2003			2002

NET CASH FLOWS FROM OPERATING ACTIVITIES		$	5,133		$	3,199

CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of securities held to maturity		(39,982	)		(31,163	)
	Purchases of securities available for sale		(33,370	)		(16,525	)
	Proceeds from sales of securities available for sale		5,463
	Proceeds from call, maturity and principal payments on securities		55,093			34,515
	Net (increase) decrease in loans made to customers		(3,376	)		3,701
	Proceeds from disposition of other real estate		21			167
	Purchase of premises and equipment		(216	)		(339	)

	Net cash flows from investing activities		(16,367	)		(9,644	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Net increase in deposit accounts		2,025			2,677
	Net decrease in borrowings		(279	)		(1,526	)
	Dividends paid		(1,753	)		(1,722	)
	Purchases of treasury stock		(1,139	)		(1,124	)
	Treasury shares reissued		787			675

	Net cash flows from financing activities		(359	)		(1,020	)

	NET CHANGE IN CASH AND CASH EQUIVALENTS		(11,593	)		(7,465	)

CASH AND CASH EQUIVALENTS
	Beginning of period		32,571			26,720

	End of period	$	20,978		$	19,255

SUPPLEMENTAL DISCLOSURES
	Interest paid	$	4,115		$	5,307
	Income taxes paid	$	850		$	950

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

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

1.) Management Representation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

2.) Reclassifications:

Certain items contained in the 2002 financial statements have been reclassified to conform to the presentation for 2003. Such reclassifications had no effect on the net results of operations.

3.) Investment Securities:

Securities classified as held to maturity are those that management has the positive intent and ability to hold to maturity. Securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, with such amortization or accretion included in interest income.

Securities classified as available for sale are those that could be sold for liquidity, investment management, or similar reasons even though management has no present intentions to do so. Securities available for sale are carried at fair value using the specific identification method. Changes in the unrealized gains and losses on available for sale securities are recorded net of tax effect as a component of comprehensive income.

Trading securities are principally held with the intention of selling in the near term. Trading securities are carried at fair value with changes in fair value reported in the Consolidated Statements of Income.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

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


	SIX MONTHS				THREE MONTHS
	June 30,				June 30,
	2003		2002		2003		2002

Proceeds on securities sold	$	5,463	$	0	$	2,952	$	0
Gross realized gains		367		0		208		0
Gross realized losses		0		0		0		0

Proceeds on securities called	$	8,890	$	11,020	$	1,050	$	5,960
Gross realized gains		117		174		8		63
Gross realized losses		0		0		0		0

Securities available for sale, carried at fair value, totalled $119,217 at June 30, 2003 and $115,795 at December 31, 2002 representing 56.1% and 57.9%, respectively, of all investment securities. These levels provide an adequate level of liquidity in management’s opinion.

Investment securities with a carrying value of approximately $51,420 at June 30, 2003 and $38,126 at December 31, 2002 were pledged to secure deposits and for other purposes.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

The amortized cost and estimated market value of debt securities at June 30, 2003, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.


Investment securities		AMORTIZED		ESTIMATED
available for sale		COST		FAIR VALUE

Due in one year or less		$	664	$	666
Due after one year through five years			7,577		8,027
Due after five years through ten years			20,704		21,611
Due after ten years			25,064		26,972

			54,009		57,276
	Mortgage-backed securities		57,328		58,726

		$	111,337	$	116,002


Investment securities		AMORTIZED		ESTIMATED
held to maturity		COST		FAIR VALUE

Due in one year or less		$	126	$	129
Due after one year through five years			186		202
Due after five years through ten years			13,687		14,070
Due after ten years			42,730		45,118

			56,729		59,519
	Mortgage-backed securities		36,554		36,699

		$	93,283	$	96,218

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

The amortized cost and estimated fair value of investment securities available for sale and investment securities held to maturity as of June 30, 2003, are as follows:


				GROSS		GROSS		ESTIMATED
Investment securities		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
available for sale		COST		GAINS		LOSSES		VALUE

U.S. Treasury Securities		$	4,060	$	666	$		$	4,726
U.S. Government agencies and corporations			23,384		1,127				24,511
Obligations of states and political subdivisions			17,849		1,264		4		19,109
Mortgage-backed and related securities			57,328		1,569		171		58,726
Corporate securities			8,716		264		50		8,930

