UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number
0-13814
CORTLAND BANCORP
(Exact Name of Registrant as Specified in its Charter)
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Ohio
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34-14511184
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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194 West Main Street, Cortland, Ohio
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44410
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
(330) 637-8040
Securities registered pursuant to Section l2(b) of the Act: None
Securities registered pursuant to Section l2(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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Yes
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No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
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Yes
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No
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by
Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 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.
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Yes
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No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(229.405 of the chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of the Form 10-K or any amendment to this Form 10-K
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company.
See the definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
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No
Based upon the closing price of the registrant’s common stock of June 29, 2007, the aggregate
market value of the voting stock held by non-affiliates of the registrant was approximately
$72,881,908. For purposes of this response directors and executive officers are considered the
affiliates of the issuer at that date.
The number of shares outstanding of the issuer’s classes of common stock as of March 11, 2008:
4,398,878 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Shareholders Report for the year ended
December 31, 2007 are incorporated by reference into Parts I, II and IV.
Portions of the Proxy Statement for the annual shareholders meeting to be held April 22,
2008 are incorporated by reference into Part III.
PART I
Item l.
Business
General
THE CORPORATION
Information relating to Item 1 — Business General — THE CORPORATION — is set forth in the
Corporation’s 2007 Annual Report to Shareholders, Page 4, Brief Description of the Business and is
incorporated herein by reference.
CORTLAND BANKS
Information relating to Item 1 — Business General — CORTLAND BANKS — is set forth in the
Corporation’s 2007 Annual Report to Shareholders, Page 4, Brief Description of the Business and is
incorporated herein by reference.
NEW RESOURCES LEASING COMPANY
Information relating to Item 1 — Business General — NEW RESOURCES LEASING COMPANY — is set
forth in the Corporation’s 2007 Annual Report to Shareholders, Page 4, Brief Description of the
Business and is incorporated herein by reference.
SUPERVISION AND REGULATION
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 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.
I-2
Item l.
Business
General (Continued)
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which
contains important new requirements for public companies in the area of financial disclosure and
corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written
certifications by the Company’s Chief Executive Officer and Chief Financial Officer are required.
These certifications attest that the Company’s quarterly and annual reports filed with the SEC do
not contain any untrue statement of a material fact or omit to state a material fact. The Company
has also implemented a program designed to comply with Section 404 of the Sarbanes-Oxley Act, which
includes the identification of significant processes and accounts, documentation of the design of
control effectiveness over process and entity level controls, and testing of the operating
effectiveness of key controls.
COMPETITION
Information relating to Item 1 — Business General — COMPETITION — is set forth in the
Corporation’s 2007 Annual Report to Shareholders, Page 4, Brief Description of the Business and is
incorporated herein by reference.
EMPLOYEES
Information relating to Item 1 — Business General — EMPLOYEES — is set forth in the
Corporation’s 2007 Annual Report to Shareholders, Page 4, Brief Description of the Business and is
incorporated herein by reference
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. The public may read and copy any materials filed with the Commission at the
SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days
during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330.
I-3
Item l.
Business
Statistical Disclosure
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Information relating to I — Distribution of Assets, Liabilities and Shareholders’ Equity;
Interest Rates and Interest Differential is set forth in the Corporation’s 2007 Annual Report to
Shareholders under the pages indicated below and is incorporated herein by reference:
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Pages in 2007
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Annual Report
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to Shareholders
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A. Average Balance Sheet -
December 31, 2007, 2006 and 2005
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32 & 33
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B. Analysis of Net Interest Earnings -
Years ending December 31, 2007, 2006 and 2005
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32 & 33
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C. Rate and Volume Analysis -
2007 change from 2006
and 2006 change from 2005
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41
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II. INVESTMENT PORTFOLIO
Information relating to II — Investment Portfolio is set forth in the Corporation’s 2007
Annual Report to Shareholders under the pages indicated below and is incorporated herein by
reference:
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Pages in 2007
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Annual Report
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to Shareholders
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A. Book value of investments -
December 31, 2007, 2006 and 2005
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50 - 51
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B. Summary of securities held -
December 31, 2007
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51 & 52
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C. N/A
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I-4
III. LOAN PORTFOLIO (ALL DOMESTIC)
A. TYPES OF LOANS
Information relating to III — Loan Portfolio — A. Types of Loans is set forth in the
Corporation’s 2007 Annual Report to Shareholders, Page 48, Loan Portfolio and is incorporated
herein by reference.
B. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Information relating to III — Loan Portfolio — B. Maturities and Sensitivities of Loans to
Interest Rates is set forth in the Corporation’s 2007 Annual Report to Shareholders, Page 48, Loan
Portfolio and is incorporated herein by reference.
C. RISK ELEMENTS
Information relating to III — Loan Portfolio — C. Risk Elements, is set forth in the
Corporation’s 2007 Annual Report to Shareholders under the pages indicated below and is
incorporated herein by reference:
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Pages in 2007
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Annual Report
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to Shareholders
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1. Nonaccrual, Past Due and Restructured Loans
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(1) Aggregate amount in each category (5 years)
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38
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(2) Interest income
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(i) That would have been recorded
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20 & 38
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(ii) That was included in income
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20 & 38
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(3) Policy for placing loans on non-accrual status
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11-13 & 19-20
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2. Potential Problem Loans
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20
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3. Foreign Outstandings
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N/A
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4. Loan concentrations over 10% not otherwise disclosed
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N/A
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D. Other Interest Bearing Assets — N/A
I-5
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. Analysis of the Allowance for Loan Loss
Information relating to IV — Summary of Loan Loss Experience — A. Analysis of the
Allowance for Loan Loss is set forth in the Corporation’s 2007 Annual Report to Shareholders,
Pages 46-47, Loan Loss Experience and is incorporated herein by reference.
B. Breakdown of the Allowance for Loan Losses
Information relating to IV — Summary of Loan Loss Experience — B. Breakdown of the
Allowance for Loan Losses is set forth in the Corporation’s 2007 Annual Report to Shareholders
under the pages indicated below and is incorporated herein by reference.
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Pages in 2007
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Annual Report
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to Shareholders
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Breakdown of the Allowance for Loan Losses
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47
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Percentage of loans in each category
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46 - 48
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Loan Commitments and Lines of Credit
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23-24 & 56-57
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V. DEPOSITS (ALL DOMESTIC)
A. Average Deposits and Average Rates Paid on Deposit Categories
Information relating to V — Deposits — A. Average Deposits and Rates is set forth in the
Corporation’s 2007 Annual Report to Shareholders, Pages 32
& 33, Five Year Summary Average
Balance Sheet, Yields and Rates and is incorporated herein by reference.
B.
Not applicable
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Not applicable
D. Summary of Time Deposits of $100,000 or More
Information relating to V — Deposits — D. Summary of Time Deposits of $100,000 or More by
Maturity Range, is set forth in the Corporation’s 2007 Annual Report to Shareholders, Page 21,
Note 6, Deposits and is incorporated herein by reference.
E. Not applicable
VI. RETURN ON EQUITY AND ASSETS
Information relating to VI — Return on Equity and Assets is set forth in the
Corporation’s 2007 Annual Report to Shareholders, page 34, Selected Financial Data and is
incorporated herein by reference.
VII. SHORT TERM BORROWINGS
Not required
I-6
Item 1A. Risk Factors
The material risks and uncertainties that management believes affect the Company are described
below. Before making an investment decision with respect to the Company’s stock, you should
carefully consider the risks and uncertainties as described below together with all of the
information included herein. The risks and uncertainties described below are not the only risks and
uncertainties the Company faces. Additional risks and uncertainties not presently known and that
are deemed immaterial also may have a material adverse effect on the Company’s result of operations
and financial condition. If any of the following risks actually occur, the Company’s common stock
could decline.
Fluctuations in interest rates could adversely affect the Company’s earnings and financial
condition.
As is the case for most financial institutions, the Company’s earnings are substantially
dependent upon net interest income, which is the difference between (a) the rates earned on loans,
securities and other earning assets and (b) the interest rates paid on borrowings and deposits.
These interest rates are highly sensitive to various factors beyond the Banks control, including
but not limited to:
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the general economic conditions;
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governmental monetary policy;
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regulatory policies;
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rate of inflation;
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rate of unemployment.
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For instance, an economic downturn, increase in unemployment, or higher interest rates could
decrease the demand for loans and other products and services and/or result in a deterioration in
credit quality and/or loan performance.
The Company’s business may be adversely affected by changes in government policies.
The Company operates as a State Chartered Financial Institution and is subject to the Banking
regulations of the Ohio Department of Commerce and the Division of Financial Institutions. The
Company is also a member of the Federal Reserve Banks 6
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District. As such, the
Company’s success depends not only on competitive factors but also on regulations that are issued
by these organizations. Congress and state legislatures and federal and state regulatory agencies
continually review and change banking laws, regulations and policies. Changes to statutes,
regulations or regulatory policies, including changes in interpretation or implementations of
statutes, regulations or policies, could affect the Company in substantial and unpredictable ways,
with the potential to significantly impact the Company’s cost structure. Also, the Company’s
failure to comply with laws, regulations or policies could result in sanctions by the regulatory
agencies and damage its reputation.
The Company’s earnings and reputation may be adversely affected by credit risk.
A significant portion of the Company’s loan portfolio is secured by real property. Originating
and underwriting loans properly are integral to the Company’s success. Credit risk is the risk of
not being able to collect the contractual obligation, including all principal and interest income
when the borrower is unable to repay the obligation as agreed. Credit risk could be affected by a
variety of negative conditions, including, (1) general, regional or local economic conditions, (2)
rapid increase in interest rates, and/or (3) a downturn in an industry sector.
I-7
Item 1A. Risk Factors (Continued)
The Company’s general and specific credit risk are significant components of the Company’s
reserve for loan losses which is also based upon, among other things:
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historical experience;
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economic conditions;
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regular reviews of delinquencies and loan portfolio quality;
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industry concentrations;
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and results of regulatory examinations.
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Based upon such factors, management makes various assumptions and judgments about the ultimate
collectibility of the respective loan portfolios. Although the Company believes that the reserve
for loan losses is adequate, there can be no assurance that such reserve will prove sufficient to
cover future losses. These determinations are based upon estimates that are inherently subjective.
As such, future adjustments will be necessary if economic conditions change or adverse developments
arise with respect to nonperforming or performing loans or if regulatory supervision changes.
Material losses would result in a material decrease in the Company’s net income, and possibly its
capital, and could result in the inability to pay dividends, among other adverse conditions.
The Company’s industry is very competitive and intense.
The Bank competes with a variety of competition including: other commercial banks, savings and
loan associations, finance companies, insurance companies, brokerage and investment banking firms
and credit unions. Many of these competitors have greater resources and lending limits than the
Bank and may offer certain services that the Bank does not provide. The Company’s profitability
depends upon the continued ability to compete effectively in our markets with the Company’s core
products.
The Company’s business could be adversely affected by a downturn in the local geographic
markets where we operate and depend.
The Bank derives the majority of its loans and deposits from the communities located in
Northeast Ohio region. The local economic conditions in these areas have a significant impact on
the generation of the Bank’s loan and deposit portfolios; the ability of borrowers to repay these
loans; and the value of collateral securing these loans. Adverse changes in the economic conditions
of the Northeast Ohio region in general could result in a negative impact on the financial results
of the Company’s operations and have a negative effect on our profitability.
A significant challenge for the future of the Company is recruiting and retaining top talent.
In the Company’s competitive market, success will be determined in large part by who can hire
and retain the best talent. Finding and retaining high performance employees is a particular
challenge for banks in the Company’s core market of Northeast Ohio.
International conflicts and terrorism could adversely impact the Company’s earnings and
operations.
The potential for terrorist activity is unpredictable and could negatively impact general and
economic conditions in the United States and the Bank’s local economy in particular. The impact of
such terrorism could have a significant adverse impact to the Company’s earnings and operations in
ways that cannot be anticipated and/or estimated.
I-8
Item 1A. Risk Factors (Continued)
The Company’s stock price is volatile.
The Company’s stock price has been volatile in the past, and several factors could cause the
price to fluctuate substantially in the future. These factors include:
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Actual or anticipated variations in earnings;
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Changes in analysts recommendations or projections;
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Operating and stock performance of other companies deemed to be peers;
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News reports of trends, concerns and other issues related to the financial services
industry;
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Low volume of stock trades.
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The Bank’s stock price may fluctuate significantly in the future, and these fluctuations may
be unrelated to the Bank’s performance. General market price declines or market volatility in the
future could adversely affect the price of the Bank’s stock, and the current market price may not
be indicative of future market prices.
Further information relating to Item 1A. Risk Factors is set forth in the Corporations 2007
Annual Report to Shareholders Management’s Discussion Analysis. Including but not limited to Page
35, Note regarding Forward-Looking Statements; pages 46-47, Loan Loss Experience; pages 59-60,
Market Risk; pages 60-61, Critical Accounting Policies and page 61, Impact of Inflation, and
incorporated herein by reference.
Item 1B.
Unresolved Staff Comments
— N/A
Item 2.
Properties
CORTLAND BANCORP’S PROPERTY
Information relating to Item 2 — Properties — is set forth in the Corporation’s 2007 Annual
Report to Shareholders, page 4, Brief Description of the Business — CORTLAND BANCORP — and is
incorporated herein by reference.
CORTLAND BANKS’ PROPERTY
Information relating to Item 2 — Properties — is set forth in the Corporation’s 2007 Annual
Report to Shareholders, page 4, Brief Description of the Business, THE CORTLAND SAVINGS AND BANKING
COMPANY — and is incorporated herein by reference.
Information relating to Item 2 — Properties — Location of Offices is set forth in the
Corporation’s 2007 Annual Report to Shareholders, on the back cover, Cortland Banks Offices and
Locations and is incorporated herein by reference.
Item 3.
Legal Proceedings
Information relating to Item 3 — Legal Proceedings — is set forth in the Corporation’s 2007
Annual Report to Shareholders, page 30, Note 17, Litigation, and is incorporated herein by
reference.
I-9
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report.
Item 4A. Identification of Executive Officers of the Registrant
The names, ages and positions of the executive officers as of March 11,
2008 are as follows:
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Name
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Age
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Position Held
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Lawrence A. Fantauzzi
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60
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President, Chief Executive
Officer and Director
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James M. Gasior
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48
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Senior Vice President, Secretary,
Chief Financial Officer and Director
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Craig M. Phythyon
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46
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Senior Vice President, Treasurer and
Chief Investment Officer
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All of the officers listed above will hold office until the next annual meeting of
shareholders and until their successors are duly elected and qualified.
Principal Occupation and Business Experience of Executive Officers
During the past five years the business experience of each of the executive officers has been
as follows:
Mr. Fantauzzi succeeded Mr. Platt as President and Chief Executive Officer of The Cortland
Savings and Banking Company beginning October 3, 2005. Mr. Fantauzzi also succeeded Mr. Platt as
President of Cortland Bancorp beginning November 1, 2005. Previously, Mr. Fantauzzi has served
as Senior Vice President of the Bank since 1996. He served as Controller and Chief Financial
Officer, as well as Secretary-Treasurer of both Cortland Bancorp and The Cortland Savings and
Banking Company (the “Bank”). Mr. Fantauzzi has also been Vice President and Director of New
Resources Leasing Corporation, a subsidiary of the Bancorp, since 1995. Mr. Fantauzzi is 60 years
old and has been a member of the Board of Directors since February 9, 1999.
Mr. Gasior is Senior Vice President, Chief Financial Officer and Secretary of Cortland
Bancorp. He is also Senior Vice President, Chief Financial Officer and Secretary of the Bank. Mr.
Gasior is a Certified Public Accountant, a member of the American Institute of CPA’s and the Ohio
Society of CPA’s, is 48 years of age and has been a member of the Board of Directors since November
of 2005. Previously, Mr. Gasior served as Senior Vice President of Lending and Administration of
Cortland Bancorp and its subsidiary bank from April 1999 to October 2005.
Mr. Phythyon is Senior Vice President, Chief Investment Officer and Treasurer of Cortland
Bancorp. He is also Senior Vice President, Chief Investment Officer and Treasurer of the Bank.
Previously, Mr. Phythyon served as Vice President — Assistant Controller of the Bank beginning in
2002 and Assistant Vice President — Assistant Controller beginning in 1997. Mr. Phythyon is 46
years old.
I-10
PART II
Information relating to Items 5, 6, 7, 7A and 8 is set forth in the Corporation’s 2007 Annual
Report to Shareholders under the pages indicated below and is incorporated herein by reference:
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Pages in 2007
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Annual Report
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to Shareholders
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Item 5.
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Market for Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchase of Equity Securities
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a) Market Information
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30 & 62
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b) Holders
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62
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c) Dividends
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30, 36 & 62
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d) N/A
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e) Shareholder Return Performance Graph
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CUMULATIVE VALUE OF $100 INVESTMENT
Comparison of Five-Year Cumulative Total Return Among Cortland Bancorp,
The Russell 2000 Index and SNL Securities Index of Banks with Assets
Under $500 Million. (1)
Total Return Performance
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Period Ending
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Index
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12/31/02
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12/31/03
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12/31/04
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12/31/05
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12/31/06
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|
12/31/07
|
|
|
|
|
Cortland Bancorp
|
|
|
|
100.00
|
|
|
|
|
122.16
|
|
|
|
|
104.39
|
|
|
|
|
90.01
|
|
|
|
|
96.43
|
|
|
|
|
67.89
|
|
|
|
|
Russell 2000
|
|
|
|
100.00
|
|
|
|
|
147.25
|
|
|
|
|
174.24
|
|
|
|
|
182.18
|
|
|
|
|
215.64
|
|
|
|
|
212.26
|
|
|
|
|
SNL Bank < $500M Index
|
|
|
|
100.00
|
|
|
|
|
145.97
|
|
|
|
|
168.49
|
|
|
|
|
178.39
|
|
|
|
|
187.41
|
|
|
|
|
152.17
|
|
|
|
|
|
(1)
|
|
Assumes that on December 31, 2002, $100 each was invested in the common shares of Cortland
Bancorp, the Russell 200 index, and the SNL Bank Index, with all subsequent dividends
reinvested. Cortland Bancorp is not among the banking companies included in the SNL Bank
Index, nor is it included in the Russell 2000 index. SNL Securities provided information for
Cortland Bancorp, The Russell 2000 index and the SNL Bank Index. Past performance provides no
guarantee or assurance that similar results can or will be achieved in the future.
|
II-1
PART II (CONTINUED)
|
|
|
|
|
|
|
Item 5
.
(Continued)
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities in
The Fourth Quarter of 2007
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
35-61
|
|
|
|
|
|
|
|
|
|
|
|
54-55,
|
|
|
|
|
|
59-60
|
|
|
|
|
|
4-34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation of Disclosure Controls and Procedures
. With the supervision and
participation of management, including the Company’s principal executive officer and principal
financial officer, the effectiveness of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) has been
evaluated as of the end of the period covered by this report. Based upon that evaluation, the
Company’s principal executive officer and principal financial officer have concluded that such
disclosure controls and procedures are, to the best of their knowledge, effective as of the end of
the period covered by this report to ensure that material information relating to the Company and
its consolidated subsidiaries is made known to them, particularly during the period for which our
periodic reports, including this report, are being prepared.
Annual Report on Internal Control Over Financial Reporting
. The Report on
Management’s Assessment of Internal Control Over Financial Reporting is included on page 5 of the
2007 Annual Report to Shareholders and is incorporated herein by reference.
Attestation Report of the Registered Public Accounting Firm
. The Attestation Report
of the Company’s independent registered public accounting firm is included on page 6 of the 2007
Annual Report to Shareholders and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
. Our Chief Executive Officer and
Chief Financial Officer have concluded that there have been no significant changes during the
period covered by this report in the Company’s internal control over financial reporting (as
defined in Rules 13a-13 and 15d-15 of the Exchange Act) that have materially affected, or are
reasonable likely to materially affect, internal control over financial reporting.