	Total debt securities		111,337		4,890		225		116,002
Marketable equity securities			28		126				154
Other securities			3,061						3,061

	Total available for sale	$	114,426	$	5,016	$	225	$	119,217


				GROSS		GROSS		ESTIMATED
Investment securities		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
held to maturity		COST		GAINS		LOSSES		VALUE

U.S. Government agencies and corporations		$	25,376	$	634	$		$	26,010
Obligations of states and political subdivisions			31,353		2,187		31		33,509
Mortgage-backed and related securities			36,554		190		45		36,699

	Total held to maturity	$	93,283	$	3,011	$	76	$	96,218

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

The following provides a summary of the amortized cost and estimated fair value of investment securities available for sale and investment securities held to maturity as of December 31, 2002:


				GROSS		GROSS		ESTIMATED
Investment securities		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
available for sale		COST		GAINS		LOSSES		VALUE

U.S. Treasury Securities		$	5,093	$	592	$		$	5,685
U.S. Government agencies and corporations			25,585		1,150		1		26,734
Obligations of states and political subdivisions			22,032		723		17		22,738
Mortgage-backed and related securities			55,261		2,256		26		57,491

	Total debt securities		107,971		4,721		44		112,648
Marketable equity securities			28		113				141
Other securities			3,006						3,006

	Total available for sale	$	111,005	$	4,834	$	44	$	115,795


				GROSS		GROSS		ESTIMATED
Investment securities		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
held to maturity		COST		GAINS		LOSSES		VALUE

U.S. Government agencies and corporations		$	22,190	$	645	$		$	22,835
Obligations of states and political subdivisions			31,517		1,078		81		32,514
Mortgage-backed and related securities			30,401		237		30		30,608

	Total held to maturity	$	84,108	$	1,960	$	111	$	85,957

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

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

The Company currently does not enter into derivative financial instruments including futures, forwards, interest rate risk swaps, option contracts, or other financial instruments with similar characteristics. The Company also does not participate in any partnerships or other special purpose entities that might give rise to off-balance sheet liabilities.

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

In the event of nonperformance by the other party, the Company’s exposure to credit loss on these financial instruments is represented by the contract or notional amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. The amount and nature of collateral obtained, if any, is based on management’s credit evaluation.


			CONTRACT OR
			NOTIONAL AMOUNT

			June 30,		December 31,
			2003		2002

Financial instruments whose contract amount represents credit risk:
	Commitments to extend credit:
		Fixed rate	$	4,161	$	859
		Variable		28,787		36,890
	Standby letters of credit			888		615

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Generally these financial arrangements have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

The Company, through its subsidiary bank, grants residential, consumer and commercial loans, and also offers a variety of saving plans to customers located primarily in Northeast Ohio and Western Pennsylvania. The following represents the composition of the loan portfolio:


	June 30,			December 31,
	2003			2002

1-4 family residential mortgages		30.9	%		33.6	%
Commercial mortgages		48.3	%		45.4	%
Consumer loans		4.2	%		5.1	%
Commercial loans		12.1	%		11.5	%
Home equity loans		4.5	%		4.4	%

There are $310 in mortgage loans held for sale included in 1-4 family residential mortgages as of June 30, 2003, and $2,022 at December 31, 2002. These loans are carried, in the aggregate, at the lower of cost or estimated market value based on secondary market prices.

The following table sets forth the aggregate balance of underperforming loans for each of the following categories at June 30, 2003 and December 31, 2002:


	June 30,		December 31,
	2003		2002

Loans accounted for on a nonaccrual basis	$	2,387	$	1,406
Loans contractually past due 90 days or more as to interest or principal payments (not included in nonaccrual loans above)	None		None
Loans considered troubled debt restructurings (not included in nonaccrual loans or loans contractually past due above)		22		26

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

The following shows the amounts of contractual interest income and interest income actually reflected in income on loans accounted for on a nonaccrual basis and loans considered troubled debt restructuring for the six months ended June 30, 2003 and 2002.


	June 30,		June 30,
	2003		2002

Gross interest income that would have been recorded if the loans had been current in accordance with their original terms	$	144	$	77
Interest income actually included in income on the loan		45		36

A loan is placed on a nonaccrual basis whenever sufficient information is received to question the collectibility of the loan or any time legal proceedings are initiated involving a loan. When a loan is placed on nonaccrual status, any interest that has been accrued and not collected on the loan is charged against earnings. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction to principal or reported as interest income according to management’s judgement as to collectibility of principal.

A loan is returned to accrual status when either all of the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, 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.

Impaired loans are generally included in nonaccrual loans. Management does not individually evaluate certain smaller balance loans for impairment as such loans are evaluated on an aggregate basis. These loans include 1-4 family, consumer and home equity loans. Impaired loans were evaluated using the fair value of collateral as the measurement method. At June 30, 2003 the recorded investment in impaired loans was $2,714 while the related portion of the allowance for loan losses was $837. At December 31, 2002, there were no loans considered impaired.

There were $583 as of June 30, 2003, and $2,058 as of December 31, 2002, in loans not included in the above categories and not considered impaired, but which can be considered potential problem loans.

Any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed above do not (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

The following is an analysis of the allowance for loan losses for the six-month periods ended June 30, 2003 and June 30, 2002:


		2003			2002

Balance at beginning of period		$	3,134		$	2,998
Loan charge-offs:
	1-4 family residential mortgages		—			—
	Commercial mortgages		—			—
	Consumer loans		84			93
	Commercial loans		221			117
	Home equity loans		—			—

			305			210

Recoveries on previous loan losses:
	1 - 4 family residential mortgages		—			—
	Commercial mortgages		—			—
	Consumer loans		58			41
	Commercial loans		4			9
	Home equity loans		—			—

			62			50

Net charge-offs			(243	)		(160	)
Provision charged to operations			100			175

Balance at end of period		$	2,991		$	3,013

Ratio of annualized net charge-offs to average loans outstanding			0.25	%		0.16	%

The increase in charge-offs during the first half of 2003 primarily reflects an impaired commercial loan credit for which a specific loss reserve had previously been established.

For each of the periods presented above, the provision for loan losses charged to operations is based on management’s judgment after taking into consideration all known factors connected with the collectibility of the existing portfolio. Management evaluates the portfolio in light of economic conditions, changes in the nature and volume of the portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operations include previous loan loss experience, the status of past due interest and principal payments, the quality of financial information supplied by customers and the general economic conditions present in the lending area of the Company’s bank subsidiary.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands)

5.) Legal Proceedings:

Since 1993 the Company’s subsidiary bank has been a defendant in a class action lawsuit, Frank Slentz, et al. v. Cortland Savings and Banking Company, involving purchased interests in two campgrounds.

On September 30, 2002 the registrant received notice that The Court of Common Pleas in Trumbull County, Ohio had ordered the dismissal of all Plaintiffs’ claims in Slentz, et al (Plaintiffs) versus Cortland Savings and Banking Company (Defendant), and a related case, McDonagh, et al (Plaintiffs) versus Cortland Savings and Banking Company (Defendant), and granted registrant’s subsidiary bank, Cortland Savings and Banking Company, Summary Judgment on all counts of Plaintiffs’ Complaint in both cases.

These two class action cases originated in 1993 with filings in the Northern District of Ohio Eastern Division of the Federal Court system. In addition to their alleged Federal claims, Plaintiffs had alleged State law claims which were included as pendent causes of action. On October 20, 1997 the federal judge presiding over these cases filed a judgment entry dismissing all federal claims against the registrant’s subsidiary bank without prejudice. The judgment of the district court was appealed by Plaintiffs. On March 2, 1999 the United States Court of Appeals for the Sixth Circuit affirmed the decision of the district court to grant summary judgment in favor of the defendant bank and dismissing all of Plaintiffs’ Federal Claims. While awaiting the ruling of the Sixth Circuit Court of Appeals, the Plaintiffs asserted their alleged State law claims by filing suit in the Common Pleas Court of Trumbull County seeking damages of approximately $4.3 million.

Plaintiffs have filed an appeal of the judgment rendered by the Common Pleas Court of Trumbull County. While it is not feasible to predict the ultimate resolution of this matter, an outcome unfavorable to the Company’s bank subsidiary could have a material effect on the Company’s quarterly and annual operating results for that period in which such a judgment might be rendered. It remains the Company’s intent to vigorously defend these actions.