Item 9B
.
Other Information
Not applicable
II-2
PART III
|
|
|
|
|
Item l0.
|
|
Directors, Executive Officers and Corporate Governance
|
Information relating to this item will be set forth in the Corporation’s definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities and Exchange Commission within
120 days after the end of our 2007 fiscal year in connection with its annual meeting of
shareholders to be held April 22, 2008. Such information is incorporated herein by reference.
This information will be found under but not limited to the captions of “Board Nominees”,
“Continuing Directors”, “The Board of Directors and Committees of the Board”, “Section 16(a)
Beneficial Ownership Reporting Compliance”, “Election of Directors” and “Audit Committee Matters”.
Information relating to executive officers of the Corporation is set forth in Part I. Item 4A.
|
|
|
|
|
Item ll.
|
|
Executive Compensation
|
Information relating to this item will be set forth in the Corporation’s definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities and Exchange Commission within
120 days after the end of our 2007 fiscal year in connection with its annual meeting of
shareholders to be held April 22, 2008. Such information is incorporated herein by reference.
This information will be found under but not limited to the captions of “Executive Compensation”
and “Directors Compensation”.
|
|
|
|
|
Item l2.
|
|
Security Ownership of Certain Beneficial Owners and Management and
Related Shareholders Matters
|
Information relating to this item will be set forth in the Corporation’s definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities and Exchange Commission within
120 days after the end of our 2007 fiscal year in connection with its annual meeting of
shareholders to be held April 22, 2008. Such information is incorporated herein by reference.
This information will be found under but not limited to the captions of “Share Ownership by
Directors and Executive Officers”.
|
|
|
|
|
Item l3.
|
|
Certain Relationships and Related Transactions, and Director
Independence
|
Information relating to this item will be set forth in the Corporation’s definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities and Exchange Commission within
120 days after the end of our 2007 fiscal year in connection with its annual meeting of
shareholders to be held April 22, 2008. Such information is incorporated herein by reference.
This information will be found under but not limited to the captions of “Transactions with Related
Parties” and “The Board of Directors and Committees of the Board”.
|
|
|
|
|
Item l4.
|
|
Principal Accountant Fees and Services
|
Information relating to this item will be set forth in the Corporation’s definitive proxy statement
to be filed pursuant to Regulation 14A of the Securities and Exchange Commission within 120 days
after the end of our 2007 fiscal year in connection with its annual meeting of shareholders to be
held April 22, 2008. Such information is incorporated herein by reference. This information will
be found under but not limited to the captions of “Audit Committee Matters”.
III-l
PART IV
|
|
|
|
|
Item l5.
|
|
Exhibits, Financial Statement Schedules
|
(a) l.
Financial Statements
Included in Part II of this report:
Item 8., Financial Statements and Accompanying Information,
is set forth in the Corporation’s 2007 Annual Report to
Shareholders and is incorporated by reference in Part II
of this report.
|
|
|
|
|
|
|
|
|
Pages in 2007
|
|
|
|
|
Annual Report
|
|
|
|
|
To Shareholders
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
6
|
|
|
Consolidated Statements of Income for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
7
|
|
|
Consolidated Balance Sheets as of December 31, 2007 and 2006
|
|
|
8
|
|
|
Consolidated Statements of Shareholders’ Equity for the Years
Ended December 31, 2007, 2006 and 2005
|
|
|
9
|
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
10
|
|
|
Notes to Consolidated Financial Statements
|
|
|
11 - 31
|
|
|
|
|
|
|
(a) 2.
|
|
Financial Statement Schedules
|
Included in Part IV of this report as Exhibit 23:
Independent Accountants’ Consent
Schedules:
All schedules are omitted because they are not
applicable.
|
|
|
|
|
(a) 3.
|
|
Exhibits Required by Item 601 of Regulation S-K
|
The exhibits filed or incorporated by reference as a part of
this report are listed in the Index to Exhibits which appears
at page IV-3 hereof and is incorporated herein by reference.
Exhibit 11 – Statement regarding computation of earnings per share -
is set forth in the Corporation’s 2007 Annual Report to Shareholders
page 14, Note 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Per Share Amounts – and is incorporated herein by reference.
IV-l
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 11, 2008
|
|
|
|
By
|
|
/s/Lawrence A. Fantauzzi,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
|
|
|
President, Chief Executive
|
|
|
|
|
|
|
|
|
|
Officer and Director
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
/s/K.Ray Mahan
|
|
Director and Chairman of the Board
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
/s/Lawrence A. Fantauzzi
|
|
President, Chief Executive
Officer and Director
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/James M. Gasior
|
|
Senior Vice President,
|
|
March 11, 2008
|
|
|
|
Secretary and Director
(Chief Financial
Officer)
|
|
Date
|
|
|
|
|
|
|
|
/s/Jerry A. Carleton
|
|
Director
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
/s/David C. Cole
|
|
Director
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
/s/George E. Gessner
|
|
Director
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
/s/Neil J. Kaback
|
|
Director
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
/s/Richard B. Thompson
|
|
Director
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
/s/Timothy K. Woofter
|
|
Director
|
|
March 11, 2008
|
|
|
|
|
|
Date
|
IV-2
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part of this report:
Item 15(b). Exhibits
|
|
|
|
|
Exhibit 3.1
|
|
Restated Amended Articles of Cortland Bancorp reflecting amendment dated May
18, 1999. Note: filed for purposes of SEC reporting compliance only. This restated
document has not been filed with the State of Ohio. (1)
|
|
|
|
|
|
Exhibit 3.2
|
|
Code of Regulations for the Bancorp, as amended (1)
|
|
|
|
|
|
|
|
Code of Regulations, Cortland Savings and Banking (2)
|
|
|
|
|
|
Exhibit 4
|
|
The rights of holders of equity securities are defined in portions of the
Articles of Incorporation and Code of Regulations as referenced in 3.1 and 3.2.(1)
|
|
|
|
|
|
* Exhibit 10.1
|
|
Group Term Carve Out Plan dated February 23,2001 by The Cortland
Savings and Banking Company with each executive officer other than Rodger W. Platt and
with selected other officers, as amended by the August 2002 letter amendment.(1)
|
|
|
|
|
|
* Exhibit 10.2
|
|
Group Term Carve Out Plan Amended Split Dollar Policy Endorsement
entered into by The Cortland Savings and Banking Company on December 15, 2003 with
Stephen A. Telego, Sr.(1)
|
|
|
|
|
|
* Exhibit 10.3
|
|
Amended Director Retirement Agreement between Cortland Bancorp and
Jerry A. Carleton, dated as of December 18, 2007 (3)
|
|
|
|
|
|
* Exhibit 10.4
|
|
Amended Director Retirement Agreement between Cortland Bancorp and
David C. Cole, dated as of December 18, 2007. (3)
|
|
|
|
|
|
* Exhibit 10.5
|
|
Amended Director Retirement Agreement between Cortland Bancorp and
George E. Gessner, dated as of December 18, 2007. (3)
|
|
|
|
|
|
* Exhibit 10.6
|
|
Amended Director Retirement Agreement between Cortland Bancorp and
William A. Hagood, dated as of October 12, 2003 (1)
|
|
|
|
|
|
* Exhibit 10.7
|
|
Amended Director Retirement Agreement between Cortland Bancorp and
James E. Hoffman III, dated as of December 18, 2007. (3)
|
|
|
|
|
|
* Exhibit 10.8
|
|
Amended Director Retirement Agreement between Cortland Bancorp and
Neil J. Kaback, dated as of December 18, 2007. (3)
|
|
|
|
|
|
* Exhibit 10.9
|
|
Director Retirement Agreement between Cortland Bancorp and K. Ray
Mahan, dated as of March 1, 2001 (1)
|
|
|
|
|
|
* Exhibit 10.10
|
|
Amended Director Retirement Agreement between Cortland Bancorp
and Richard B. Thompson, dated as of December 18, 2007 (3)
|
|
|
|
|
|
* Exhibit 10.11
|
|
Amended Director Retirement Agreement between Cortland Bancorp
and Timothy K. Woofter, dated as of December 18, 2007. (3)
|
IV-3
INDEX TO EXHIBITS (Continued)
|
|
|
|
|
* Exhibit 10.12
|
|
Form of Split Dollar Agreement entered into by Cortland Bancorp
and each of Directors David C. Cole, George E. Gessner, William A. Hagood, James E.
Hoffman III, K. Ray Mahan, and Timothy K. Woofter as of February 23, 2001, as of March
1, 2004 with Director Neil J. Kaback, and as of October 1, 2001 with Director Richard
B. Thompson; as amended on December 26, 2006, for Directors Cole, Gessner, Hoffman,
Mahan, Thompson, and Woofter;(2) and Amended Split Dollar Agreement and Endorsement
entered into by Cortland Bancorp as of December 18, 2007, with Director Jerry A.
Carleton. (3)
|
|
|
|
|
|
* Exhibit 10.13
|
|
Split Dollar Agreement between The Cortland Savings and Banking
Company and Rodger W. Platt dated of as February 23, 2001, as amended on August 15,
2002 and September 29, 2005 (1)
|
|
|
|
|
|
* Exhibit 10.14
|
|
Endorsement Split Dollar Agreement between The Cortland Savings
and Banking Company and Rodger W. Platt dated as of September 29, 2005 (1)
|
|
|
|
|
|
* Exhibit 10.15
|
|
Form of Indemnification Agreement entered into by Cortland
Bancorp with each of its directors as of May 24, 2005 (1)
|
|
|
|
|
|
* Exhibit 10.16
|
|
Amended Salary Continuation Agreement between The Cortland
Savings and Banking Company and Rodger W. Platt, dated as of August 15, 2002 (1)
|
|
|
|
|
|
* Exhibit 10.17
|
|
Second Amended and Restated Salary Continuation Agreement between
The Cortland Savings and Banking Company and Timothy Carney, dated as of December 17,
2003 (1)
|
|
|
|
|
|
* Exhibit 10.18
|
|
Second Amended and Restated Salary Continuation Agreement between
The Cortland Savings and Banking Company and Lawrence A. Fantauzzi, dated as of
December 16, 2003 (1)
|
|
|
|
|
|
* Exhibit 10.19
|
|
Second Amended and Restated Salary Continuation Agreement between
The Cortland Savings and Banking Company and James M. Gasior, dated as of December 15,
2003 (1)
|
|
|
|
|
|
* Exhibit 10.20
|
|
Amended Salary Continuation Agreement between The Cortland
Savings and Banking Company and Marlene Lenio, dated as of September 9, 2002 (1)
|
|
|
|
|
|
* Exhibit 10.21
|
|
Salary Continuation Agreement between The Cortland Savings and
Banking Company and Craig Phythyon, dated as of December 15, 2003 (1)
|
|
|
|
|
|
* Exhibit 10.22
|
|
Second Amended and Restated Salary Continuation Agreement between
The Cortland Savings and Banking Company and Stephen A. Telego, Sr., dated as of
December 15, 2003 (1)
|
|
|
|
|
|
* Exhibit 10.23
|
|
Second Amended and Restated Salary Continuation Agreement between
The Cortland Savings and Banking Company and Danny L. White, dated as of December 15,
2003 (1)
|
|
|
|
|
|
* Exhibit 10.24
|
|
Second Amended Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and Timothy Carney, dated as of December 17, 2003
(1)
|
IV-4
INDEX TO EXHIBITS (Continued)
|
|
|
|
|
* Exhibit 10.25
|
|
Second Amended Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and Lawrence A. Fantauzzi, dated as of December
16, 2003 (1)
|
|
|
|
|
|
* Exhibit 10.26
|
|
Second Amended Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and James M. Gasior, dated as of December 15, 2003
(1)
|
|
|
|
|
|
* Exhibit 10.27
|
|
Amended Split Dollar Agreement between The Cortland Savings and
Banking Company and Marlene Lenio, dated as of September 9, 2002 (1), as amended on
December 11, 2006 (2)
|
|
|
|
|
|
* Exhibit 10.28
|
|
Split Dollar Agreement and Endorsement between The Cortland
Savings and Banking Company and Craig Phythyon, dated as of December 15, 2003 (1)
|
|
|
|
|
|
* Exhibit 10.29
|
|
Second Amended Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and Stephen A. Telego, Sr., dated as of December
15, 2003 (1)
|
|
|
|
|
|
* Exhibit 10.30
|
|
Second Amended Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and Danny L. White, dated as of December 15, 2003
(1)
|
|
|
|
|
|
* Exhibit 10.31
|
|
Severance Agreement Due to Change in Control of Cortland Bancorp
entered by Cortland Bancorp and The Cortland Savings and Banking Company in January
2001 with each of Timothy Carney, Lawrence A. Fantauzzi, James M. Gasior, and Stephen
A. Telego, Sr. (1)
|
|
|
|
|
|
* Exhibit 10.32
|
|
Severance Agreement Due to Change in Control of Cortland Bancorp
entered by Cortland Bancorp and The Cortland Savings and Banking Company in January
2001 with each of Marlene Lenio, Barbara Sandrock, and Danny L. White (1)
|
|
|
|
|
|
Exhibit 13
|
|
Annual Report to security holders (filed herewith)
|
|
|
|
|
|
Exhibit 14
|
|
Code of Ethics (filed herewith)
|
|
|
|
|
|
Exhibit 21
|
|
Subsidiaries of the Registrant (filed herewith)
|
|
|
|
|
|
Exhibit 23
|
|
Consents of experts and counsel — Consent of independent registered public
Accounting firm. (filed herewith)
|
|
|
|
|
|
Exhibit 31.1
|
|
Certification of the Chief Executive Officer under Rule 13a-14(a) (filed
herewith)
|
|
|
|
|
|
Exhibit 31.2
|
|
Certification of the Chief Financial Officer under Rule 13a-14(a) (filed
herewith)
|
|
|
|
|
|
Exhibit 32
|
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
required under section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
|
|
*
|
|
Management contract or compensatory plan or arrangement
|
|
|
|
(1)
|
|
Filed previously as an Exhibit to form 10-K filed on March 15, 2006
|
|
|
|
(2)
|
|
Filed previously as an Exhibit to form 10-K filed on March 15, 2007
|
|
|
|
(3)
|
|
Filed herewith
|
Copies of any exhibits will be furnished to shareholders upon written request. Requests
should be directed to James Gasior, Secretary, Cortland Bancorp, 194 West Main Street, Cortland,
Ohio 44410.
IV-5
Exhibit 10.3
Cortland Bancorp
Amended Director Retirement Agreement
This
Amended Director Retirement Agreement
(this “Agreement”) is entered into as of
this 18th day of December, 2007, by and between Cortland Bancorp (the “Company”), a bank holding
company located in Cortland, Ohio, and Jerry A. Carleton, a director of the Company (the
“Director”).
Whereas
, to encourage the Director to remain a member of the Company’s board of
directors, the Company entered into a Director Retirement Agreement dated as of July 26, 2005, with
the Director, providing for specified retirement benefits for the Director after termination of
director service, payable from the Company’s general assets,
Whereas
, none of the conditions or events included in the definition of the term
“golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit
Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule
359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Company, is
contemplated insofar as the Company or the Cortland Savings and Banking Company is concerned, and
Whereas
, the Company and the Director intend that this Agreement shall amend and
restate in its entirety the July 26, 2005 Director Retirement Agreement.
Now Therefore
, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the
Company hereby agree as follows.
Article 1
Definitions
1.1
“
Accrual Balance
” means the liability that should be accrued by the Company under
generally accepted accounting principles (“GAAP”) for the Company’s obligation to the Director
under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by
Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate
specified hereinafter. The Accrual Balance at Normal Retirement Age shall equal the present value
of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator
for determining the Accrual Balance. The rate is based on the yield on a 20-year corporate bond
rated Aa by Moody’s, rounded to the nearest
1
/
4
%. The Plan Administrator may adjust the discount
rate to maintain the rate within reasonable standards according to GAAP.
1.2
“
Beneficiary
” means each designated person, determined according to Article 4, or the
estate of the deceased Director, entitled to benefits, if any, at the Director’s death.
1.3
“
Beneficiary Designation Form
” means the form established from time to time by the Plan
Administrator that the Director completes, signs, and returns to the Plan Administrator to
designate one or more Beneficiaries.
1.4
“
Change in Control
” means a change in control as defined in Code section 409A and rules,
regulations, and guidance of general application thereunder issued by the Department of the
Treasury, including –
(a)
Change in ownership
: a change in ownership of the Company occurs on the date any
one person or group accumulates ownership of Company stock constituting more than 50% of the
total fair market value or total voting power of Company stock,
(b)
Change in effective control
: (
x
) any one person, or more than one person acting as
a group, acquires within a 12-month period ownership of Company stock possessing 30% or more
of the total voting power of Company stock, or (
y
) a majority of the Company’s board of
directors is replaced during any 12-month period by directors whose appointment or election
is not endorsed in advance by a majority of the Company’s board of directors, or
(c)
Change in ownership of a substantial portion of assets
: a change in ownership of a
substantial portion of the Company’s assets occurs if in a 12-month period any one person or
more than one person acting as a group acquires from the Company assets having a total gross
fair market value equal to or exceeding 40% of the total gross fair market value of all of
the Company’s assets immediately before the acquisition or acquisitions. For this purpose,
gross fair market value means the value of the Company’s assets, or the value of the assets
being disposed of, determined without regard to any liabilities associated with the assets.
1.5
“
Code
” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and
guidance of general application issued by the Department of the Treasury under the Internal Revenue
Code of 1986, as amended.
1.6
“
Disability
” means, because of a medically determinable physical or mental impairment that
can be expected to result in death or that can be expected to last for a continuous period of at
least 12 months, (
x
) the Director is unable to engage in any substantial gainful activity, or (
y
)
the Director is receiving income replacement benefits for a period of at least three months under
an accident and health plan. Medical determination of disability may be made either by the Social
Security Administration or by the provider of an accident or health plan covering employees of the
Company or its subsidiaries. Upon request of the Plan Administrator, the Director must submit
proof to the Plan Administrator of the Social Security Administration’s or provider’s
determination.
1.7
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons
other than death, Disability, or Termination for Cause. Early Termination excludes a Separation
from Service governed by section 2.4.
2
1.8
“
Effective Date
” means March 1, 2005.
1.9
“
Normal Retirement Age
” means the Director’s 70
th
birthday.
1.10
“
Plan Administrator
” or “
Administrator
” means the plan administrator described in Article
7.
1.11
“
Plan Year
” means each 12-month period from the Effective Date of this Agreement.
1.12
“
Separation from Service
” means the Director’s service as a director and independent
contractor to the Company and any member of a controlled group, as defined in Code section 414,
terminates for any reason, other than because of a leave of absence approved by the Company or the
Director’s death. For purposes of this Agreement, if there is a dispute about the status of the
Director or the date of the Director’s Separation from Service, the Company shall have the sole and
absolute right to decide the dispute unless a Change in Control shall have occurred.
1.13
“
Termination for Cause
” or “
Cause
” means the Director is not nominated by the board or
nominating committee for reelection as a director after the expiration of his current term, or the
Director is removed from the board of directors, in either case –
(a) because of the Director’s gross negligence or gross neglect of duties, or
(b) because of the Director’s commission of a felony, or commission of a misdemeanor
involving moral turpitude, or
(c) because of the Director’s fraud, disloyalty, dishonesty, or willful violation of
any law or significant policy of the Company committed in connection with the Director’s
service and resulting in an adverse effect on the Company, or
(d) because the Director is removed from service or permanently prohibited from
participating in the Company’s or the Cortland Savings and Banking Company’s affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C.
1818(e)(4) or (g)(1)].
Article 2
Lifetime Benefits
2.1 Normal Retirement
. For Separation from Service on or after Normal Retirement Age, the
Company shall pay to the Director the benefit described in this section 2.1 instead of any other
benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates
under Article 5.
2.1.1
Amount of benefit
. The annual benefit under this section 2.1 is $10,000.
3
2.1.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director’s Separation from Service occurs, the Company shall pay the annual
benefit to the Director in 12 equal monthly installments on the first day of each month.
The annual benefit shall be paid to the Director for ten years.
2.2 Early Termination
. After Early Termination, the Company shall pay to the Director the
benefit described in this section 2.2 instead of any other benefit under this Agreement. However,
no benefits shall be payable if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.2 versus the benefit under section 2.4. If the Director’s
Separation from Service occurs within 12 months after a Change in Control, no benefit shall be
payable under this section 2.2 and the Director shall instead be entitled to the benefit under
section 2.4 or, if the Director first attained Normal Retirement Age, section 2.1.
2.2.1
Amount of benefit
. The annual benefit under this section 2.2 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.2.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.3 Disability Benefit
. If the Director’s Separation from Service occurs because of
Disability before Normal Retirement Age, the Company shall pay to the Director the benefit
described in this section 2.3 instead of any other benefit under this Agreement.
2.3.1
Amount of benefit
. The annual benefit under this section 2.3 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.3.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.4 Change in Control
. If the Director’s Separation from Service occurs within 12 months
after a Change in Control, the Company shall pay to the Director the benefit described in this
section 2.4 instead of any other benefit under this Agreement. However, no benefits shall be
payable under this Agreement if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.4 versus the Early Termination benefit under section 2.2.
4
If the Director’s Separation from Service occurs within 12 months after a Change in Control, no
benefit shall be payable under section 2.2 and the Director shall instead be entitled to the
benefit under this section 2.4. But if the Director shall have attained Normal Retirement Age when
Separation from Service within 12 months after a Change in Control occurs, the Director shall be
entitled solely to the benefit provided by section 2.1, not this section 2.4.
2.4.1
Amount of benefit
. The benefit under this section 2.4 is the Accrual Balance on
the date of the Director’s Separation from Service.
2.4.2
Payment of benefit
. The Company shall pay this benefit to the Director in a
single lump sum three days after the Director’s Separation from Service.
2.5 Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or
Disability Benefit When a Change in Control Occurs
. If a Change in Control occurs while the
Director is receiving the Normal Retirement Age benefit under section 2.1, the Company shall pay
the remaining salary continuation benefits to the Director in a single lump sum three days after
the Change in Control. If a Change in Control occurs after Separation from Service but while the
Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3, the Company shall pay the
remaining salary continuation benefits to the Director in a single lump sum three days after the
Change in Control. The lump-sum payment due to the Director as a result of a Change in Control
shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when
the Change in Control occurs.
2.6 Annual Benefit Statement
. Within 120 days after the end of each Plan Year the Plan
Administrator shall provide or cause to be provided to the Director an annual benefit statement
showing benefits payable or potentially payable to the Director under this Agreement. Each annual
benefit statement shall supersede the previous year’s annual benefit statement. If there is a
contradiction between this Agreement and the annual benefit statement concerning the amount of a
particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4
hereof, the amount of the benefit determined under the Agreement shall control.
2.7 Savings Clause Relating to Compliance with Code Section 409A
. If any provision of this
Agreement would subject the Director to additional tax or interest under Code section 409A, the
Company shall reform the provision. However, the Company shall maintain to the maximum extent
practicable the original intent of the applicable provision without subjecting the Director to
additional tax or interest, and the Company shall not be required to incur any additional
compensation expense as a result of the reformed provision.
2.8 One Benefit Only
. Despite anything to the contrary in this Agreement, the Director and
Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the
first event to occur that is dealt with by this Agreement. Except as provided in section 2.5 or
Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the
Director or Beneficiary to other or additional benefits under this Agreement.
5
Article 3
Death Benefits
3.1 Death Before Normal Retirement Age and Before Separation from Service
. If the Director
dies before Normal Retirement Age and before Separation from Service, 30 days after the Director’s
death the Company shall pay to the Director’s Beneficiary in a single lump sum an amount equal to
the Accrual Balance on the date of the Director’s death.
3.2 Death After Normal Retirement Age but Before Separation from Service
. If the Director
dies after Normal Retirement Age but before Separation from Service, the Company shall for a period
of ten years pay to the Director’s Beneficiary the Normal Retirement Benefit specified in section
2.1.
3.3 Death Before Normal Retirement Age but After Separation from Service
. (a)
After payments
begin
. If, a Separation from Service before Normal Retirement Age having previously occurred, the
Director dies after Early Termination benefits under section 2.2 or Disability benefits under
section 2.3 begin but before receiving all such payments, the Company shall pay the remaining
benefits to the Director’s Beneficiary at the same time and in the same amounts the payments would
have been made to the Director had the Director survived.
(b)
Before payments begin
. If, a Separation from Service before Normal Retirement Age having
previously occurred, the Director is entitled at Normal Retirement Age to the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3 but dies before the benefit
payments begin, the Company shall pay to the Director’s Beneficiary the Early Termination benefit
under section 2.2 or the Disability benefit under section 2.3, as the case may be, but the benefit
payments shall begin on the first day of the month immediately after the month in which the
Director’s death occurs.
3.4 Death After Separation from Service After Normal Retirement Age
. (a)
After payments
begin
. If, a Separation from Service on or after Normal Retirement Age having previously occurred,
the Director dies after benefit payments under section 2.1 begin but before receiving all such
payments, the Company shall pay the remaining benefits to the Director’s Beneficiary at the same
time and in the same amounts the payments would have been made to the Director had the Director
survived.
(b)
Before payments begin
. If, a Separation from Service on or after Normal Retirement Age
having previously occurred, the Director is entitled to the benefit under section Article 2.1 but
dies before the benefit payments begin, beginning with the month immediately after the month in
which the Director’s death occurs the Company shall pay to the Director’s Beneficiary the Normal
Retirement benefit under section 2.1.
Article 4
Beneficiaries
4.1 Beneficiary Designations
. The Director shall have the right to designate at any time a
Beneficiary to receive any benefits payable under this Agreement after the Director’s
6
death. The Beneficiary designated under this Agreement may be the same as or different from the
beneficiary designation under any other benefit plan of the Company in which the Director
participates.
4.2 Beneficiary Designation: Change
. The Director shall designate a Beneficiary by completing
and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its
designated agent. The Director’s Beneficiary designation shall be deemed automatically revoked if
the Beneficiary predeceases the Director or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by
completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and
the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance
by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations
previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last
Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before
the Director’s death.
4.3 Acknowledgment
. No designation or change in designation of a Beneficiary shall be
effective until received, accepted, and acknowledged in writing by the Plan Administrator or its
designated agent.
4.4 No Beneficiary Designation
. If the Director dies without a valid beneficiary designation,
or if all designated Beneficiaries predecease the Director, then the Director’s spouse shall be the
designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the
personal representative of the Director’s estate.
4.5 Facility of Payment
. If a benefit is payable to a minor, to a person declared
incapacitated, or to a person incapable of handling the disposition of his or her property, the
Company may pay such benefit to the guardian, legal representative, or person having the care or
custody of the minor, incapacitated person, or incapable person. The Company may require proof of
incapacity, minority, or guardianship as it may deem appropriate before distribution of the
benefit. Distribution shall completely discharge the Company from all liability for the benefit.
Article 5
General Limitations
5.1 Termination for Cause
. Despite any contrary provision of this Agreement, the Company
shall not pay any benefit under this Agreement and this Agreement shall terminate if the Director’s
Separation from Service is the result of Termination for Cause. Likewise, no benefits shall be
paid under the Split Dollar Agreement and Endorsement, as amended, between the Company and the
Director and the Split Dollar Agreement and Endorsement, as amended, also shall terminate if
Separation from Service is the result of Termination for Cause. The board of directors or a duly
authorized committee of the board shall have the sole and absolute right to determine whether the
bases for denial of benefits for cause exist. Benefits may be denied for cause regardless of
whether the Director continued to serve as a director after the board or committee made its
determination not to nominate the Director for reelection.
7
5.2 Misstatement
. The Company shall not pay any benefit under this Agreement if the Director
has made any material misstatement of fact on any application for life insurance purchased by the
Company.
5.3 Removal
. If the Director is removed or permanently prohibited from participating in the
Company’s or the Cortland Savings and Banking Company’s affairs by an order issued under section
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all
obligations of the Company under this Agreement shall terminate as of the effective date of the
order, and the Split Dollar Agreement and Endorsement, as amended, also shall terminate.
5.4 Default
. Despite any contrary provision of this Agreement, if the Company or the Cortland
Savings and Banking Company is in “default” or “in danger of default,” as those terms are defined
in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this
Agreement shall terminate.
5.5 FDIC Open-Bank Assistance
. All obligations under this Agreement shall terminate, except
to the extent determined that continuation of the contract is necessary for the continued operation
of the Cortland Savings and Banking Company, when the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the Cortland Savings and Banking Company
under the authority contained in section 13(c) of the Federal Deposit Insurance Act. 12 U.S.C.
1823(c). Any rights of the parties that have already vested shall not be affected by such action,
however.
Article 6
Claims and Review Procedures
6.1 Claims Procedure
. The Company shall notify any person or entity that makes a claim for
benefits under this Agreement (the “Claimant”) in writing, within 90 days of Claimant’s written
application for benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (
w
) the specific reasons for such denial, (
x
) a specific
reference to the provisions of the Agreement on which the denial is based, (
y
) a description of any
additional information or material necessary for the Claimant to perfect his or her claim, and a
description of why it is needed, and (
z
) an explanation of the Agreement’s claims review procedure
and other appropriate information as to the steps to be taken if the Claimant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may extend the time for
up to an additional 90 days.
6.2 Review Procedure
. If the Claimant is determined by the Company not to be eligible for
benefits, or if the Claimant believes that he or she is entitled to greater or different benefits,
the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a
petition for review with the Company within 60 days after receipt of the notice issued
8
by the Company. Said petition shall state the specific reasons, which the Claimant believes
entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt
by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Company verbally or in writing, and the Claimant
(or counsel) shall have the right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the 60-day period, stating specifically the basis of its
decision, written in a manner to be understood by the Claimant and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period
is not sufficient, the decision may be deferred for up to another 60 days at the election of the
Company, but notice of this deferral shall be given to the Claimant.
Article 7
Administration of Agreement
7.1 Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator
consisting of the Company’s board of directors or such committee or person(s) as the board shall
appoint. The Director may be a member of the Plan Administrator. The Plan Administrator shall
also have the discretion and authority to (
x
) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Agreement and (
y
) decide or resolve any and
all questions, including interpretations of this Agreement, as may arise in connection with the
Agreement.
7.2 Agents
. In the administration of this Agreement, the Plan Administrator may employ agents
and delegate to them such administrative duties as it sees fit (including acting through a duly
appointed representative), and may from time to time consult with counsel, who may be counsel to
the Company.
7.3 Binding Effect of Decisions
. The decision or action of the Plan Administrator about any
question arising out of the administration, interpretation, and application of the Agreement and
the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Agreement. No Director or Beneficiary shall be deemed to have
any right, vested or nonvested, regarding the continued use of any previously adopted assumptions,
including but not limited to the discount rate and calculation method employed in the determination
of the Accrual Balance.
7.4 Indemnity of Plan Administrator
. The Company shall indemnify and hold harmless the
members of the Plan Administrator against any and all claims, losses, damages, expenses, or
liabilities arising from any action or failure to act with respect to this Agreement, except in the
case of willful misconduct by the Plan Administrator or any of its members.
7.5 Company Information
. To enable the Plan Administrator to perform its functions, the
Company shall supply full and timely information to the Plan Administrator on all matters relating
to the date and circumstances of the retirement, Disability, death, or Separation from Service of
the Director, and such other pertinent information as the Plan Administrator may reasonably
require.
9
Article 8
Miscellaneous
8.1 Amendment and Termination
. This Agreement may be amended solely by a written agreement
signed by the Company and by the Director. Except as provided in Article 5, this Agreement may be
terminated solely by a written agreement signed by the Company and by the Director.
8.2 Binding Effect
. This Agreement shall bind the Director and the Company, and their
beneficiaries, survivors, executors, successors, administrators, and transferees.
8.3 No Guarantee of Service
. This Agreement is not a contract for services. It does not give
the Director the right to remain a Director of the Company nor does it interfere with the right of
the Company’s shareholders not to re-elect the Director or the right of shareholders or the Board
to remove an individual as a director of the Company. The Agreement also does not require the
Director to remain a director or interfere with the Director’s right to terminate service at any
time.
8.4 Non-Transferability
. Benefits under this Agreement may not be sold, transferred,
assigned, pledged, attached, or encumbered.
8.5 Successors
;
Binding Agreement
. By an assumption agreement in form and substance
satisfactory to the Director, the Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform this Agreement had no
succession occurred.
8.6 Tax Withholding
. The Company shall withhold any taxes that are required to be withheld
from the benefits provided under this Agreement.
8.7 Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of
the State of Ohio, except to the extent preempted by the laws of the United States of America.
8.8 Unfunded Arrangement
. The Director and Beneficiary are general unsecured creditors of the
Company for the payment of benefits under this Agreement. The benefits represent the mere promise
by the Company to pay benefits. The rights to benefits are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director’s life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
8.9 Entire Agreement
. This Agreement and the Split Dollar Agreement and Endorsement, as
amended, constitute the entire agreement between the Company and the Director concerning the
subject matter hereof. No rights are granted to the Director under this
10
Agreement other than those specifically set forth herein. This Agreement amends and restates in
its entirety the Director Retirement Agreement dated as of July 26, 2005.
8.10 Severability
. If any provision of this Agreement is held invalid, such invalidity shall
not affect any other provision of this Agreement not held invalid, and each such other provision
shall continue in full force and effect to the full extent consistent with law. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such
provision, and the remainder of such provision, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent with law.
8.11 Captions and Counterparts
. Captions and section headings in this Agreement are included
solely for convenience of reference and shall not affect the meaning or interpretation of any
provision of this Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one and the same
instrument.
8.12 Notices
. All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, return receipt requested, with postage prepaid, to the following addresses or to
such other address as either party may designate by like notice. If to the Company, notice shall
be given to the board of directors, Cortland Bancorp, 194 W. Main Street, P.O. Box 98, Cortland,
Ohio 44410-1466, or to such other or additional person or persons as the Company shall have
designated to the Director in writing. If to the Director, notice shall be given to the Director
at the address of the Director appearing on the Company’s records, or to such other or additional
person or persons as the Director shall have designated to the Company in writing.
In Witness Whereof
, the Director and a duly authorized Company officer have executed
this Amended Director Retirement Agreement as of the date first written above.
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Director
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Cortland Bancorp
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By:
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Title:
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11
Beneficiary Designation
Cortland Bancorp
Amended Director Retirement Agreement
I, Jerry A. Carleton, designate the following as beneficiary of any death benefits under this
Amended Director Retirement Agreement:
Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the
exact
name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new written
designation with the Company. I further understand that the designations will be automatically
revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our
marriage is subsequently dissolved.
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Signature:
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Jerry A. Carleton
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Date:
, 200
Received
by the Company
this
day of
, 200
.
By:
Title:
12
Exhibit 10.4
Cortland Bancorp
Amended Director Retirement Agreement
This
Amended Director Retirement Agreement
(this “Agreement”) is entered into as of
this 18
th
day of December, 2007, by and between Cortland Bancorp (the “Company”), a bank
holding company located in Cortland, Ohio, and David C. Cole, a director of the Company (the
“Director”).
Whereas
, to encourage the Director to remain a member of the Company’s board of
directors, the Company entered into a Director Retirement Agreement with the Director dated as of
March 1, 2001, as amended February 24, 2004, providing for specified retirement benefits for the
Director after termination of director service, payable from the Company’s general assets,
Whereas
, none of the conditions or events included in the definition of the term
“golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit
Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule
359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Company, is
contemplated insofar as the Company or the Cortland Savings and Banking Company is concerned, and
Whereas
, the Company and the Director intend that this Agreement shall amend and
restate in its entirety the March 1, 2001 Director Retirement Agreement, as amended February 24,
2004.
Now Therefore
, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the
Company hereby agree as follows.
Article 1
Definitions
1.1
“
Accrual Balance
” means the liability that should be accrued by the Company under
generally accepted accounting principles (“GAAP”) for the Company’s obligation to the Director
under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by
Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate
specified hereinafter. The Accrual Balance at Normal Retirement Age shall equal the present value
of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator
for determining the Accrual Balance. The rate is based on the yield on a 20-year corporate bond
rated Aa by Moody’s, rounded to the nearest
1
/
4
%. The Plan Administrator may adjust the discount
rate to maintain the rate within reasonable standards according to GAAP.
1.2
“
Beneficiary
” means each designated person, determined according to Article 4, or the
estate of the deceased Director, entitled to benefits, if any, at the Director’s death.
1.3
“
Beneficiary Designation Form
” means the form established from time to time by the Plan
Administrator that the Director completes, signs, and returns to the Plan Administrator to
designate one or more Beneficiaries.
1.4
“
Change in Control
” means a change in control as defined in Code section 409A and rules,
regulations, and guidance of general application thereunder issued by the Department of the
Treasury, including —
(a)
Change in ownership
: a change in ownership of the Company occurs on the date any
one person or group accumulates ownership of Company stock constituting more than 50% of the
total fair market value or total voting power of Company stock,
(b)
Change in effective control
: (
x
) any one person, or more than one person acting as
a group, acquires within a 12-month period ownership of Company stock possessing 30% or more
of the total voting power of Company stock, or (
y
) a majority of the Company’s board of
directors is replaced during any 12-month period by directors whose appointment or election
is not endorsed in advance by a majority of the Company’s board of directors, or
(c)
Change in ownership of a substantial portion of assets
: a change in ownership of a
substantial portion of the Company’s assets occurs if in a 12-month period any one person or
more than one person acting as a group acquires from the Company assets having a total gross
fair market value equal to or exceeding 40% of the total gross fair market value of all of
the Company’s assets immediately before the acquisition or acquisitions. For this purpose,
gross fair market value means the value of the Company’s assets, or the value of the assets
being disposed of, determined without regard to any liabilities associated with the assets.
1.5
“
Code
” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and
guidance of general application issued by the Department of the Treasury under the Internal Revenue
Code of 1986, as amended.
1.6
“
Disability
” means, because of a medically determinable physical or mental impairment that
can be expected to result in death or that can be expected to last for a continuous period of at
least 12 months, (
x
) the Director is unable to engage in any substantial gainful activity, or (
y
)
the Director is receiving income replacement benefits for a period of at least three months under
an accident and health plan. Medical determination of disability may be made either by the Social
Security Administration or by the provider of an accident or health plan covering employees of the
Company or its subsidiaries. Upon request of the Plan Administrator, the Director must submit
proof to the Plan Administrator of the Social Security Administration’s or provider’s
determination.
1.7
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons
other than death, Disability, or Termination for Cause. Early Termination excludes a Separation
from Service governed by section 2.4.
2
1.8
“
Effective Date
” means March 1, 2001.
1.9
“
Normal Retirement Age
” means the Director’s 61
st
birthday.
1.10
“
Plan Administrator
” or “
Administrator
” means the plan administrator described in Article 7.
1.11
“
Plan Year
” means each 12-month period from the Effective Date of this Agreement.