The Bank is also involved in other 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.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share data)

6.) Earnings Per Share and Capital Transactions:

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


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JUNE 30,				June 30,

	2003		2002		2003		2002

Net Income	$	1,365	$	1,539	$	2,827	$	2,981
Weighted average common shares outstanding *		3,982,642		4,039,467		3,988,164		4,044,856
Basic earnings per share *	$	0.34	$	0.38	$	0.71	$	0.74
Diluted earnings per share *	$	0.34	$	0.38	$	0.71	$	0.74

* Average shares outstanding and resultant per share amounts have been restated to give retroactive effect to the 3% stock dividend of January 1, 2003.

7.) Stock Repurchase Program

On January 23, 2001, the Company’s Board of Directors approved a Stock Repurchase Program (the “2001 Program”), which allowed the Company to repurchase up to 187,000 shares (or approximately 4.9% of the 3,815,125 shares outstanding as of January 31, 2001) of the Company’s outstanding common stock. The program expired February 6, 2002. On January 22, 2002, the Company’s Board of Directors approved a new program (the “2002 Program”), which allowed the Company to repurchase up to 193,000 shares (or approximately 4.9% of the 3,943,151 shares outstanding as of January 31, 2002) of the Company’s outstanding common stock. This program expired on February 6, 2003. On January 28, 2003, the Company’s Board of Directors once again approved a new program (the “2003 Program”) which allows the Company to repurchase up to 196,000 shares (or approximately 4.9% of the 3,998,191 shares outstanding as of January 28, 2003) of the Company’s outstanding common stock. This program will expire not later than February 6, 2004, with results depending on market conditions. 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.

Repurchase amounts are effected through open market transactions or in privately negotiated agreements in accordance with applicable regulations of the Securities and Exchange Commission. Under the 2001 program based on the value of the Company’s stock on January 31, 2001, the commitment to repurchase the stock over the next year was approximately $3,179. The Company repurchased 51,321 shares under the 2001 Program.

CORTLAND BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share data)

Under the 2002 Program, based on the value of the Company’s stock on January 31, 2002, the commitment to repurchase the stock over the next year was $4,053. The Company repurchased 19,745 shares between January 1 and February 6, 2003, bringing the total repurchased shares to 114,073 under the 2002 Program. The Company also reissued 20,592 shares to existing shareholders through its dividend reinvestment program in January 2003, bringing the total number of shares reissued during the 2002 Program to 52,647.

Under the 2003 Program, based on the value of the Company’s stock on January 28, 2003, the commitment to repurchase the stock over the next twelve months was $5,037. As of June 30, 2003, the Company has repurchased 22,617 shares under the 2003 Program. The Company also reissued 10,042 shares to existing shareholders through its dividend reinvestment program under the 2003 Program. Based on the price of the Company’s stock at June 30, 2003, the remaining commitment to repurchase the stock was approximately $5,618.

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

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

Note Regarding Forward-looking Statements

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

Liquidity

The central role of the Company’s liquidity management is to (1) ensure sufficient liquid funds to meet the normal transaction requirements of its customers, (2) take advantage of market opportunities requiring flexibility and speed, and (3) provide a cushion against unforeseen liquidity needs.

Principal sources of liquidity for the Company include assets considered relatively liquid, such as interest-bearing deposits in other banks, federal funds sold, cash and due from banks, as well as cash flows from maturities and repayments of loans, investment securities and mortgage-backed securities.

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

Along with its liquid assets, the Company has other sources of liquidity available to it which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, the ability to obtain deposits through the adjustment of interest rates, the purchasing of federal funds, borrowings from the Federal Home Loan Bank of Cincinnati and access to the Federal Reserve Discount Window.

Cash and cash equivalents decreased compared to levels at year-end 2002, as the Company moved to reduce its level of Federal Funds Sold in response to additional interest rate reductions implemented by the Federal Reserve. Operating activities provided cash of $5,133 and $3,199 during the six months ended June 30, 2003 and 2002, respectively. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for June 30, 2003 and 2002.

Capital Resources

The capital management function is a continuous process which consists of providing capital for both the current financial position and the anticipated future growth of the Company. Central to this process is internal equity generation, particularly through earnings retention. Internal capital generation is measured as the annualized rate of return on equity, exclusive of any appreciation or depreciation relating to available for sale securities, multiplied by the percentage of earnings retained. Internally generated capital retained by the Company measured 4.1% for the six months ended June 30, 2003 and 5.1% for the six months ended June 30, 2002. Overall capital (a figure which reflects earnings, dividends paid, common stock issued, treasury shares purchased, treasury shares reissued and the net change in the estimated fair value of available for sale securities) increased at an annual rate of 2.8%.

Risk-based standards for measuring capital adequacy require banks and bank holding companies to maintain capital based on “risk-adjusted” assets. Categories of assets with potentially higher credit risk require more capital than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as standby letters of credit and interest rate swaps.

These standards also classify capital into two tiers, referred to as Tier 1 and Tier 2. The Company’s Tier 1 capital consists of common shareholders’ equity (excluding any gain or loss on available for sale debt securities) less intangible assets and the net unrealized loss on equity securities with readily determinable fair values. Tier 2 capital is the allowance for loan and lease losses reduced for certain regulatory limitations.

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

Risk based capital standards require a minimum ratio of 8% of qualifying total capital to risk-adjusted total assets with at least 4% constituting Tier 1 capital. Capital qualifying as Tier 2 capital is limited to 100% of Tier 1 capital. All banks and bank holding companies are also required to maintain a minimum leverage capital ratio (Tier 1 capital to total average assets) in the range of 3% to 4%, subject to regulatory guidelines.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required banking regulatory agencies to revise risk-based capital standards to ensure that they adequately account for the following additional risks: interest rate, concentration of credit, and non traditional activities. Accordingly, regulators will subjectively consider an institution’s exposure to declines in the economic value of its capital due to changes in interest rates in evaluating capital adequacy. The table below illustrates the Company’s risk weighted capital ratios at June 30, 2003 and December 31, 2002.


		June 30, 2003			December 31, 2002

Tier 1 Capital		$	49,333		$	48,593
Tier 2 Capital			2,939			2,822

TOTAL QUALIFYING CAPITAL		$	52,272		$	51,415

Risk Adjusted Total Assets (*)		$	230,474		$	221,332

	Tier 1 Risk-Based Capital Ratio		21.41	%		21.95	%

	Total Risk-Based Capital Ratio		22.68	%		23.23	%

	Tier 1 Risk-Based Capital to Average Assets (Leverage Capital Ratio)		11.45	%		11.12	%

(*) Includes off-balance sheet exposures.

Assets, less intangibles and the net unrealized market value adjustment of investment securities available for sale, averaged $430,975 for the six months ended June 30, 2003 and $437,149 for the year ended December 31, 2002.

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

First Six Months of 2003 as Compared to First Six Months of 2002

During the first six months of 2003, net interest income after provision for loan losses decreased by $889 compared to the first six months of 2002. Total interest income decreased by $2,075 or 15.1%, from the level recorded in 2002. This was accompanied by a decrease in interest expense of $1,111 or 21.2%, and a $75 decrease in the provision for loan losses.

The decline in net interest income was the product of a 1.5% year-over-year decline in average earning assets and compression in the Company’s net interest margin rates as short-term interest rates approach zero. The Company’s net interest margin for the first six months of 2003 measured 4.0% compared to 4.4% a year ago.

The average rate paid on interest sensitive liabilities decreased by 60 basis points year-over-year. The average balance of interest sensitive liabilities decreased by $9,029 or 2.7%. Compared to the first six months of last year, average borrowings decreased by $3,014 while the average rate paid on borrowings remained stable at 5.2%. Average interest bearing demand deposits increased by $840, while savings and money market accounts decreased by $330. The average rate paid on these products decreased by 60 basis points in the aggregate. The average balance on time deposit products decreased by $6,525 as the average rate paid decreased by 69 basis points, from 4.4% to 3.7%.

Interest and dividend income on securities registered a decrease of $846 or 14.8%, during the first six months of 2003 when compared to 2002, while on a fully tax equivalent basis income on investment securities decreased by $811 or 12.9%. The average invested balances decreased by $60 from the levels of a year ago. The decrease in the average balance of investment securities was accompanied by an 82 basis point decrease in the tax equivalent yield of the portfolio.