1.12
“
Separation from Service
” means the Director’s service as a director and independent
contractor to the Company and any member of a controlled group, as defined in Code section 414,
terminates for any reason, other than because of a leave of absence approved by the Company or the
Director’s death. For purposes of this Agreement, if there is a dispute about the status of the
Director or the date of the Director’s Separation from Service, the Company shall have the sole and
absolute right to decide the dispute unless a Change in Control shall have occurred.
1.13
“
Termination for Cause
” or “
Cause
” means the Director is not nominated by the board or
nominating committee for reelection as a director after the expiration of his current term, or the
Director is removed from the board of directors, in either case —
(a) because of the Director’s gross negligence or gross neglect of duties, or
(b) because of the Director’s commission of a felony, or commission of a misdemeanor
involving moral turpitude, or
(c) because of the Director’s fraud, disloyalty, dishonesty, or willful violation of
any law or significant policy of the Company committed in connection with the Director’s
service and resulting in an adverse effect on the Company, or
(d) because the Director is removed from service or permanently prohibited from
participating in the Company’s or the Cortland Savings and Banking Company’s affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C.
1818(e)(4) or (g)(1)].
Article 2
Lifetime Benefits
2.1 Normal Retirement
. For Separation from Service on or after Normal Retirement Age, the
Company shall pay to the Director the benefit described in this section 2.1 instead of any other
benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates
under Article 5.
2.1.1
Amount of benefit
. The annual benefit under this section 2.1 is $10,000.
3
2.1.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director’s Separation from Service occurs, the Company shall pay the annual
benefit to the Director in 12 equal monthly installments on the first day of each month.
The annual benefit shall be paid to the Director for ten years.
2.2 Early Termination
. After Early Termination, the Company shall pay to the Director the
benefit described in this section 2.2 instead of any other benefit under this Agreement. However,
no benefits shall be payable if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.2 versus the benefit under section 2.4. If the Director’s
Separation from Service occurs within 12 months after a Change in Control, no benefit shall be
payable under this section 2.2 and the Director shall instead be entitled to the benefit under
section 2.4 or, if the Director first attained Normal Retirement Age, section 2.1.
2.2.1
Amount of benefit
. The annual benefit under this section 2.2 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.2.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.3 Disability Benefit
. If the Director’s Separation from Service occurs because of
Disability before Normal Retirement Age, the Company shall pay to the Director the benefit
described in this section 2.3 instead of any other benefit under this Agreement.
2.3.1
Amount of benefit
. The annual benefit under this section 2.3 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.3.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.4 Change in Control
. If the Director’s Separation from Service occurs within 12 months
after a Change in Control, the Company shall pay to the Director the benefit described in this
section 2.4 instead of any other benefit under this Agreement. However, no benefits shall be
payable under this Agreement if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.4 versus the Early Termination benefit under section 2.2.
4
If the Director’s Separation from Service occurs within 12 months after a Change in Control, no
benefit shall be payable under section 2.2 and the Director shall instead be entitled to the
benefit under this section 2.4. But if the Director shall have attained Normal Retirement Age when
Separation from Service within 12 months after a Change in Control occurs, the Director shall be
entitled solely to the benefit provided by section 2.1, not this section 2.4.
2.4.1
Amount of benefit
. The benefit under this section 2.4 is the Accrual Balance on
the date of the Director’s Separation from Service.
2.4.2
Payment of benefit
. The Company shall pay this benefit to the Director in a
single lump sum three days after the Director’s Separation from Service.
2.5 Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or
Disability Benefit When a Change in Control Occurs
. If a Change in Control occurs while the
Director is receiving the Normal Retirement Age benefit under section 2.1, the Company shall pay
the remaining salary continuation benefits to the Director in a single lump sum three days after
the Change in Control. If a Change in Control occurs after Separation from Service but while the
Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3, the Company shall pay the
remaining salary continuation benefits to the Director in a single lump sum three days after the
Change in Control. The lump-sum payment due to the Director as a result of a Change in Control
shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when
the Change in Control occurs.
2.6 Annual Benefit Statement
. Within 120 days after the end of each Plan Year the Plan
Administrator shall provide or cause to be provided to the Director an annual benefit statement
showing benefits payable or potentially payable to the Director under this Agreement. Each annual
benefit statement shall supersede the previous year’s annual benefit statement. If there is a
contradiction between this Agreement and the annual benefit statement concerning the amount of a
particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4
hereof, the amount of the benefit determined under the Agreement shall control.
2.7 Savings Clause Relating to Compliance with Code Section 409A
. If any provision of this
Agreement would subject the Director to additional tax or interest under Code section 409A, the
Company shall reform the provision. However, the Company shall maintain to the maximum extent
practicable the original intent of the applicable provision without subjecting the Director to
additional tax or interest, and the Company shall not be required to incur any additional
compensation expense as a result of the reformed provision.
2.8 One Benefit Only
. Despite anything to the contrary in this Agreement, the Director and
Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the
first event to occur that is dealt with by this Agreement. Except as provided in section 2.5 or
Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the
Director or Beneficiary to other or additional benefits under this Agreement.
5
Article 3
Death Benefits
3.1 Death Before Normal Retirement Age and Before Separation from Service
. If the Director
dies before Normal Retirement Age and before Separation from Service, 30 days after the Director’s
death the Company shall pay to the Director’s Beneficiary in a single lump sum an amount equal to
the Accrual Balance on the date of the Director’s death.
3.2 Death After Normal Retirement Age but Before Separation from Service
. If the Director
dies after Normal Retirement Age but before Separation from Service, the Company shall for a period
of ten years pay to the Director’s Beneficiary the Normal Retirement Benefit specified in section
2.1.
3.3 Death Before Normal Retirement Age but After Separation from Service
. (a)
After payments
begin
. If, a Separation from Service before Normal Retirement Age having previously occurred, the
Director dies after Early Termination benefits under section 2.2 or Disability benefits under
section 2.3 begin but before receiving all such payments, the Company shall pay the remaining
benefits to the Director’s Beneficiary at the same time and in the same amounts the payments would
have been made to the Director had the Director survived.
(b)
Before payments begin
. If, a Separation from Service before Normal Retirement Age having
previously occurred, the Director is entitled at Normal Retirement Age to the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3 but dies before the benefit
payments begin, the Company shall pay to the Director’s Beneficiary the Early Termination benefit
under section 2.2 or the Disability benefit under section 2.3, as the case may be, but the benefit
payments shall begin on the first day of the month immediately after the month in which the
Director’s death occurs.
3.4 Death After Separation from Service After Normal Retirement Age
. (a)
After payments
begin
. If, a Separation from Service on or after Normal Retirement Age having previously occurred,
the Director dies after benefit payments under section 2.1 begin but before receiving all such
payments, the Company shall pay the remaining benefits to the Director’s Beneficiary at the same
time and in the same amounts the payments would have been made to the Director had the Director
survived.
(b)
Before payments begin
. If, a Separation from Service on or after Normal Retirement Age
having previously occurred, the Director is entitled to the benefit under section Article 2.1 but
dies before the benefit payments begin, beginning with the month immediately after the month in
which the Director’s death occurs the Company shall pay to the Director’s Beneficiary the Normal
Retirement benefit under section 2.1.
Article 4
Beneficiaries
4.1 Beneficiary Designations
. The Director shall have the right to designate at any time a
Beneficiary to receive any benefits payable under this Agreement after the Director’s
6
death. The Beneficiary designated under this Agreement may be the same as or different from the
beneficiary designation under any other benefit plan of the Company in which the Director
participates.
4.2 Beneficiary Designation: Change
. The Director shall designate a Beneficiary by completing
and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its
designated agent. The Director’s Beneficiary designation shall be deemed automatically revoked if
the Beneficiary predeceases the Director or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by
completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and
the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance
by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations
previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last
Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before
the Director’s death.
4.3 Acknowledgment
. No designation or change in designation of a Beneficiary shall be
effective until received, accepted, and acknowledged in writing by the Plan Administrator or its
designated agent.
4.4 No Beneficiary Designation
. If the Director dies without a valid beneficiary designation,
or if all designated Beneficiaries predecease the Director, then the Director’s spouse shall be the
designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the
personal representative of the Director’s estate.
4.5 Facility of Payment
. If a benefit is payable to a minor, to a person declared
incapacitated, or to a person incapable of handling the disposition of his or her property, the
Company may pay such benefit to the guardian, legal representative, or person having the care or
custody of the minor, incapacitated person, or incapable person. The Company may require proof of
incapacity, minority, or guardianship as it may deem appropriate before distribution of the
benefit. Distribution shall completely discharge the Company from all liability for the benefit.
Article 5
General Limitations
5.1 Termination for Cause
. Despite any contrary provision of this Agreement, the Company
shall not pay any benefit under this Agreement and this Agreement shall terminate if the Director’s
Separation from Service is the result of Termination for Cause. Likewise, no benefits shall be
paid under the Split Dollar Agreement and Endorsement, as amended, between the Company and the
Director and the Split Dollar Agreement and Endorsement, as amended, also shall terminate if
Separation from Service is the result of Termination for Cause. The board of directors or a duly
authorized committee of the board shall have the sole and absolute right to determine whether the
bases for denial of benefits for cause exist. Benefits may be denied for cause regardless of
whether the Director continued to serve as a director after the board or committee made its
determination not to nominate the Director for reelection.
7
5.2 Misstatement
. The Company shall not pay any benefit under this Agreement if the Director
has made any material misstatement of fact on any application for life insurance purchased by the
Company.
5.3 Removal
. If the Director is removed or permanently prohibited from participating in the
Company’s or the Cortland Savings and Banking Company’s affairs by an order issued under section
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all
obligations of the Company under this Agreement shall terminate as of the effective date of the
order, and the Split Dollar Agreement and Endorsement, as amended, also shall terminate.
5.4 Default
. Despite any contrary provision of this Agreement, if the Company or the Cortland
Savings and Banking Company is in “default” or “in danger of default,” as those terms are defined
in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this
Agreement shall terminate.
5.5 FDIC Open-Bank Assistance
. All obligations under this Agreement shall terminate, except
to the extent determined that continuation of the contract is necessary for the continued operation
of the Cortland Savings and Banking Company, when the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the Cortland Savings and Banking Company
under the authority contained in section 13(c) of the Federal Deposit Insurance Act. 12 U.S.C.
1823(c). Any rights of the parties that have already vested shall not be affected by such action,
however.
Article 6
Claims and Review Procedures
6.1 Claims Procedure
. The Company shall notify any person or entity that makes a claim for
benefits under this Agreement (the “Claimant”) in writing, within 90 days of Claimant’s written
application for benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (
w
) the specific reasons for such denial, (
x
) a specific
reference to the provisions of the Agreement on which the denial is based, (
y
) a description of any
additional information or material necessary for the Claimant to perfect his or her claim, and a
description of why it is needed, and (
z
) an explanation of the Agreement’s claims review procedure
and other appropriate information as to the steps to be taken if the Claimant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may extend the time for
up to an additional 90 days.
6.2 Review Procedure
. If the Claimant is determined by the Company not to be eligible for
benefits, or if the Claimant believes that he or she is entitled to greater or different benefits,
the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a
petition for review with the Company within 60 days after receipt of the notice issued
8
by the Company. Said petition shall state the specific reasons, which the Claimant believes
entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt
by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Company verbally or in writing, and the Claimant
(or counsel) shall have the right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the 60-day period, stating specifically the basis of its
decision, written in a manner to be understood by the Claimant and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period
is not sufficient, the decision may be deferred for up to another 60 days at the election of the
Company, but notice of this deferral shall be given to the Claimant.
Article 7
Administration of Agreement
7.1 Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator
consisting of the Company’s board of directors or such committee or person(s) as the board shall
appoint. The Director may be a member of the Plan Administrator. The Plan Administrator shall
also have the discretion and authority to (
x
) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Agreement and (
y
) decide or resolve any and
all questions, including interpretations of this Agreement, as may arise in connection with the
Agreement.
7.2 Agents
. In the administration of this Agreement, the Plan Administrator may employ agents
and delegate to them such administrative duties as it sees fit (including acting through a duly
appointed representative), and may from time to time consult with counsel, who may be counsel to
the Company.
7.3 Binding Effect of Decisions
. The decision or action of the Plan Administrator about any
question arising out of the administration, interpretation, and application of the Agreement and
the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Agreement. No Director or Beneficiary shall be deemed to have
any right, vested or nonvested, regarding the continued use of any previously adopted assumptions,
including but not limited to the discount rate and calculation method employed in the determination
of the Accrual Balance.
7.4 Indemnity of Plan Administrator
. The Company shall indemnify and hold harmless the
members of the Plan Administrator against any and all claims, losses, damages, expenses, or
liabilities arising from any action or failure to act with respect to this Agreement, except in the
case of willful misconduct by the Plan Administrator or any of its members.
7.5 Company Information
. To enable the Plan Administrator to perform its functions, the
Company shall supply full and timely information to the Plan Administrator on all matters relating
to the date and circumstances of the retirement, Disability, death, or Separation from Service of
the Director, and such other pertinent information as the Plan Administrator may reasonably
require.
9
Article 8
Miscellaneous
8.1 Amendment and Termination
. This Agreement may be amended solely by a written agreement
signed by the Company and by the Director. Except as provided in Article 5, this Agreement may be
terminated solely by a written agreement signed by the Company and by the Director.
8.2 Binding Effect
. This Agreement shall bind the Director and the Company, and their
beneficiaries, survivors, executors, successors, administrators, and transferees.
8.3 No Guarantee of Service
. This Agreement is not a contract for services. It does not give
the Director the right to remain a Director of the Company nor does it interfere with the right of
the Company’s shareholders not to re-elect the Director or the right of shareholders or the Board
to remove an individual as a director of the Company. The Agreement also does not require the
Director to remain a director or interfere with the Director’s right to terminate service at any
time.
8.4 Non-Transferability
. Benefits under this Agreement may not be sold, transferred,
assigned, pledged, attached, or encumbered.
8.5 Successors
;
Binding Agreement
. By an assumption agreement in form and substance
satisfactory to the Director, the Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform this Agreement had no
succession occurred.
8.6 Tax Withholding
. The Company shall withhold any taxes that are required to be withheld
from the benefits provided under this Agreement.
8.7 Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of
the State of Ohio, except to the extent preempted by the laws of the United States of America.
8.8 Unfunded Arrangement
. The Director and Beneficiary are general unsecured creditors of the
Company for the payment of benefits under this Agreement. The benefits represent the mere promise
by the Company to pay benefits. The rights to benefits are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director’s life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
8.9 Entire Agreement
. This Agreement and the Split Dollar Agreement and Endorsement, as
amended, constitute the entire agreement between the Company and the Director concerning the
subject matter hereof. No rights are granted to the Director under this Agreement other than those
specifically set forth herein. This Agreement amends and restates in
10
its entirety the Director Retirement Agreement dated as of March 1, 2001, as amended February 24,
2004.
8.10 Severability
. If any provision of this Agreement is held invalid, such invalidity shall
not affect any other provision of this Agreement not held invalid, and each such other provision
shall continue in full force and effect to the full extent consistent with law. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such
provision, and the remainder of such provision, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent with law.
8.11 Captions and Counterparts
. Captions and section headings in this Agreement are included
solely for convenience of reference and shall not affect the meaning or interpretation of any
provision of this Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one and the same
instrument.
8.12 Notices
. All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, return receipt requested, with postage prepaid, to the following addresses or to
such other address as either party may designate by like notice. If to the Company, notice shall
be given to the board of directors, Cortland Bancorp, 194 W. Main Street, P.O. Box 98, Cortland,
Ohio 44410-1466, or to such other or additional person or persons as the Company shall have
designated to the Director in writing. If to the Director, notice shall be given to the Director
at the address of the Director appearing on the Company’s records, or to such other or additional
person or persons as the Director shall have designated to the Company in writing.
In Witness Whereof
, the Director and a duly authorized Company officer have executed
this Amended Director Retirement Agreement as of the date first written above.
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Director
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Cortland Bancorp
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By:
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Title:
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11
Beneficiary Designation
Cortland Bancorp
Amended Director Retirement Agreement
I, David C. Cole, designate the following as beneficiary of any death benefits under this
Amended Director Retirement Agreement:
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Note:
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To name a trust as beneficiary, please provide the name of the trustee(s) and the
exact
name and date of the trust agreement.
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I understand that I may change these beneficiary designations by filing a new written
designation with the Company. I further understand that the designations will be automatically
revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our
marriage is subsequently dissolved.
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Signature:
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David C. Cole
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Date:
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200___
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Received by the Company this
day of
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12
Exhibit 10.5
Cortland Bancorp
Amended Director Retirement Agreement
This
Amended Director Retirement Agreement
(this “Agreement”) is entered into as of
this 18
th
day of December, 2007, by and between Cortland Bancorp (the “Company”), a bank
holding company located in Cortland, Ohio, and George E. Gessner, a director of the Company (the
“Director”).
Whereas
, to encourage the Director to remain a member of the Company’s board of
directors, the Company entered into a Director Retirement Agreement with the Director dated as of
March 1, 2001, as amended February 24, 2004, providing for specified retirement benefits for the
Director after termination of director service, payable from the Company’s general assets,
Whereas
, none of the conditions or events included in the definition of the term
“golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit
Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule
359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Company, is
contemplated insofar as the Company or the Cortland Savings and Banking Company is concerned, and
Whereas
, the Company and the Director intend that this Agreement shall amend and
restate in its entirety the March 1, 2001 Director Retirement Agreement, as amended February 24,
2004.
Now Therefore
, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the
Company hereby agree as follows.
Article 1
Definitions
1.1
“
Accrual Balance
” means the liability that should be accrued by the Company under
generally accepted accounting principles (“GAAP”) for the Company’s obligation to the Director
under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by
Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate
specified hereinafter. The Accrual Balance at Normal Retirement Age shall equal the present value
of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator
for determining the Accrual Balance. The rate is based on the yield on a 20-year corporate bond
rated Aa by Moody’s, rounded to the nearest
1
/
4
%. The Plan Administrator may adjust the discount
rate to maintain the rate within reasonable standards according to GAAP.
1.2
“
Beneficiary
” means each designated person, determined according to Article 4, or the
estate of the deceased Director, entitled to benefits, if any, at the Director’s death.
1.3
“
Beneficiary Designation Form
” means the form established from time to time by the Plan
Administrator that the Director completes, signs, and returns to the Plan Administrator to
designate one or more Beneficiaries.
1.4
“
Change in Control
” means a change in control as defined in Code section 409A and rules,
regulations, and guidance of general application thereunder issued by the Department of the
Treasury, including –
(a)
Change in ownership
: a change in ownership of the Company occurs on the date any
one person or group accumulates ownership of Company stock constituting more than 50% of the
total fair market value or total voting power of Company stock,
(b)
Change in effective control
: (
x
) any one person, or more than one person acting as
a group, acquires within a 12-month period ownership of Company stock possessing 30% or more
of the total voting power of Company stock, or (
y
) a majority of the Company’s board of
directors is replaced during any 12-month period by directors whose appointment or election
is not endorsed in advance by a majority of the Company’s board of directors, or
(c)
Change in ownership of a substantial portion of assets
: a change in ownership of a
substantial portion of the Company’s assets occurs if in a 12-month period any one person or
more than one person acting as a group acquires from the Company assets having a total gross
fair market value equal to or exceeding 40% of the total gross fair market value of all of
the Company’s assets immediately before the acquisition or acquisitions. For this purpose,
gross fair market value means the value of the Company’s assets, or the value of the assets
being disposed of, determined without regard to any liabilities associated with the assets.