Interest and fees on loans decreased by $1,249, or 15.7%, for the first six months of 2003 compared to 2002. An $11,486 decrease in the average balance of the loan portfolio, or 5.6%, was accompanied by a 76 basis point decrease in the portfolio’s tax equivalent yield.

Interest on trading account securities measured $24 at June 30, 2003. Trading account securities had an average balance of $814 and a yield of 5.9% in the first six months of 2003. There was no trading account activity in the first six months of 2002. Other interest income decreased by $4 from the same period a year ago. The average balance of Federal Funds sold and other money market funds increased by $4,399. The yield on federal funds decreased by 51 basis points compared to 2002.

Other income from all sources increased by $633 from the same period a year ago. Gains on 1-4 residential mortgage loans sold in the secondary mortgage market increased by $228 from the same period a year ago. Gains on securities called and net gains on the sale of available for sale investment securities increased by $310 from year ago levels. Gains on trading account securities in 2003 were $125 with no activity recorded in 2002. Fees for other customer services increased by $42. Other sources of non-recurring non-interest income decreased by $72 from the same period a year ago.

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

Reflecting the residual effects of the recent economic recession, loan charge-offs during the first six months were $305 in 2003 in contrast to $210 in 2002, while the recovery of previously charged-off loans amounted to $62 in 2003 compared to $50 in 2002. A provision for loan loss of $100 was charged to operations in 2003, compared to the $175 charged in 2002. Non-accrual loans at June 30, 2003 represented 1.2% of the loan portfolio compared to 0.7% at December 31, 2002 and 0.6% a year ago. At June 30, 2003, the loan loss allowance of $2,991 represented 1.6% of outstanding loans.

Total other expenses in the first six months were $5,754 in 2003 compared to $5,711 in 2002, an increase of only $43 or 0.8%. Full time equivalent employment during the first six months averaged 168 employees in 2003, a 0.6% decrease from the 169 employed in the same period of 2002. Salaries and benefits increased by $56 or 1.7% compared to the similar period a year ago, primarily due to the increased cost of benefits.

For the first six months of 2003, state and local taxes increased by $6 or 2.3%. Occupancy and equipment expense decreased by $55 or (5.3)%. All other expense categories increased by 3.0% or $36 as a group.

Income before income tax expense amounted to $3,555 for the first six months of 2003 compared to $3,854 for the similar period of 2002. The effective tax rate for the first six months was 20.5% in 2003 compared to 22.7% in 2002, resulting in income tax expense of $728 and $873 respectively. Net income for the first six months registered $2,827 in 2003 compared to $2,981 in 2002, representing per share amounts of $0.71 in 2003 and $0.74 in 2002.

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

Second Quarter of 2003 as Compared to Second Quarter of 2002

During the second quarter of 2003 net interest income after provision for loan losses decreased by $549 as compared to second quarter 2002. Year-over-year average earning assets decreased by 1.4% while average interest-bearing liabilities decreased by 2.8%. Average loans decreased by 4.7%, while average investments increased by 0.6%.

The composite tax equivalent yield on earning assets decreased by 94 basis points from the same quarter a year ago. The tax equivalent yield of the investment portfolio and the trading account measured 5.3%, a 102 basis point decrease from the same quarter a year ago, while the loan portfolio yielded 7.0%, down 80 basis points from last year’s rate. Meanwhile, the rate paid on interest-bearing liabilities decreased 60 basis points compared to a year ago. The net effect of these changes was that the tax equivalent net interest margin decreased to 4.0%, a decrease of 44 basis points from that achieved during last year’s second quarter.

Loans net of the allowance for losses decreased by $9,474 during the period June 30, 2002 to June 30, 2003. Gross loans as a percentage of earning assets stood at 46.7% as of June 30, 2003 as compared to 48.5% on June 30, 2002. The loan to deposit ratio at the end of the first six months of 2003 was 57.1% compared to 59.5% at the end of the same period a year ago. The investment portfolio represented 62.9% of each deposit dollar, up from 60.9% a year ago.

Loan charge-offs during the second quarter were $149 in 2003 and $135 in 2002, while the recovery of previously charged-off loans amounted to $33 during the second quarter of 2003 compared to $27 in the same period of 2002.

Other income for the quarter increased by $276 or 45.6% compared to the same period a year ago. The net gain on loans sold during the quarter amounted to $166 compared to $24 a year ago. There was $221 in gains on investment and trading securities transactions in the second quarter of 2003 compared to the $63 gain realized in 2002. Fees from other customer services increased by $26. Other sources of non-recurring non-interest income decreased by $50 from the same period a year ago.

Total other expenses in the second quarter were $2,860 in 2003 and $2,857 in 2002, as increase of $3 or 0.1%. Employee salaries and benefits increased by $2 or 0.1%. Occupancy and equipment expense showed a $24 decrease, or (4.6)%. Other expenses as a group increased by $25 or 3.5% compared to the same period last year.

Income before tax for quarter decreased by 13.9% to $1,713 in 2003 from the $1,989 recorded in 2002. Net income for the quarter of $1,365 represented an 11.3% decrease from the $1,539 earned a year ago. Earnings per share amounted to $0.34 and $0.38 for the second quarter of 2003 and 2002, respectively.

CORTLAND BANCORP AND SUBSIDIARIES

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

(Dollars in thousands)

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). The Company’s bank subsidiary is rated “satisfactory” for CRA purposes, and remains well capitalized and well managed, in management’s opinion.

In June 1998, FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Under recently cleared Derivatives Implementation Group (DIG) Statement 133 Implementation Issue C13, “Scope Exceptions: When a Loan Commitment is Included in the Scope of Statement 133,” the issuer (but not the holder) must apply Statement 133 to loan commitments related to the origination or acquisition of mortgage loans that will be held for resale. The guidance is effective the first day of a reporting entity’s first fiscal quarter beginning after April 10, 2002 (that is, July 1, 2002, for the Company). The adoption of this guidance does not have a current impact on the Company’s financial statements.

Available Information

The Company files an annual report on Form 10K, quarterly reports on Form 10Q, current reports on Form 8K and amendments to those reports with the Securities and Exchange Commission (SEC) pursuant to Section 13 (a) or (15)d of the Exchange Act. The Company’s Internet address is www.cortland-banks.com. The Company makes available through this address, free of charge, the reports filed, as soon as reasonably practicable after such material is electronically filed, or furnished to the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(Dollars in thousands)

Management considers interest rate risk to be the Company’s principal source of market risk. Since December 31, 2002, short-term interest rates, as measured by U. S. Treasury securities with maturities of one year or less, have decreased by 23 to 39 basis points, reflecting concerns about economic weakness and deflation. Intermediate interest rates, as measured by U.S. Treasury securities with maturities of two to five years, decreased by 29 to 32 basis points. Long-term interest rates as measured by U.S. Treasury securities with maturities of ten to twenty years decreased by 29 to 31 basis points.

Over the past twelve months, the Federal Reserve has decreased its target rate for overnight federal funds by 75 basis points. Through the quarter ended June 30, 2003, the yield curve has steepened slightly as the difference between the yield on the ten-year Treasury and the three-month Treasury has increased to 264 basis points from 261 basis points at December 31, 2002. Interest rates continue to peak in the long-end of the Treasury curve.

The net effect of these changes in the level of interest rates and the shape of the yield curve had mixed effects on the Company’s risk position. When these changes are incorporated into the Company’s risk analysis, simulated results for an unchanged rate environment indicate a $164 decrease in the net interest income for the twelve month horizon subsequent to June 30, 2003 compared to the simulated results for a similar twelve month horizon subsequent to December 31, 2002, primarily reflecting the continued decline in yields on federal funds sold, loans, investments and limited opportunity to reprice non maturity deposit products as short term interest rates approach zero. Meanwhile, the protracted current environment of low interest rates resulted in an acceleration of mortgage prepayments and increased competitive pressures to renegotiate the interest rates of existing loan customers prior to their scheduled repricing date, all of which has increased the potential volatility of the Company`s net interest income to future interest rate changes.