1.5
“
Code
” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and
guidance of general application issued by the Department of the Treasury under the Internal Revenue
Code of 1986, as amended.
1.6
“
Disability
” means, because of a medically determinable physical or mental impairment that
can be expected to result in death or that can be expected to last for a continuous period of at
least 12 months, (
x
) the Director is unable to engage in any substantial gainful activity, or (
y
)
the Director is receiving income replacement benefits for a period of at least three months under
an accident and health plan. Medical determination of disability may be made either by the Social
Security Administration or by the provider of an accident or health plan covering employees of the
Company or its subsidiaries. Upon request of the Plan Administrator, the Director must submit
proof to the Plan Administrator of the Social Security Administration’s or provider’s
determination.
1.7
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons
other than death, Disability, or Termination for Cause. Early Termination excludes a Separation
from Service governed by section 2.4.
2
1.8
“
Effective Date
” means March 1, 2001.
1.9
“
Normal Retirement Age
” means the Director’s 66
th
birthday.
1.10
“
Plan Administrator
” or “
Administrator
” means the plan administrator described in Article
7.
1.11
“
Plan Year
” means each 12-month period from the Effective Date of this Agreement.
1.12
“
Separation from Service
” means the Director’s service as a director and independent
contractor to the Company and any member of a controlled group, as defined in Code section 414,
terminates for any reason, other than because of a leave of absence approved by the Company or the
Director’s death. For purposes of this Agreement, if there is a dispute about the status of the
Director or the date of the Director’s Separation from Service, the Company shall have the sole and
absolute right to decide the dispute unless a Change in Control shall have occurred.
1.13
“
Termination for Cause
” or “
Cause
” means the Director is not nominated by the board or
nominating committee for reelection as a director after the expiration of his current term, or the
Director is removed from the board of directors, in either case –
(a) because of the Director’s gross negligence or gross neglect of duties, or
(b) because of the Director’s commission of a felony, or commission of a misdemeanor
involving moral turpitude, or
(c) because of the Director’s fraud, disloyalty, dishonesty, or willful violation of
any law or significant policy of the Company committed in connection with the Director’s
service and resulting in an adverse effect on the Company, or
(d) because the Director is removed from service or permanently prohibited from
participating in the Company’s or the Cortland Savings and Banking Company’s affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C.
1818(e)(4) or (g)(1)].
Article 2
Lifetime Benefits
2.1 Normal Retirement
. For Separation from Service on or after Normal Retirement Age, the
Company shall pay to the Director the benefit described in this section 2.1 instead of any other
benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates
under Article 5.
2.1.1
Amount of benefit
. The annual benefit under this section 2.1 is $10,000.
3
2.1.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director’s Separation from Service occurs, the Company shall pay the annual
benefit to the Director in 12 equal monthly installments on the first day of each month.
The annual benefit shall be paid to the Director for ten years.
2.2 Early Termination
. After Early Termination, the Company shall pay to the Director the
benefit described in this section 2.2 instead of any other benefit under this Agreement. However,
no benefits shall be payable if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.2 versus the benefit under section 2.4. If the Director’s
Separation from Service occurs within 12 months after a Change in Control, no benefit shall be
payable under this section 2.2 and the Director shall instead be entitled to the benefit under
section 2.4 or, if the Director first attained Normal Retirement Age, section 2.1.
2.2.1
Amount of benefit
. The annual benefit under this section 2.2 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.2.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.3 Disability Benefit
. If the Director’s Separation from Service occurs because of
Disability before Normal Retirement Age, the Company shall pay to the Director the benefit
described in this section 2.3 instead of any other benefit under this Agreement.
2.3.1
Amount of benefit
. The annual benefit under this section 2.3 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.3.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.4 Change in Control
. If the Director’s Separation from Service occurs within 12 months
after a Change in Control, the Company shall pay to the Director the benefit described in this
section 2.4 instead of any other benefit under this Agreement. However, no benefits shall be
payable under this Agreement if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.4 versus the Early Termination benefit under section 2.2.
4
If the Director’s Separation from Service occurs within 12 months after a Change in Control, no
benefit shall be payable under section 2.2 and the Director shall instead be entitled to the
benefit under this section 2.4. But if the Director shall have attained Normal Retirement Age when
Separation from Service within 12 months after a Change in Control occurs, the Director shall be
entitled solely to the benefit provided by section 2.1, not this section 2.4.
2.4.1
Amount of benefit
. The benefit under this section 2.4 is the Accrual Balance on
the date of the Director’s Separation from Service.
2.4.2
Payment of benefit
. The Company shall pay this benefit to the Director in a
single lump sum three days after the Director’s Separation from Service.
2.5 Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or
Disability Benefit When a Change in Control Occurs
. If a Change in Control occurs while the
Director is receiving the Normal Retirement Age benefit under section 2.1, the Company shall pay
the remaining salary continuation benefits to the Director in a single lump sum three days after
the Change in Control. If a Change in Control occurs after Separation from Service but while the
Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3, the Company shall pay the
remaining salary continuation benefits to the Director in a single lump sum three days after the
Change in Control. The lump-sum payment due to the Director as a result of a Change in Control
shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when
the Change in Control occurs.
2.6 Annual Benefit Statement
. Within 120 days after the end of each Plan Year the Plan
Administrator shall provide or cause to be provided to the Director an annual benefit statement
showing benefits payable or potentially payable to the Director under this Agreement. Each annual
benefit statement shall supersede the previous year’s annual benefit statement. If there is a
contradiction between this Agreement and the annual benefit statement concerning the amount of a
particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4
hereof, the amount of the benefit determined under the Agreement shall control.
2.7 Savings Clause Relating to Compliance with Code Section 409A
. If any provision of this
Agreement would subject the Director to additional tax or interest under Code section 409A, the
Company shall reform the provision. However, the Company shall maintain to the maximum extent
practicable the original intent of the applicable provision without subjecting the Director to
additional tax or interest, and the Company shall not be required to incur any additional
compensation expense as a result of the reformed provision.
2.8 One Benefit Only
. Despite anything to the contrary in this Agreement, the Director and
Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the
first event to occur that is dealt with by this Agreement. Except as provided in section 2.5 or
Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the
Director or Beneficiary to other or additional benefits under this Agreement.
5
Article 3
Death Benefits
3.1 Death Before Normal Retirement Age and Before Separation from Service
. If the Director
dies before Normal Retirement Age and before Separation from Service, 30 days after the Director’s
death the Company shall pay to the Director’s Beneficiary in a single lump sum an amount equal to
the Accrual Balance on the date of the Director’s death.
3.2 Death After Normal Retirement Age but Before Separation from Service
. If the Director
dies after Normal Retirement Age but before Separation from Service, the Company shall for a period
of ten years pay to the Director’s Beneficiary the Normal Retirement Benefit specified in section
2.1.
3.3 Death Before Normal Retirement Age but After Separation from Service
. (a)
After payments
begin
. If, a Separation from Service before Normal Retirement Age having previously occurred, the
Director dies after Early Termination benefits under section 2.2 or Disability benefits under
section 2.3 begin but before receiving all such payments, the Company shall pay the remaining
benefits to the Director’s Beneficiary at the same time and in the same amounts the payments would
have been made to the Director had the Director survived.
(b)
Before payments begin
. If, a Separation from Service before Normal Retirement Age having
previously occurred, the Director is entitled at Normal Retirement Age to the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3 but dies before the benefit
payments begin, the Company shall pay to the Director’s Beneficiary the Early Termination benefit
under section 2.2 or the Disability benefit under section 2.3, as the case may be, but the benefit
payments shall begin on the first day of the month immediately after the month in which the
Director’s death occurs.
3.4 Death After Separation from Service After Normal Retirement Age
. (a)
After payments
begin
. If, a Separation from Service on or after Normal Retirement Age having previously occurred,
the Director dies after benefit payments under section 2.1 begin but before receiving all such
payments, the Company shall pay the remaining benefits to the Director’s Beneficiary at the same
time and in the same amounts the payments would have been made to the Director had the Director
survived.
(b)
Before payments begin
. If, a Separation from Service on or after Normal Retirement Age
having previously occurred, the Director is entitled to the benefit under section Article 2.1 but
dies before the benefit payments begin, beginning with the month immediately after the month in
which the Director’s death occurs the Company shall pay to the Director’s Beneficiary the Normal
Retirement benefit under section 2.1.
Article 4
Beneficiaries
4.1 Beneficiary Designations
. The Director shall have the right to designate at any time a
Beneficiary to receive any benefits payable under this Agreement after the Director’s
6
death. The Beneficiary designated under this Agreement may be the same as or different from the
beneficiary designation under any other benefit plan of the Company in which the Director
participates.
4.2 Beneficiary Designation: Change
. The Director shall designate a Beneficiary by completing
and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its
designated agent. The Director’s Beneficiary designation shall be deemed automatically revoked if
the Beneficiary predeceases the Director or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by
completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and
the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance
by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations
previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last
Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before
the Director’s death.
4.3 Acknowledgment
. No designation or change in designation of a Beneficiary shall be
effective until received, accepted, and acknowledged in writing by the Plan Administrator or its
designated agent.
4.4 No Beneficiary Designation
. If the Director dies without a valid beneficiary designation,
or if all designated Beneficiaries predecease the Director, then the Director’s spouse shall be the
designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the
personal representative of the Director’s estate.
4.5 Facility of Payment
. If a benefit is payable to a minor, to a person declared
incapacitated, or to a person incapable of handling the disposition of his or her property, the
Company may pay such benefit to the guardian, legal representative, or person having the care or
custody of the minor, incapacitated person, or incapable person. The Company may require proof of
incapacity, minority, or guardianship as it may deem appropriate before distribution of the
benefit. Distribution shall completely discharge the Company from all liability for the benefit.
Article 5
General Limitations
5.1 Termination for Cause
. Despite any contrary provision of this Agreement, the Company
shall not pay any benefit under this Agreement and this Agreement shall terminate if the Director’s
Separation from Service is the result of Termination for Cause. Likewise, no benefits shall be
paid under the Split Dollar Agreement and Endorsement, as amended, between the Company and the
Director and the Split Dollar Agreement and Endorsement, as amended, also shall terminate if
Separation from Service is the result of Termination for Cause. The board of directors or a duly
authorized committee of the board shall have the sole and absolute right to determine whether the
bases for denial of benefits for cause exist. Benefits may be denied for cause regardless of
whether the Director continued to serve as a director after the board or committee made its
determination not to nominate the Director for reelection.
7
5.2 Misstatement
. The Company shall not pay any benefit under this Agreement if the Director
has made any material misstatement of fact on any application for life insurance purchased by the
Company.
5.3 Removal
. If the Director is removed or permanently prohibited from participating in the
Company’s or the Cortland Savings and Banking Company’s affairs by an order issued under section
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all
obligations of the Company under this Agreement shall terminate as of the effective date of the
order, and the Split Dollar Agreement and Endorsement, as amended, also shall terminate.
5.4 Default
. Despite any contrary provision of this Agreement, if the Company or the Cortland
Savings and Banking Company is in “default” or “in danger of default,” as those terms are defined
in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this
Agreement shall terminate.
5.5 FDIC Open-Bank Assistance
. All obligations under this Agreement shall terminate, except
to the extent determined that continuation of the contract is necessary for the continued operation
of the Cortland Savings and Banking Company, when the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the Cortland Savings and Banking Company
under the authority contained in section 13(c) of the Federal Deposit Insurance Act. 12 U.S.C.
1823(c). Any rights of the parties that have already vested shall not be affected by such action,
however.
Article 6
Claims and Review Procedures
6.1 Claims Procedure
. The Company shall notify any person or entity that makes a claim for
benefits under this Agreement (the “Claimant”) in writing, within 90 days of Claimant’s written
application for benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (
w
) the specific reasons for such denial, (
x
) a specific
reference to the provisions of the Agreement on which the denial is based, (
y
) a description of any
additional information or material necessary for the Claimant to perfect his or her claim, and a
description of why it is needed, and (
z
) an explanation of the Agreement’s claims review procedure
and other appropriate information as to the steps to be taken if the Claimant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may extend the time for
up to an additional 90 days.
6.2 Review Procedure
. If the Claimant is determined by the Company not to be eligible for
benefits, or if the Claimant believes that he or she is entitled to greater or different benefits,
the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a
petition for review with the Company within 60 days after receipt of the notice issued
8
by the Company. Said petition shall state the specific reasons, which the Claimant believes
entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt
by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Company verbally or in writing, and the Claimant
(or counsel) shall have the right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the 60-day period, stating specifically the basis of its
decision, written in a manner to be understood by the Claimant and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period
is not sufficient, the decision may be deferred for up to another 60 days at the election of the
Company, but notice of this deferral shall be given to the Claimant.
Article 7
Administration of Agreement
7.1 Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator
consisting of the Company’s board of directors or such committee or person(s) as the board shall
appoint. The Director may be a member of the Plan Administrator. The Plan Administrator shall
also have the discretion and authority to (
x
) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Agreement and (
y
) decide or resolve any and
all questions, including interpretations of this Agreement, as may arise in connection with the
Agreement.
7.2 Agents
. In the administration of this Agreement, the Plan Administrator may employ agents
and delegate to them such administrative duties as it sees fit (including acting through a duly
appointed representative), and may from time to time consult with counsel, who may be counsel to
the Company.
7.3 Binding Effect of Decisions
. The decision or action of the Plan Administrator about any
question arising out of the administration, interpretation, and application of the Agreement and
the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Agreement. No Director or Beneficiary shall be deemed to have
any right, vested or nonvested, regarding the continued use of any previously adopted assumptions,
including but not limited to the discount rate and calculation method employed in the determination
of the Accrual Balance.
7.4 Indemnity of Plan Administrator
. The Company shall indemnify and hold harmless the
members of the Plan Administrator against any and all claims, losses, damages, expenses, or
liabilities arising from any action or failure to act with respect to this Agreement, except in the
case of willful misconduct by the Plan Administrator or any of its members.
7.5 Company Information
. To enable the Plan Administrator to perform its functions, the
Company shall supply full and timely information to the Plan Administrator on all matters relating
to the date and circumstances of the retirement, Disability, death, or Separation from Service of
the Director, and such other pertinent information as the Plan Administrator may reasonably
require.
9
Article 8
Miscellaneous
8.1 Amendment and Termination
. This Agreement may be amended solely by a written agreement
signed by the Company and by the Director. Except as provided in Article 5, this Agreement may be
terminated solely by a written agreement signed by the Company and by the Director.
8.2 Binding Effect
. This Agreement shall bind the Director and the Company, and their
beneficiaries, survivors, executors, successors, administrators, and transferees.
8.3 No Guarantee of Service
. This Agreement is not a contract for services. It does not give
the Director the right to remain a Director of the Company nor does it interfere with the right of
the Company’s shareholders not to re-elect the Director or the right of shareholders or the Board
to remove an individual as a director of the Company. The Agreement also does not require the
Director to remain a director or interfere with the Director’s right to terminate service at any
time.
8.4 Non-Transferability
. Benefits under this Agreement may not be sold, transferred,
assigned, pledged, attached, or encumbered.
8.5 Successors
;
Binding Agreement
. By an assumption agreement in form and substance
satisfactory to the Director, the Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform this Agreement had no
succession occurred.
8.6 Tax Withholding
. The Company shall withhold any taxes that are required to be withheld
from the benefits provided under this Agreement.
8.7 Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of
the State of Ohio, except to the extent preempted by the laws of the United States of America.
8.8 Unfunded Arrangement
. The Director and Beneficiary are general unsecured creditors of the
Company for the payment of benefits under this Agreement. The benefits represent the mere promise
by the Company to pay benefits. The rights to benefits are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director’s life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
8.9 Entire Agreement
. This Agreement and the Split Dollar Agreement and Endorsement, as
amended, constitute the entire agreement between the Company and the Director concerning the
subject matter hereof. No rights are granted to the Director under this Agreement other than those
specifically set forth herein. This Agreement amends and restates in
10
its entirety the Director Retirement Agreement dated as of March 1, 2001, as amended February 24,
2004.
8.10 Severability
. If any provision of this Agreement is held invalid, such invalidity shall
not affect any other provision of this Agreement not held invalid, and each such other provision
shall continue in full force and effect to the full extent consistent with law. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such
provision, and the remainder of such provision, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent with law.
8.11 Captions and Counterparts
. Captions and section headings in this Agreement are included
solely for convenience of reference and shall not affect the meaning or interpretation of any
provision of this Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one and the same
instrument.
8.12 Notices
. All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, return receipt requested, with postage prepaid, to the following addresses or to
such other address as either party may designate by like notice. If to the Company, notice shall
be given to the board of directors, Cortland Bancorp, 194 W. Main Street, P.O. Box 98, Cortland,
Ohio 44410-1466, or to such other or additional person or persons as the Company shall have
designated to the Director in writing. If to the Director, notice shall be given to the Director
at the address of the Director appearing on the Company’s records, or to such other or additional
person or persons as the Director shall have designated to the Company in writing.
In Witness Whereof
, the Director and a duly authorized Company officer have executed
this Amended Director Retirement Agreement as of the date first written above.
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Director
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Cortland Bancorp
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By:
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George E. Gessner
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Title:
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11
Beneficiary Designation
Cortland Bancorp
Amended Director Retirement Agreement
I, George E. Gessner, designate the following as beneficiary of any death benefits under this
Amended Director Retirement Agreement:
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Note:
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To name a trust as beneficiary, please provide the name of the trustee(s) and the
exact
name and date of the trust agreement.
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I understand that I may change these beneficiary designations by filing a new written
designation with the Company. I further understand that the designations will be automatically
revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our
marriage is subsequently dissolved.
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Signature:
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George E. Gessner
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Received by the Company this
day of
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Exhibit 10.7
Cortland
Bancorp
Amended
Director Retirement Agreement
This
Amended Director Retirement Agreement
(this “Agreement”) is entered into as of
this 18th day of December, 2007, by and between Cortland Bancorp (the “Company”), a bank holding
company located in Cortland, Ohio, and James E. Hoffman III, a director of the Company (the
“Director”).
Whereas
, to encourage the Director to remain a member of the Company’s board of
directors, the Company entered into a Director Retirement Agreement with the Director dated as of
March 1, 2001, as amended February 24, 2004, providing for specified retirement benefits for the
Director after termination of director service, payable from the Company’s general assets,
Whereas
, none of the conditions or events included in the definition of the term
“golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit
Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule
359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Company, is
contemplated insofar as the Company or the Cortland Savings and Banking Company is concerned, and
Whereas
, the Company and the Director intend that this Agreement shall amend and
restate in its entirety the March 1, 2001 Director Retirement Agreement, as amended February 24,
2004.
Now Therefore
, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the
Company hereby agree as follows.
Article 1
Definitions
1.1
“
Accrual Balance
” means the liability that should be accrued by the Company under
generally accepted accounting principles (“GAAP”) for the Company’s obligation to the Director
under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by
Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate
specified hereinafter. The Accrual Balance at Normal Retirement Age shall equal the present value
of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator
for determining the Accrual Balance. The rate is based on the yield on a 20-year corporate bond
rated Aa by Moody’s, rounded to the nearest
1
/
4
%. The Plan Administrator may adjust the discount
rate to maintain the rate within reasonable standards according to GAAP.
1.2
“
Beneficiary
” means each designated person, determined according to Article 4, or the
estate of the deceased Director, entitled to benefits, if any, at the Director’s death.
1.3
“
Beneficiary Designation Form
” means the form established from time to time by the Plan
Administrator that the Director completes, signs, and returns to the Plan Administrator to
designate one or more Beneficiaries.
1.4
“
Change in Control
” means a change in control as defined in Code section 409A and rules,
regulations, and guidance of general application thereunder issued by the Department of the
Treasury, including —
(a)
Change in ownership
: a change in ownership of the Company occurs on the date any
one person or group accumulates ownership of Company stock constituting more than 50% of the
total fair market value or total voting power of Company stock,
(b)
Change in effective control
: (
x
) any one person, or more than one person acting as
a group, acquires within a 12-month period ownership of Company stock possessing 30% or more
of the total voting power of Company stock, or (
y
) a majority of the Company’s board of
directors is replaced during any 12-month period by directors whose appointment or election
is not endorsed in advance by a majority of the Company’s board of directors, or
(c)
Change in ownership of a substantial portion of assets
: a change in ownership of a
substantial portion of the Company’s assets occurs if in a 12-month period any one person or
more than one person acting as a group acquires from the Company assets having a total gross
fair market value equal to or exceeding 40% of the total gross fair market value of all of
the Company’s assets immediately before the acquisition or acquisitions. For this purpose,
gross fair market value means the value of the Company’s assets, or the value of the assets
being disposed of, determined without regard to any liabilities associated with the assets.
1.5
“
Code
” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and
guidance of general application issued by the Department of the Treasury under the Internal Revenue
Code of 1986, as amended.
1.6
“
Disability
” means, because of a medically determinable physical or mental impairment that
can be expected to result in death or that can be expected to last for a continuous period of at
least 12 months, (
x
) the Director is unable to engage in any substantial gainful activity, or (
y
)
the Director is receiving income replacement benefits for a period of at least three months under
an accident and health plan. Medical determination of disability may be made either by the Social
Security Administration or by the provider of an accident or health plan covering employees of the
Company or its subsidiaries. Upon request of the Plan Administrator, the Director must submit
proof to the Plan Administrator of the Social Security Administration’s or provider’s
determination.
1.7
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons
other than death, Disability, or Termination for Cause. Early Termination excludes a Separation
from Service governed by section 2.4.
2
1.8
“
Effective Date
” means March 1, 2001.
1.9
“
Normal Retirement Age
” means the Director’s 62
nd
birthday.
1.10
“
Plan Administrator
” or “
Administrator
” means the plan administrator described in Article
7.
1.11
“
Plan Year
” means each 12-month period from the Effective Date of this Agreement.
1.12
“
Separation from Service
” means the Director’s service as a director and independent
contractor to the Company and any member of a controlled group, as defined in Code section 414,
terminates for any reason, other than because of a leave of absence approved by the Company or the
Director’s death. For purposes of this Agreement, if there is a dispute about the status of the
Director or the date of the Director’s Separation from Service, the Company shall have the sole and
absolute right to decide the dispute unless a Change in Control shall have occurred.
1.13
“
Termination for Cause
” or “
Cause
” means the Director is not nominated by the board or
nominating committee for reelection as a director after the expiration of his current term, or the
Director is removed from the board of directors, in either case —
(a) because of the Director’s gross negligence or gross neglect of duties, or
(b) because of the Director’s commission of a felony, or commission of a misdemeanor
involving moral turpitude, or
(c) because of the Director’s fraud, disloyalty, dishonesty, or willful violation of
any law or significant policy of the Company committed in connection with the Director’s
service and resulting in an adverse effect on the Company, or
(d) because the Director is removed from service or permanently prohibited from
participating in the Company’s or the Cortland Savings and Banking Company’s affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C.
1818(e)(4) or (g)(1)].
Article 2
Lifetime Benefits
2.1 Normal Retirement
. For Separation from Service on or after Normal Retirement Age, the
Company shall pay to the Director the benefit described in this section 2.1 instead of any other
benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates
under Article 5.
2.1.1
Amount of benefit
. The annual benefit under this section 2.1 is $10,000.
3
2.1.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director’s Separation from Service occurs, the Company shall pay the annual
benefit to the Director in 12 equal monthly installments on the first day of each month.
The annual benefit shall be paid to the Director for ten years.
2.2 Early Termination
. After Early Termination, the Company shall pay to the Director the
benefit described in this section 2.2 instead of any other benefit under this Agreement. However,
no benefits shall be payable if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.2 versus the benefit under section 2.4. If the Director’s
Separation from Service occurs within 12 months after a Change in Control, no benefit shall be
payable under this section 2.2 and the Director shall instead be entitled to the benefit under
section 2.4 or, if the Director first attained Normal Retirement Age, section 2.1.
2.2.1
Amount of benefit
. The annual benefit under this section 2.2 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.2.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.3 Disability Benefit
. If the Director’s Separation from Service occurs because of
Disability before Normal Retirement Age, the Company shall pay to the Director the benefit
described in this section 2.3 instead of any other benefit under this Agreement.
2.3.1
Amount of benefit
. The annual benefit under this section 2.3 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.3.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.4 Change in Control
. If the Director’s Separation from Service occurs within 12 months
after a Change in Control, the Company shall pay to the Director the benefit described in this
section 2.4 instead of any other benefit under this Agreement. However, no benefits shall be
payable under this Agreement if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.4 versus the Early Termination benefit under section 2.2.
4
If the Director’s Separation from Service occurs within 12 months after a Change in Control, no
benefit shall be payable under section 2.2 and the Director shall instead be entitled to the
benefit under this section 2.4. But if the Director shall have attained Normal Retirement Age when
Separation from Service within 12 months after a Change in Control occurs, the Director shall be
entitled solely to the benefit provided by section 2.1, not this section 2.4.
2.4.1
Amount of benefit
. The benefit under this section 2.4 is the Accrual Balance on
the date of the Director’s Separation from Service.
2.4.2
Payment of benefit
. The Company shall pay this benefit to the Director in a
single lump sum three days after the Director’s Separation from Service.
2.5 Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or
Disability Benefit When a Change in Control Occurs
. If a Change in Control occurs while the
Director is receiving the Normal Retirement Age benefit under section 2.1, the Company shall pay
the remaining salary continuation benefits to the Director in a single lump sum three days after
the Change in Control. If a Change in Control occurs after Separation from Service but while the
Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3, the Company shall pay the
remaining salary continuation benefits to the Director in a single lump sum three days after the
Change in Control. The lump-sum payment due to the Director as a result of a Change in Control
shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when
the Change in Control occurs.
2.6 Annual Benefit Statement
. Within 120 days after the end of each Plan Year the Plan
Administrator shall provide or cause to be provided to the Director an annual benefit statement
showing benefits payable or potentially payable to the Director under this Agreement. Each annual
benefit statement shall supersede the previous year’s annual benefit statement. If there is a
contradiction between this Agreement and the annual benefit statement concerning the amount of a
particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4
hereof, the amount of the benefit determined under the Agreement shall control.
2.7 Savings Clause Relating to Compliance with Code Section 409A
. If any provision of this
Agreement would subject the Director to additional tax or interest under Code section 409A, the
Company shall reform the provision. However, the Company shall maintain to the maximum extent
practicable the original intent of the applicable provision without subjecting the Director to
additional tax or interest, and the Company shall not be required to incur any additional
compensation expense as a result of the reformed provision.
2.8 One Benefit Only
. Despite anything to the contrary in this Agreement, the Director and
Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the
first event to occur that is dealt with by this Agreement. Except as provided in section 2.5 or
Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the
Director or Beneficiary to other or additional benefits under this Agreement.
5
Article 3
Death Benefits
3.1 Death Before Normal Retirement Age and Before Separation from Service
. If the Director
dies before Normal Retirement Age and before Separation from Service, 30 days after the Director’s
death the Company shall pay to the Director’s Beneficiary in a single lump sum an amount equal to
the Accrual Balance on the date of the Director’s death.
3.2 Death After Normal Retirement Age but Before Separation from Service
. If the Director
dies after Normal Retirement Age but before Separation from Service, the Company shall for a period
of ten years pay to the Director’s Beneficiary the Normal Retirement Benefit specified in section
2.1.
3.3 Death Before Normal Retirement Age but After Separation from Service
. (a)
After payments
begin
. If, a Separation from Service before Normal Retirement Age having previously occurred, the
Director dies after Early Termination benefits under section 2.2 or Disability benefits under
section 2.3 begin but before receiving all such payments, the Company shall pay the remaining
benefits to the Director’s Beneficiary at the same time and in the same amounts the payments would
have been made to the Director had the Director survived.
(b)
Before payments begin
. If, a Separation from Service before Normal Retirement Age having
previously occurred, the Director is entitled at Normal Retirement Age to the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3 but dies before the benefit
payments begin, the Company shall pay to the Director’s Beneficiary the Early Termination benefit
under section 2.2 or the Disability benefit under section 2.3, as the case may be, but the benefit
payments shall begin on the first day of the month immediately after the month in which the
Director’s death occurs.
3.4 Death After Separation from Service After Normal Retirement Age
. (a)
After payments
begin
. If, a Separation from Service on or after Normal Retirement Age having previously occurred,
the Director dies after benefit payments under section 2.1 begin but before receiving all such
payments, the Company shall pay the remaining benefits to the Director’s Beneficiary at the same
time and in the same amounts the payments would have been made to the Director had the Director
survived.
(b)
Before payments begin
. If, a Separation from Service on or after Normal Retirement Age
having previously occurred, the Director is entitled to the benefit under section Article 2.1 but
dies before the benefit payments begin, beginning with the month immediately after the month in
which the Director’s death occurs the Company shall pay to the Director’s Beneficiary the Normal
Retirement benefit under section 2.1.
Article 4
Beneficiaries
4.1 Beneficiary Designations
. The Director shall have the right to designate at any time a
Beneficiary to receive any benefits payable under this Agreement after the Director’s
6
death. The Beneficiary designated under this Agreement may be the same as or different from the
beneficiary designation under any other benefit plan of the Company in which the Director
participates.
4.2 Beneficiary Designation: Change
. The Director shall designate a Beneficiary by completing
and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its
designated agent. The Director’s Beneficiary designation shall be deemed automatically revoked if
the Beneficiary predeceases the Director or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by
completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and
the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance
by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations
previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last
Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before
the Director’s death.
4.3 Acknowledgment
. No designation or change in designation of a Beneficiary shall be
effective until received, accepted, and acknowledged in writing by the Plan Administrator or its
designated agent.
4.4 No Beneficiary Designation
. If the Director dies without a valid beneficiary designation,
or if all designated Beneficiaries predecease the Director, then the Director’s spouse shall be the
designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the
personal representative of the Director’s estate.
4.5 Facility of Payment
. If a benefit is payable to a minor, to a person declared
incapacitated, or to a person incapable of handling the disposition of his or her property, the
Company may pay such benefit to the guardian, legal representative, or person having the care or
custody of the minor, incapacitated person, or incapable person. The Company may require proof of
incapacity, minority, or guardianship as it may deem appropriate before distribution of the
benefit. Distribution shall completely discharge the Company from all liability for the benefit.
Article 5
General Limitations
5.1 Termination for Cause
. Despite any contrary provision of this Agreement, the Company
shall not pay any benefit under this Agreement and this Agreement shall terminate if the Director’s
Separation from Service is the result of Termination for Cause. Likewise, no benefits shall be
paid under the Split Dollar Agreement and Endorsement, as amended, between the Company and the
Director and the Split Dollar Agreement and Endorsement, as amended, also shall terminate if
Separation from Service is the result of Termination for Cause. The board of directors or a duly
authorized committee of the board shall have the sole and absolute right to determine whether the
bases for denial of benefits for cause exist. Benefits may be denied for cause regardless of
whether the Director continued to serve as a director after the board or committee made its
determination not to nominate the Director for reelection.
7
5.2 Misstatement
. The Company shall not pay any benefit under this Agreement if the Director
has made any material misstatement of fact on any application for life insurance purchased by the
Company.
5.3 Removal
. If the Director is removed or permanently prohibited from participating in the
Company’s or the Cortland Savings and Banking Company’s affairs by an order issued under section
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all
obligations of the Company under this Agreement shall terminate as of the effective date of the
order, and the Split Dollar Agreement and Endorsement, as amended, also shall terminate.
5.4 Default
. Despite any contrary provision of this Agreement, if the Company or the Cortland
Savings and Banking Company is in “default” or “in danger of default,” as those terms are defined
in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this
Agreement shall terminate.
5.5 FDIC Open-Bank Assistance
. All obligations under this Agreement shall terminate, except
to the extent determined that continuation of the contract is necessary for the continued operation
of the Cortland Savings and Banking Company, when the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the Cortland Savings and Banking Company
under the authority contained in section 13(c) of the Federal Deposit Insurance Act. 12 U.S.C.
1823(c). Any rights of the parties that have already vested shall not be affected by such action,
however.
Article 6
Claims and Review Procedures
6.1 Claims Procedure
. The Company shall notify any person or entity that makes a claim for
benefits under this Agreement (the “Claimant”) in writing, within 90 days of Claimant’s written
application for benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (
w
) the specific reasons for such denial, (
x
) a specific
reference to the provisions of the Agreement on which the denial is based, (
y
) a description of any
additional information or material necessary for the Claimant to perfect his or her claim, and a
description of why it is needed, and (
z
) an explanation of the Agreement’s claims review procedure
and other appropriate information as to the steps to be taken if the Claimant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may extend the time for
up to an additional 90 days.
6.2 Review Procedure
. If the Claimant is determined by the Company not to be eligible for
benefits, or if the Claimant believes that he or she is entitled to greater or different benefits,
the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a
petition for review with the Company within 60 days after receipt of the notice issued
8
by the Company. Said petition shall state the specific reasons, which the Claimant believes
entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt
by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Company verbally or in writing, and the Claimant
(or counsel) shall have the right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the 60-day period, stating specifically the basis of its
decision, written in a manner to be understood by the Claimant and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period
is not sufficient, the decision may be deferred for up to another 60 days at the election of the
Company, but notice of this deferral shall be given to the Claimant.
Article 7
Administration of Agreement
7.1 Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator
consisting of the Company’s board of directors or such committee or person(s) as the board shall
appoint. The Director may be a member of the Plan Administrator. The Plan Administrator shall
also have the discretion and authority to (
x
) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Agreement and (
y
) decide or resolve any and
all questions, including interpretations of this Agreement, as may arise in connection with the
Agreement.
7.2 Agents
. In the administration of this Agreement, the Plan Administrator may employ agents
and delegate to them such administrative duties as it sees fit (including acting through a duly
appointed representative), and may from time to time consult with counsel, who may be counsel to
the Company.
7.3 Binding Effect of Decisions
. The decision or action of the Plan Administrator about any
question arising out of the administration, interpretation, and application of the Agreement and
the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Agreement. No Director or Beneficiary shall be deemed to have
any right, vested or nonvested, regarding the continued use of any previously adopted assumptions,
including but not limited to the discount rate and calculation method employed in the determination
of the Accrual Balance.
7.4 Indemnity of Plan Administrator
. The Company shall indemnify and hold harmless the
members of the Plan Administrator against any and all claims, losses, damages, expenses, or
liabilities arising from any action or failure to act with respect to this Agreement, except in the
case of willful misconduct by the Plan Administrator or any of its members.
7.5 Company Information
. To enable the Plan Administrator to perform its functions, the
Company shall supply full and timely information to the Plan Administrator on all matters relating
to the date and circumstances of the retirement, Disability, death, or Separation from Service of
the Director, and such other pertinent information as the Plan Administrator may reasonably
require.
9
Article 8
Miscellaneous
8.1 Amendment and Termination
. This Agreement may be amended solely by a written agreement
signed by the Company and by the Director. Except as provided in Article 5, this Agreement may be
terminated solely by a written agreement signed by the Company and by the Director.
8.2 Binding Effect
. This Agreement shall bind the Director and the Company, and their
beneficiaries, survivors, executors, successors, administrators, and transferees.
8.3 No Guarantee of Service
. This Agreement is not a contract for services. It does not give
the Director the right to remain a Director of the Company nor does it interfere with the right of
the Company’s shareholders not to re-elect the Director or the right of shareholders or the Board
to remove an individual as a director of the Company. The Agreement also does not require the
Director to remain a director or interfere with the Director’s right to terminate service at any
time.
8.4 Non-Transferability
. Benefits under this Agreement may not be sold, transferred,
assigned, pledged, attached, or encumbered.
8.5 Successors
;
Binding Agreement
. By an assumption agreement in form and substance
satisfactory to the Director, the Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform this Agreement had no
succession occurred.
8.6 Tax Withholding
. The Company shall withhold any taxes that are required to be withheld
from the benefits provided under this Agreement.
8.7 Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of
the State of Ohio, except to the extent preempted by the laws of the United States of America.
8.8 Unfunded Arrangement
. The Director and Beneficiary are general unsecured creditors of the
Company for the payment of benefits under this Agreement. The benefits represent the mere promise
by the Company to pay benefits. The rights to benefits are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director’s life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
8.9 Entire Agreement
. This Agreement and the Split Dollar Agreement and Endorsement, as
amended, constitute the entire agreement between the Company and the Director concerning the
subject matter hereof. No rights are granted to the Director under this Agreement other than those
specifically set forth herein. This Agreement amends and restates in
10
its entirety the Director Retirement Agreement dated as of March 1, 2001, as amended February 24,
2004.
8.10 Severability
. If any provision of this Agreement is held invalid, such invalidity shall
not affect any other provision of this Agreement not held invalid, and each such other provision
shall continue in full force and effect to the full extent consistent with law. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such
provision, and the remainder of such provision, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent with law.
8.11 Captions and Counterparts
. Captions and section headings in this Agreement are included
solely for convenience of reference and shall not affect the meaning or interpretation of any
provision of this Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one and the same
instrument.
8.12 Notices
. All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, return receipt requested, with postage prepaid, to the following addresses or to
such other address as either party may designate by like notice. If to the Company, notice shall
be given to the board of directors, Cortland Bancorp, 194 W. Main Street, P.O. Box 98, Cortland,
Ohio 44410-1466, or to such other or additional person or persons as the Company shall have
designated to the Director in writing. If to the Director, notice shall be given to the Director
at the address of the Director appearing on the Company’s records, or to such other or additional
person or persons as the Director shall have designated to the Company in writing.
In Witness Whereof
, the Director and a duly authorized Company officer have executed
this Amended Director Retirement Agreement as of the date first written above.
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Director
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Cortland Bancorp
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By:
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James E. Hoffman III
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Title:
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11
Beneficiary Designation
Cortland Bancorp
Amended Director Retirement Agreement
I, James E. Hoffman III, designate the following as beneficiary of any death benefits under
this Amended Director Retirement Agreement:
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Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the
exact
name and date of the trust agreement.
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I understand that I may change these beneficiary designations by filing a new written
designation with the Company. I further understand that the designations will be automatically
revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our
marriage is subsequently dissolved.
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Signature:
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James E. Hoffman III
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Received by the Company
this
day of
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Exhibit 10.8
Cortland Bancorp
Amended Director Retirement Agreement
This
Amended Director Retirement Agreement
(this “Agreement”) is entered into as of
this 18th day of December, 2007, by and between Cortland Bancorp (the “Company”), a bank holding
company located in Cortland, Ohio, and Neil J. Kaback, a director of the Company (the “Director”).
Whereas
, to encourage the Director to remain a member of the Company’s board of
directors, the Company entered into a Director Retirement Agreement with the Director dated as of
March 1, 2004, providing for specified retirement benefits for the Director after termination of
director service, payable from the Company’s general assets,
Whereas
, none of the conditions or events included in the definition of the term
“golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit
Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule
359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Company, is
contemplated insofar as the Company or the Cortland Savings and Banking Company is concerned, and
Whereas
, the Company and the Director intend that this Agreement shall amend and
restate in its entirety the March 1, 2004 Director Retirement Agreement.
Now Therefore
, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the
Company hereby agree as follows.