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(CONTINUED)

(Dollars in thousands)

The following table indicates the Company’s current estimate of interest rate sensitivity based on the composition of the balance sheet at June 30, 2003 and December 31, 2002. For purposes of this analysis, short term interest rates as measured by the federal funds rate and the prime lending rate are assumed to increase (decrease) gradually over the subsequent twelve month period, reaching a level 300 basis points higher (lower) than the rates in effect at June 30, 2003 and December 31, 2002. Under both the rising rate scenario and the falling rate scenario, the yield curve is assumed to exhibit a parallel shift. The analysis assumes no growth in assets and liabilities and no change in asset or liability mix over the subsequent twelve month period.


	Simulated Net Interest Income (NII) Scenarios
	For the Twelve Months Ending
	Net Interest Income				$ Change in NII						% Change in NII
Changes in	June 30,		Dec. 31,		June 30,			Dec. 31,			June 30,			Dec. 31,
Interest Rates	2004		2003		2004			2003			2004			2003

Graduated increase of +300 basis points		15,613		16,111		(739	)		(405	)		(4.5	)%		(2.5	)%
Short term rates unchanged		16,352		16,516
Graduated decrease of - -300 basis points		15,512		16,117		(840	)		(399	)		(5.1	)%		(2.4	)%

The Company’s sensitivity to a decreasing rate environment increased, reflecting a larger decline in the Company’s expected net interest income. Sensitivity to the rising rate environment also increased with a larger decline in net interest income expected. Overall, the Company’s sensitivity to a change in interest rates remains balanced, with simulated net interest income declining by 4.5% in the case of rising rates and 5.1% in the case of falling rates.

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

CORTLAND BANCORP AND SUBSIDIARIES

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures: The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive, chief financial, and other senior officers of the Company have concluded that the Company’s disclosure controls and procedures were adequate and sufficiently effective to ensure that information required to be disclosed is gathered, analyzed and reported with adequate timeliness, accuracy and completeness.

Changes in internal controls: The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial officers.

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

See Note (5) of the financial statements.

Item 2. Changes in Securities

Not applicable

Item 3. Defaults upon Senior Securities

Not applicable

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

(a) On April 15, 2003, Cortland Bancorp held its annual meeting of shareholders.

(b) The following directors were elected for three-year terms ending in 2006.


		George A Gessner

		James E. Hoffman

		Timothy K. Woofter

Directors whose term of office continued after the annual meeting:


		William A. Hagood

		K. Ray Mahan

		Rodger W. Platt

		Richard B. Thompson

		Lawrence A. Fantauzzi

		David C. Cole

(c) At the close of business on the record date, 3,989,805 Cortland Bancorp shares were outstanding and entitled to vote.

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION (CONTINUED)

The result of the election of directors was as follows:


	Votes		Votes
	Cast		Cast		Votes
	For		Against		Abstained

George A. Gessner		2,762,121		49,694		0
James E. Hoffman		2,737,953		74,773		0
Timothy K. Woofter		2,770,844		40,971		0

Item 5. Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K


(a)		Exhibits

	2.		Not applicable

	4.		Not applicable

	10.		Not applicable

	11.		See Note (6) of the Financial Statements

	15.		Not applicable

	18.		Not applicable

	19.		Not applicable

	22.		Not applicable

	23.		Not applicable

	24.		Not applicable

	31.1		CEO certification (Filed herewith)

	31.2		CFO certification (Filed herewith)

	32.		Certifications of Chief Executive Officer and Chief Financial Officer required under Section 906 of Sarbanes-Oxley Act of 2002 (Filed herewith)

CORTLAND BANCORP AND SUBSIDIARIES

PART II — OTHER INFORMATION (CONTINUED)


(b)		Reports on Form 8-K

Form 8-K was filed with the United States Securities and -Exchange Commission, dated April 18, 2003. The 8-K applied to Item 5 — Other Events and Regulation FD Disclosure, per the 8-K instructions, and announced first quarter results.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Cortland Bancorp (Registrant)

DATED:	August 8, 2003	/s/ Lawrence A. Fantauzzi Lawrence A. Fantauzzi Secretary/Treasurer (Chief Financial Officer)

DATED:	August 8, 2003	/s/ Rodger W. Platt Rodger W. Platt Chairman and President (Chief Executive Officer

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	(a)		On April 15, 2003, Cortland Bancorp held its annual meeting of shareholders.

	(b)		The following directors were elected for three-year terms ending in 2006.