Article 1
Definitions
1.1
“
Accrual Balance
” means the liability that should be accrued by the Company under
generally accepted accounting principles (“GAAP”) for the Company’s obligation to the Director
under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by
Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate
specified hereinafter. The Accrual Balance at Normal Retirement Age shall equal the present value
of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator
for determining the Accrual Balance. The rate is based on the yield on a 20-year corporate bond
rated Aa by Moody’s, rounded to the nearest
1
/
4
%. The Plan Administrator may adjust the discount
rate to maintain the rate within reasonable standards according to GAAP.
1.2
“
Beneficiary
” means each designated person, determined according to Article 4, or the
estate of the deceased Director, entitled to benefits, if any, at the Director’s death.
1.3
“
Beneficiary Designation Form
” means the form established from time to time by the Plan
Administrator that the Director completes, signs, and returns to the Plan Administrator to
designate one or more Beneficiaries.
1.4
“
Change in Control
” means a change in control as defined in Code section 409A and rules,
regulations, and guidance of general application thereunder issued by the Department of the
Treasury, including –
(a)
Change in ownership
: a change in ownership of the Company occurs on the date any
one person or group accumulates ownership of Company stock constituting more than 50% of the
total fair market value or total voting power of Company stock,
(b)
Change in effective control
: (
x
) any one person, or more than one person acting as
a group, acquires within a 12-month period ownership of Company stock possessing 30% or more
of the total voting power of Company stock, or (
y
) a majority of the Company’s board of
directors is replaced during any 12-month period by directors whose appointment or election
is not endorsed in advance by a majority of the Company’s board of directors, or
(c)
Change in ownership of a substantial portion of assets
: a change in ownership of a
substantial portion of the Company’s assets occurs if in a 12-month period any one person or
more than one person acting as a group acquires from the Company assets having a total gross
fair market value equal to or exceeding 40% of the total gross fair market value of all of
the Company’s assets immediately before the acquisition or acquisitions. For this purpose,
gross fair market value means the value of the Company’s assets, or the value of the assets
being disposed of, determined without regard to any liabilities associated with the assets.
1.5
“
Code
” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and
guidance of general application issued by the Department of the Treasury under the Internal Revenue
Code of 1986, as amended.
1.6
“
Disability
” means, because of a medically determinable physical or mental impairment that
can be expected to result in death or that can be expected to last for a continuous period of at
least 12 months, (
x
) the Director is unable to engage in any substantial gainful activity, or (
y
)
the Director is receiving income replacement benefits for a period of at least three months under
an accident and health plan. Medical determination of disability may be made either by the Social
Security Administration or by the provider of an accident or health plan covering employees of the
Company or its subsidiaries. Upon request of the Plan Administrator, the Director must submit
proof to the Plan Administrator of the Social Security Administration’s or provider’s
determination.
1.7
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons
other than death, Disability, or Termination for Cause. Early Termination excludes a Separation
from Service governed by section 2.4.
2
1.8
“
Effective Date
” means March 1, 2004.
1.9
“
Normal Retirement Age
” means the Director’s 67
th
birthday.
1.10
“
Plan Administrator
” or “
Administrator
” means the plan administrator described in Article
7.
1.11
“
Plan Year
” means each 12-month period from the Effective Date of this Agreement.
1.12
“
Separation from Service
” means the Director’s service as a director and independent
contractor to the Company and any member of a controlled group, as defined in Code section 414,
terminates for any reason, other than because of a leave of absence approved by the Company or the
Director’s death. For purposes of this Agreement, if there is a dispute about the status of the
Director or the date of the Director’s Separation from Service, the Company shall have the sole and
absolute right to decide the dispute unless a Change in Control shall have occurred.
1.13
“
Termination for Cause
” or “
Cause
” means the Director is not nominated by the board or
nominating committee for reelection as a director after the expiration of his current term, or the
Director is removed from the board of directors, in either case –
(a) because of the Director’s gross negligence or gross neglect of duties, or
(b) because of the Director’s commission of a felony, or commission of a misdemeanor
involving moral turpitude, or
(c) because of the Director’s fraud, disloyalty, dishonesty, or willful violation of
any law or significant policy of the Company committed in connection with the Director’s
service and resulting in an adverse effect on the Company, or
(d) because the Director is removed from service or permanently prohibited from
participating in the Company’s or the Cortland Savings and Banking Company’s affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C.
1818(e)(4) or (g)(1)].
Article 2
Lifetime Benefits
2.1 Normal Retirement
. For Separation from Service on or after Normal Retirement Age, the
Company shall pay to the Director the benefit described in this section 2.1 instead of any other
benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates
under Article 5.
2.1.1
Amount of benefit
. The annual benefit under this section 2.1 is $10,000.
3
2.1.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director’s Separation from Service occurs, the Company shall pay the annual
benefit to the Director in 12 equal monthly installments on the first day of each month.
The annual benefit shall be paid to the Director for ten years.
2.2 Early Termination
. After Early Termination, the Company shall pay to the Director the
benefit described in this section 2.2 instead of any other benefit under this Agreement. However,
no benefits shall be payable if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.2 versus the benefit under section 2.4. If the Director’s
Separation from Service occurs within 12 months after a Change in Control, no benefit shall be
payable under this section 2.2 and the Director shall instead be entitled to the benefit under
section 2.4 or, if the Director first attained Normal Retirement Age, section 2.1.
2.2.1
Amount of benefit
. The annual benefit under this section 2.2 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.2.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.3 Disability Benefit
. If the Director’s Separation from Service occurs because of
Disability before Normal Retirement Age, the Company shall pay to the Director the benefit
described in this section 2.3 instead of any other benefit under this Agreement.
2.3.1
Amount of benefit
. The annual benefit under this section 2.3 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.3.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.4 Change in Control
. If the Director’s Separation from Service occurs within 12 months
after a Change in Control, the Company shall pay to the Director the benefit described in this
section 2.4 instead of any other benefit under this Agreement. However, no benefits shall be
payable under this Agreement if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.4 versus the Early Termination benefit under section 2.2.
4
If the Director’s Separation from Service occurs within 12 months after a Change in Control, no
benefit shall be payable under section 2.2 and the Director shall instead be entitled to the
benefit under this section 2.4. But if the Director shall have attained Normal Retirement Age when
Separation from Service within 12 months after a Change in Control occurs, the Director shall be
entitled solely to the benefit provided by section 2.1, not this section 2.4.
2.4.1
Amount of benefit
. The benefit under this section 2.4 is the Accrual Balance on
the date of the Director’s Separation from Service.
2.4.2
Payment of benefit
. The Company shall pay this benefit to the Director in a
single lump sum three days after the Director’s Separation from Service.
2.5 Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or
Disability Benefit When a Change in Control Occurs
. If a Change in Control occurs while the
Director is receiving the Normal Retirement Age benefit under section 2.1, the Company shall pay
the remaining salary continuation benefits to the Director in a single lump sum three days after
the Change in Control. If a Change in Control occurs after Separation from Service but while the
Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3, the Company shall pay the
remaining salary continuation benefits to the Director in a single lump sum three days after the
Change in Control. The lump-sum payment due to the Director as a result of a Change in Control
shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when
the Change in Control occurs.
2.6 Annual Benefit Statement
. Within 120 days after the end of each Plan Year the Plan
Administrator shall provide or cause to be provided to the Director an annual benefit statement
showing benefits payable or potentially payable to the Director under this Agreement. Each annual
benefit statement shall supersede the previous year’s annual benefit statement. If there is a
contradiction between this Agreement and the annual benefit statement concerning the amount of a
particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4
hereof, the amount of the benefit determined under the Agreement shall control.
2.7 Savings Clause Relating to Compliance with Code Section 409A
. If any provision of this
Agreement would subject the Director to additional tax or interest under Code section 409A, the
Company shall reform the provision. However, the Company shall maintain to the maximum extent
practicable the original intent of the applicable provision without subjecting the Director to
additional tax or interest, and the Company shall not be required to incur any additional
compensation expense as a result of the reformed provision.
2.8 One Benefit Only
. Despite anything to the contrary in this Agreement, the Director and
Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the
first event to occur that is dealt with by this Agreement. Except as provided in section 2.5 or
Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the
Director or Beneficiary to other or additional benefits under this Agreement.
5
Article 3
Death Benefits
3.1 Death Before Normal Retirement Age and Before Separation from Service
. If the Director
dies before Normal Retirement Age and before Separation from Service, 30 days after the Director’s
death the Company shall pay to the Director’s Beneficiary in a single lump sum an amount equal to
the Accrual Balance on the date of the Director’s death.
3.2 Death After Normal Retirement Age but Before Separation from Service
. If the Director
dies after Normal Retirement Age but before Separation from Service, the Company shall for a period
of ten years pay to the Director’s Beneficiary the Normal Retirement Benefit specified in section
2.1.
3.3 Death Before Normal Retirement Age but After Separation from Service
. (a)
After payments
begin
. If, a Separation from Service before Normal Retirement Age having previously occurred, the
Director dies after Early Termination benefits under section 2.2 or Disability benefits under
section 2.3 begin but before receiving all such payments, the Company shall pay the remaining
benefits to the Director’s Beneficiary at the same time and in the same amounts the payments would
have been made to the Director had the Director survived.
(b)
Before payments begin
. If, a Separation from Service before Normal Retirement Age having
previously occurred, the Director is entitled at Normal Retirement Age to the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3 but dies before the benefit
payments begin, the Company shall pay to the Director’s Beneficiary the Early Termination benefit
under section 2.2 or the Disability benefit under section 2.3, as the case may be, but the benefit
payments shall begin on the first day of the month immediately after the month in which the
Director’s death occurs.
3.4 Death After Separation from Service After Normal Retirement Age
. (a)
After payments
begin
. If, a Separation from Service on or after Normal Retirement Age having previously occurred,
the Director dies after benefit payments under section 2.1 begin but before receiving all such
payments, the Company shall pay the remaining benefits to the Director’s Beneficiary at the same
time and in the same amounts the payments would have been made to the Director had the Director
survived.
(b)
Before payments begin
. If, a Separation from Service on or after Normal Retirement Age
having previously occurred, the Director is entitled to the benefit under section Article 2.1 but
dies before the benefit payments begin, beginning with the month immediately after the month in
which the Director’s death occurs the Company shall pay to the Director’s Beneficiary the Normal
Retirement benefit under section 2.1.
Article 4
Beneficiaries
4.1 Beneficiary Designations
. The Director shall have the right to designate at any time a
Beneficiary to receive any benefits payable under this Agreement after the Director’s
6
death. The Beneficiary designated under this Agreement may be the same as or different from the
beneficiary designation under any other benefit plan of the Company in which the Director
participates.
4.2 Beneficiary Designation: Change
. The Director shall designate a Beneficiary by completing
and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its
designated agent. The Director’s Beneficiary designation shall be deemed automatically revoked if
the Beneficiary predeceases the Director or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by
completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and
the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance
by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations
previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last
Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before
the Director’s death.
4.3 Acknowledgment
. No designation or change in designation of a Beneficiary shall be
effective until received, accepted, and acknowledged in writing by the Plan Administrator or its
designated agent.
4.4 No Beneficiary Designation
. If the Director dies without a valid beneficiary designation,
or if all designated Beneficiaries predecease the Director, then the Director’s spouse shall be the
designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the
personal representative of the Director’s estate.
4.5 Facility of Payment
. If a benefit is payable to a minor, to a person declared
incapacitated, or to a person incapable of handling the disposition of his or her property, the
Company may pay such benefit to the guardian, legal representative, or person having the care or
custody of the minor, incapacitated person, or incapable person. The Company may require proof of
incapacity, minority, or guardianship as it may deem appropriate before distribution of the
benefit. Distribution shall completely discharge the Company from all liability for the benefit.
Article 5
General Limitations
5.1 Termination for Cause
. Despite any contrary provision of this Agreement, the Company
shall not pay any benefit under this Agreement and this Agreement shall terminate if the Director’s
Separation from Service is the result of Termination for Cause. Likewise, no benefits shall be
paid under the Split Dollar Agreement and Endorsement, as amended, between the Company and the
Director and the Split Dollar Agreement and Endorsement, as amended, also shall terminate if
Separation from Service is the result of Termination for Cause. The board of directors or a duly
authorized committee of the board shall have the sole and absolute right to determine whether the
bases for denial of benefits for cause exist. Benefits may be denied for cause regardless of
whether the Director continued to serve as a director after the board or committee made its
determination not to nominate the Director for reelection.
7
5.2 Misstatement
. The Company shall not pay any benefit under this Agreement if the Director
has made any material misstatement of fact on any application for life insurance purchased by the
Company.
5.3 Removal
. If the Director is removed or permanently prohibited from participating in the
Company’s or the Cortland Savings and Banking Company’s affairs by an order issued under section
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all
obligations of the Company under this Agreement shall terminate as of the effective date of the
order, and the Split Dollar Agreement and Endorsement, as amended, also shall terminate.
5.4 Default
. Despite any contrary provision of this Agreement, if the Company or the Cortland
Savings and Banking Company is in “default” or “in danger of default,” as those terms are defined
in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this
Agreement shall terminate.
5.5 FDIC Open-Bank Assistance
. All obligations under this Agreement shall terminate, except
to the extent determined that continuation of the contract is necessary for the continued operation
of the Cortland Savings and Banking Company, when the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the Cortland Savings and Banking Company
under the authority contained in section 13(c) of the Federal Deposit Insurance Act. 12 U.S.C.
1823(c). Any rights of the parties that have already vested shall not be affected by such action,
however.
Article 6
Claims and Review Procedures
6.1 Claims Procedure
. The Company shall notify any person or entity that makes a claim for
benefits under this Agreement (the “Claimant”) in writing, within 90 days of Claimant’s written
application for benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (
w
) the specific reasons for such denial, (
x
) a specific
reference to the provisions of the Agreement on which the denial is based, (
y
) a description of any
additional information or material necessary for the Claimant to perfect his or her claim, and a
description of why it is needed, and (
z
) an explanation of the Agreement’s claims review procedure
and other appropriate information as to the steps to be taken if the Claimant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may extend the time for
up to an additional 90 days.
6.2 Review Procedure
. If the Claimant is determined by the Company not to be eligible for
benefits, or if the Claimant believes that he or she is entitled to greater or different benefits,
the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a
petition for review with the Company within 60 days after receipt of the notice issued
8
by the Company. Said petition shall state the specific reasons, which the Claimant believes
entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt
by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Company verbally or in writing, and the Claimant
(or counsel) shall have the right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the 60-day period, stating specifically the basis of its
decision, written in a manner to be understood by the Claimant and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period
is not sufficient, the decision may be deferred for up to another 60 days at the election of the
Company, but notice of this deferral shall be given to the Claimant.
Article 7
Administration of Agreement
7.1 Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator
consisting of the Company’s board of directors or such committee or person(s) as the board shall
appoint. The Director may be a member of the Plan Administrator. The Plan Administrator shall
also have the discretion and authority to (
x
) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Agreement and (
y
) decide or resolve any and
all questions, including interpretations of this Agreement, as may arise in connection with the
Agreement.
7.2 Agents
. In the administration of this Agreement, the Plan Administrator may employ agents
and delegate to them such administrative duties as it sees fit (including acting through a duly
appointed representative), and may from time to time consult with counsel, who may be counsel to
the Company.
7.3 Binding Effect of Decisions
. The decision or action of the Plan Administrator about any
question arising out of the administration, interpretation, and application of the Agreement and
the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Agreement. No Director or Beneficiary shall be deemed to have
any right, vested or nonvested, regarding the continued use of any previously adopted assumptions,
including but not limited to the discount rate and calculation method employed in the determination
of the Accrual Balance.
7.4 Indemnity of Plan Administrator
. The Company shall indemnify and hold harmless the
members of the Plan Administrator against any and all claims, losses, damages, expenses, or
liabilities arising from any action or failure to act with respect to this Agreement, except in the
case of willful misconduct by the Plan Administrator or any of its members.
7.5 Company Information
. To enable the Plan Administrator to perform its functions, the
Company shall supply full and timely information to the Plan Administrator on all matters relating
to the date and circumstances of the retirement, Disability, death, or Separation from Service of
the Director, and such other pertinent information as the Plan Administrator may reasonably
require.
9
Article 8
Miscellaneous
8.1 Amendment and Termination
. This Agreement may be amended solely by a written agreement
signed by the Company and by the Director. Except as provided in Article 5, this Agreement may be
terminated solely by a written agreement signed by the Company and by the Director.
8.2 Binding Effect
. This Agreement shall bind the Director and the Company, and their
beneficiaries, survivors, executors, successors, administrators, and transferees.
8.3 No Guarantee of Service
. This Agreement is not a contract for services. It does not give
the Director the right to remain a Director of the Company nor does it interfere with the right of
the Company’s shareholders not to re-elect the Director or the right of shareholders or the Board
to remove an individual as a director of the Company. The Agreement also does not require the
Director to remain a director or interfere with the Director’s right to terminate service at any
time.
8.4 Non-Transferability
. Benefits under this Agreement may not be sold, transferred,
assigned, pledged, attached, or encumbered.
8.5 Successors
;
Binding Agreement
. By an assumption agreement in form and substance
satisfactory to the Director, the Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform this Agreement had no
succession occurred.
8.6 Tax Withholding
. The Company shall withhold any taxes that are required to be withheld
from the benefits provided under this Agreement.
8.7 Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of
the State of Ohio, except to the extent preempted by the laws of the United States of America.
8.8 Unfunded Arrangement
. The Director and Beneficiary are general unsecured creditors of the
Company for the payment of benefits under this Agreement. The benefits represent the mere promise
by the Company to pay benefits. The rights to benefits are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director’s life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
8.9 Entire Agreement
. This Agreement and the Split Dollar Agreement and Endorsement, as
amended, constitute the entire agreement between the Company and the Director concerning the
subject matter hereof. No rights are granted to the Director under this
10
Agreement other than those specifically set forth herein. This Agreement amends and restates in
its entirety the Director Retirement Agreement dated as of March 1, 2004.
8.10 Severability
. If any provision of this Agreement is held invalid, such invalidity shall
not affect any other provision of this Agreement not held invalid, and each such other provision
shall continue in full force and effect to the full extent consistent with law. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such
provision, and the remainder of such provision, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent with law.
8.11 Captions and Counterparts
. Captions and section headings in this Agreement are included
solely for convenience of reference and shall not affect the meaning or interpretation of any
provision of this Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one and the same
instrument.
8.12 Notices
. All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, return receipt requested, with postage prepaid, to the following addresses or to
such other address as either party may designate by like notice. If to the Company, notice shall
be given to the board of directors, Cortland Bancorp, 194 W. Main Street, P.O. Box 98, Cortland,
Ohio 44410-1466, or to such other or additional person or persons as the Company shall have
designated to the Director in writing. If to the Director, notice shall be given to the Director
at the address of the Director appearing on the Company’s records, or to such other or additional
person or persons as the Director shall have designated to the Company in writing.
In Witness Whereof
, the Director and a duly authorized Company officer have executed
this Amended Director Retirement Agreement as of the date first written above.
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Director
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Cortland Bancorp
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By:
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Title:
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11
Beneficiary Designation
Cortland Bancorp
Amended Director Retirement Agreement
I, Neil J. Kaback, designate the following as beneficiary of any death benefits under this
Amended Director Retirement Agreement:
Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the
exact
name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new written
designation with the Company. I further understand that the designations will be automatically
revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our
marriage is subsequently dissolved.
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Signature:
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Neil J. Kaback
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Date:
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200
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Received by the Company this
day of
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Title:
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Exhibit 10.10
Cortland Bancorp
Amended Director Retirement Agreement
This
Amended Director Retirement Agreement
(this “Agreement”) is entered into as of
this 18
th
day of December, 2007, by and between Cortland Bancorp (the “Company”), a bank
holding company located in Cortland, Ohio, and Richard B. Thompson, a director of the Company (the
“Director”).
Whereas
, to encourage the Director to remain a member of the Company’s board of
directors, the Company entered into a Director Retirement Agreement with the Director dated as of
October 1, 2001, as amended February 24, 2004, providing for specified retirement benefits for the
Director after termination of director service, payable from the Company’s general assets,
Whereas
, none of the conditions or events included in the definition of the term
“golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit
Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule
359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Company, is
contemplated insofar as the Company or the Cortland Savings and Banking Company is concerned, and
Whereas
, the Company and the Director intend that this Agreement shall amend and
restate in its entirety the October 1, 2001 Director Retirement Agreement, as amended February 24,
2004.
Now Therefore
, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the
Company hereby agree as follows.
Article 1
Definitions
1.1
“
Accrual Balance
” means the liability that should be accrued by the Company under
generally accepted accounting principles (“GAAP”) for the Company’s obligation to the Director
under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by
Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate
specified hereinafter. The Accrual Balance at Normal Retirement Age shall equal the present value
of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator
for determining the Accrual Balance. The rate is based on the yield on a 20-year corporate bond
rated Aa by Moody’s, rounded to the nearest
1
/
4
%. The Plan Administrator may adjust the discount
rate to maintain the rate within reasonable standards according to GAAP.
1.2
“
Beneficiary
” means each designated person, determined according to Article 4, or the
estate of the deceased Director, entitled to benefits, if any, at the Director’s death.
1.3
“
Beneficiary Designation Form
” means the form established from time to time by the Plan
Administrator that the Director completes, signs, and returns to the Plan Administrator to
designate one or more Beneficiaries.
1.4
“
Change in Control
” means a change in control as defined in Code section 409A and rules,
regulations, and guidance of general application thereunder issued by the Department of the
Treasury, including —
(a)
Change in ownership
: a change in ownership of the Company occurs on the date any
one person or group accumulates ownership of Company stock constituting more than 50% of the
total fair market value or total voting power of Company stock,
(b)
Change in effective control
: (
x
) any one person, or more than one person acting as
a group, acquires within a 12-month period ownership of Company stock possessing 30% or more
of the total voting power of Company stock, or (
y
) a majority of the Company’s board of
directors is replaced during any 12-month period by directors whose appointment or election
is not endorsed in advance by a majority of the Company’s board of directors, or
(c)
Change in ownership of a substantial portion of assets
: a change in ownership of a
substantial portion of the Company’s assets occurs if in a 12-month period any one person or
more than one person acting as a group acquires from the Company assets having a total gross
fair market value equal to or exceeding 40% of the total gross fair market value of all of
the Company’s assets immediately before the acquisition or acquisitions. For this purpose,
gross fair market value means the value of the Company’s assets, or the value of the assets
being disposed of, determined without regard to any liabilities associated with the assets.
1.5
“
Code
” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and
guidance of general application issued by the Department of the Treasury under the Internal Revenue
Code of 1986, as amended.
1.6
“
Disability
” means, because of a medically determinable physical or mental impairment that
can be expected to result in death or that can be expected to last for a continuous period of at
least 12 months, (
x
) the Director is unable to engage in any substantial gainful activity, or (
y
)
the Director is receiving income replacement benefits for a period of at least three months under
an accident and health plan. Medical determination of disability may be made either by the Social
Security Administration or by the provider of an accident or health plan covering employees of the
Company or its subsidiaries. Upon request of the Plan Administrator, the Director must submit
proof to the Plan Administrator of the Social Security Administration’s or provider’s
determination.
1.7
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons
other than death, Disability, or Termination for Cause. Early Termination excludes a Separation
from Service governed by section 2.4.
2
1.8
“
Effective Date
” means October 1, 2001.
1.9
“
Normal Retirement Age
” means the Director’s 70
th
birthday.
1.10
“
Plan Administrator
” or “
Administrator
” means the plan administrator described in Article
7.
1.11
“
Plan Year
” means each 12-month period from the Effective Date of this Agreement.
1.12
“
Separation from Service
” means the Director’s service as a director and independent
contractor to the Company and any member of a controlled group, as defined in Code section 414,
terminates for any reason, other than because of a leave of absence approved by the Company or the
Director’s death. For purposes of this Agreement, if there is a dispute about the status of the
Director or the date of the Director’s Separation from Service, the Company shall have the sole and
absolute right to decide the dispute unless a Change in Control shall have occurred.
1.13
“
Termination for Cause
” or “
Cause
” means the Director is not nominated by the board or
nominating committee for reelection as a director after the expiration of his current term, or the
Director is removed from the board of directors, in either case —
(a) because of the Director’s gross negligence or gross neglect of duties, or
(b) because of the Director’s commission of a felony, or commission of a misdemeanor
involving moral turpitude, or
(c) because of the Director’s fraud, disloyalty, dishonesty, or willful violation of
any law or significant policy of the Company committed in connection with the Director’s
service and resulting in an adverse effect on the Company, or
(d) because the Director is removed from service or permanently prohibited from
participating in the Company’s or the Cortland Savings and Banking Company’s affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C.
1818(e)(4) or (g)(1)].
Article 2
Lifetime Benefits
2.1 Normal Retirement
. For Separation from Service on or after Normal Retirement Age, the
Company shall pay to the Director the benefit described in this section 2.1 instead of any other
benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates
under Article 5.
2.1.1
Amount of benefit
. The annual benefit under this section 2.1 is $10,000.
3
2.1.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director’s Separation from Service occurs, the Company shall pay the annual
benefit to the Director in 12 equal monthly installments on the first day of each month.
The annual benefit shall be paid to the Director for ten years.
2.2 Early Termination
. After Early Termination, the Company shall pay to the Director the
benefit described in this section 2.2 instead of any other benefit under this Agreement. However,
no benefits shall be payable if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.2 versus the benefit under section 2.4. If the Director’s
Separation from Service occurs within 12 months after a Change in Control, no benefit shall be
payable under this section 2.2 and the Director shall instead be entitled to the benefit under
section 2.4 or, if the Director first attained Normal Retirement Age, section 2.1.
2.2.1
Amount of benefit
. The annual benefit under this section 2.2 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.2.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.3 Disability Benefit
. If the Director’s Separation from Service occurs because of
Disability before Normal Retirement Age, the Company shall pay to the Director the benefit
described in this section 2.3 instead of any other benefit under this Agreement.
2.3.1
Amount of benefit
. The annual benefit under this section 2.3 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.3.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.4 Change in Control
. If the Director’s Separation from Service occurs within 12 months
after a Change in Control, the Company shall pay to the Director the benefit described in this
section 2.4 instead of any other benefit under this Agreement. However, no benefits shall be
payable under this Agreement if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.4 versus the Early Termination benefit under section 2.2.
4
If the Director’s Separation from Service occurs within 12 months after a Change in Control, no
benefit shall be payable under section 2.2 and the Director shall instead be entitled to the
benefit under this section 2.4. But if the Director shall have attained Normal Retirement Age when
Separation from Service within 12 months after a Change in Control occurs, the Director shall be
entitled solely to the benefit provided by section 2.1, not this section 2.4.
2.4.1
Amount of benefit
. The benefit under this section 2.4 is the Accrual Balance on
the date of the Director’s Separation from Service.
2.4.2
Payment of benefit
. The Company shall pay this benefit to the Director in a
single lump sum three days after the Director’s Separation from Service.
2.5 Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or
Disability Benefit When a Change in Control Occurs
. If a Change in Control occurs while the
Director is receiving the Normal Retirement Age benefit under section 2.1, the Company shall pay
the remaining salary continuation benefits to the Director in a single lump sum three days after
the Change in Control. If a Change in Control occurs after Separation from Service but while the
Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3, the Company shall pay the
remaining salary continuation benefits to the Director in a single lump sum three days after the
Change in Control. The lump-sum payment due to the Director as a result of a Change in Control
shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when
the Change in Control occurs.
2.6 Annual Benefit Statement
. Within 120 days after the end of each Plan Year the Plan
Administrator shall provide or cause to be provided to the Director an annual benefit statement
showing benefits payable or potentially payable to the Director under this Agreement. Each annual
benefit statement shall supersede the previous year’s annual benefit statement. If there is a
contradiction between this Agreement and the annual benefit statement concerning the amount of a
particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4
hereof, the amount of the benefit determined under the Agreement shall control.
2.7 Savings Clause Relating to Compliance with Code Section 409A
. If any provision of this
Agreement would subject the Director to additional tax or interest under Code section 409A, the
Company shall reform the provision. However, the Company shall maintain to the maximum extent
practicable the original intent of the applicable provision without subjecting the Director to
additional tax or interest, and the Company shall not be required to incur any additional
compensation expense as a result of the reformed provision.
2.8 One Benefit Only
. Despite anything to the contrary in this Agreement, the Director and
Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the
first event to occur that is dealt with by this Agreement. Except as provided in section 2.5 or
Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the
Director or Beneficiary to other or additional benefits under this Agreement.
5
Article 3
Death Benefits
3.1 Death Before Normal Retirement Age and Before Separation from Service
. If the Director
dies before Normal Retirement Age and before Separation from Service, 30 days after the Director’s
death the Company shall pay to the Director’s Beneficiary in a single lump sum an amount equal to
the Accrual Balance on the date of the Director’s death.
3.2 Death After Normal Retirement Age but Before Separation from Service
. If the Director
dies after Normal Retirement Age but before Separation from Service, the Company shall for a period
of ten years pay to the Director’s Beneficiary the Normal Retirement Benefit specified in section
2.1.
3.3 Death Before Normal Retirement Age but After Separation from Service
. (a)
After payments
begin
. If, a Separation from Service before Normal Retirement Age having previously occurred, the
Director dies after Early Termination benefits under section 2.2 or Disability benefits under
section 2.3 begin but before receiving all such payments, the Company shall pay the remaining
benefits to the Director’s Beneficiary at the same time and in the same amounts the payments would
have been made to the Director had the Director survived.
(b)
Before payments begin
. If, a Separation from Service before Normal Retirement Age having
previously occurred, the Director is entitled at Normal Retirement Age to the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3 but dies before the benefit
payments begin, the Company shall pay to the Director’s Beneficiary the Early Termination benefit
under section 2.2 or the Disability benefit under section 2.3, as the case may be, but the benefit
payments shall begin on the first day of the month immediately after the month in which the
Director’s death occurs.
3.4 Death After Separation from Service After Normal Retirement Age
. (a)
After payments
begin
. If, a Separation from Service on or after Normal Retirement Age having previously occurred,
the Director dies after benefit payments under section 2.1 begin but before receiving all such
payments, the Company shall pay the remaining benefits to the Director’s Beneficiary at the same
time and in the same amounts the payments would have been made to the Director had the Director
survived.
(b)
Before payments begin
. If, a Separation from Service on or after Normal Retirement Age
having previously occurred, the Director is entitled to the benefit under section Article 2.1 but
dies before the benefit payments begin, beginning with the month immediately after the month in
which the Director’s death occurs the Company shall pay to the Director’s Beneficiary the Normal
Retirement benefit under section 2.1.
Article 4
Beneficiaries
4.1 Beneficiary Designations
. The Director shall have the right to designate at any time a
Beneficiary to receive any benefits payable under this Agreement after the Director’s
6
death. The Beneficiary designated under this Agreement may be the same as or different from the
beneficiary designation under any other benefit plan of the Company in which the Director
participates.
4.2 Beneficiary Designation: Change
. The Director shall designate a Beneficiary by completing
and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its
designated agent. The Director’s Beneficiary designation shall be deemed automatically revoked if
the Beneficiary predeceases the Director or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by
completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and
the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance
by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations
previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last
Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before
the Director’s death.
4.3 Acknowledgment
. No designation or change in designation of a Beneficiary shall be
effective until received, accepted, and acknowledged in writing by the Plan Administrator or its
designated agent.
4.4 No Beneficiary Designation
. If the Director dies without a valid beneficiary designation,
or if all designated Beneficiaries predecease the Director, then the Director’s spouse shall be the
designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the
personal representative of the Director’s estate.
4.5 Facility of Payment
. If a benefit is payable to a minor, to a person declared
incapacitated, or to a person incapable of handling the disposition of his or her property, the
Company may pay such benefit to the guardian, legal representative, or person having the care or
custody of the minor, incapacitated person, or incapable person. The Company may require proof of
incapacity, minority, or guardianship as it may deem appropriate before distribution of the
benefit. Distribution shall completely discharge the Company from all liability for the benefit.
Article 5
General Limitations
5.1 Termination for Cause
. Despite any contrary provision of this Agreement, the Company
shall not pay any benefit under this Agreement and this Agreement shall terminate if the Director’s
Separation from Service is the result of Termination for Cause. Likewise, no benefits shall be
paid under the Split Dollar Agreement and Endorsement, as amended, between the Company and the
Director and the Split Dollar Agreement and Endorsement, as amended, also shall terminate if
Separation from Service is the result of Termination for Cause. The board of directors or a duly
authorized committee of the board shall have the sole and absolute right to determine whether the
bases for denial of benefits for cause exist. Benefits may be denied for cause regardless of
whether the Director continued to serve as a director after the board or committee made its
determination not to nominate the Director for reelection.
7
5.2 Misstatement
. The Company shall not pay any benefit under this Agreement if the Director
has made any material misstatement of fact on any application for life insurance purchased by the
Company.
5.3 Removal
. If the Director is removed or permanently prohibited from participating in the
Company’s or the Cortland Savings and Banking Company’s affairs by an order issued under section
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all
obligations of the Company under this Agreement shall terminate as of the effective date of the
order, and the Split Dollar Agreement and Endorsement, as amended, also shall terminate.
5.4 Default
. Despite any contrary provision of this Agreement, if the Company or the Cortland
Savings and Banking Company is in “default” or “in danger of default,” as those terms are defined
in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this
Agreement shall terminate.
5.5 FDIC Open-Bank Assistance
. All obligations under this Agreement shall terminate, except
to the extent determined that continuation of the contract is necessary for the continued operation
of the Cortland Savings and Banking Company, when the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the Cortland Savings and Banking Company
under the authority contained in section 13(c) of the Federal Deposit Insurance Act. 12 U.S.C.
1823(c). Any rights of the parties that have already vested shall not be affected by such action,
however.
Article 6
Claims and Review Procedures
6.1 Claims Procedure
. The Company shall notify any person or entity that makes a claim for
benefits under this Agreement (the “Claimant”) in writing, within 90 days of Claimant’s written
application for benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (
w
) the specific reasons for such denial, (
x
) a specific
reference to the provisions of the Agreement on which the denial is based, (
y
) a description of any
additional information or material necessary for the Claimant to perfect his or her claim, and a
description of why it is needed, and (
z
) an explanation of the Agreement’s claims review procedure
and other appropriate information as to the steps to be taken if the Claimant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may extend the time for
up to an additional 90 days.
6.2 Review Procedure
. If the Claimant is determined by the Company not to be eligible for
benefits, or if the Claimant believes that he or she is entitled to greater or different benefits,
the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a
petition for review with the Company within 60 days after receipt of the notice issued
8
by the Company. Said petition shall state the specific reasons, which the Claimant believes
entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt
by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Company verbally or in writing, and the Claimant
(or counsel) shall have the right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the 60-day period, stating specifically the basis of its
decision, written in a manner to be understood by the Claimant and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period
is not sufficient, the decision may be deferred for up to another 60 days at the election of the
Company, but notice of this deferral shall be given to the Claimant.
Article 7
Administration of Agreement
7.1 Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator
consisting of the Company’s board of directors or such committee or person(s) as the board shall
appoint. The Director may be a member of the Plan Administrator. The Plan Administrator shall
also have the discretion and authority to (
x
) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Agreement and (
y
) decide or resolve any and
all questions, including interpretations of this Agreement, as may arise in connection with the
Agreement.
7.2 Agents
. In the administration of this Agreement, the Plan Administrator may employ agents
and delegate to them such administrative duties as it sees fit (including acting through a duly
appointed representative), and may from time to time consult with counsel, who may be counsel to
the Company.
7.3 Binding Effect of Decisions
. The decision or action of the Plan Administrator about any
question arising out of the administration, interpretation, and application of the Agreement and
the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Agreement. No Director or Beneficiary shall be deemed to have
any right, vested or nonvested, regarding the continued use of any previously adopted assumptions,
including but not limited to the discount rate and calculation method employed in the determination
of the Accrual Balance.
7.4 Indemnity of Plan Administrator
. The Company shall indemnify and hold harmless the
members of the Plan Administrator against any and all claims, losses, damages, expenses, or
liabilities arising from any action or failure to act with respect to this Agreement, except in the
case of willful misconduct by the Plan Administrator or any of its members.
7.5 Company Information
. To enable the Plan Administrator to perform its functions, the
Company shall supply full and timely information to the Plan Administrator on all matters relating
to the date and circumstances of the retirement, Disability, death, or Separation from Service of
the Director, and such other pertinent information as the Plan Administrator may reasonably
require.
9
Article 8
Miscellaneous
8.1 Amendment and Termination
. This Agreement may be amended solely by a written agreement
signed by the Company and by the Director. Except as provided in Article 5, this Agreement may be
terminated solely by a written agreement signed by the Company and by the Director.
8.2 Binding Effect
. This Agreement shall bind the Director and the Company, and their
beneficiaries, survivors, executors, successors, administrators, and transferees.
8.3 No Guarantee of Service
. This Agreement is not a contract for services. It does not give
the Director the right to remain a Director of the Company nor does it interfere with the right of
the Company’s shareholders not to re-elect the Director or the right of shareholders or the Board
to remove an individual as a director of the Company. The Agreement also does not require the
Director to remain a director or interfere with the Director’s right to terminate service at any
time.
8.4 Non-Transferability
. Benefits under this Agreement may not be sold, transferred,
assigned, pledged, attached, or encumbered.
8.5 Successors
;
Binding Agreement
. By an assumption agreement in form and substance
satisfactory to the Director, the Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform this Agreement had no
succession occurred.
8.6 Tax Withholding
. The Company shall withhold any taxes that are required to be withheld
from the benefits provided under this Agreement.
8.7 Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of
the State of Ohio, except to the extent preempted by the laws of the United States of America.
8.8 Unfunded Arrangement
. The Director and Beneficiary are general unsecured creditors of the
Company for the payment of benefits under this Agreement. The benefits represent the mere promise
by the Company to pay benefits. The rights to benefits are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director’s life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
8.9 Entire Agreement
. This Agreement and the Split Dollar Agreement and Endorsement, as
amended, constitute the entire agreement between the Company and the Director concerning the
subject matter hereof. No rights are granted to the Director under this Agreement other than those
specifically set forth herein. This Agreement amends and restates in
10
its entirety the Director Retirement Agreement dated as of October 1, 2001, as amended February 24,
2004.
8.10 Severability
. If any provision of this Agreement is held invalid, such invalidity shall
not affect any other provision of this Agreement not held invalid, and each such other provision
shall continue in full force and effect to the full extent consistent with law. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such
provision, and the remainder of such provision, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent with law.
8.11 Captions and Counterparts
. Captions and section headings in this Agreement are included
solely for convenience of reference and shall not affect the meaning or interpretation of any
provision of this Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one and the same
instrument.
8.12 Notices
. All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, return receipt requested, with postage prepaid, to the following addresses or to
such other address as either party may designate by like notice. If to the Company, notice shall
be given to the board of directors, Cortland Bancorp, 194 W. Main Street, P.O. Box 98, Cortland,
Ohio 44410-1466, or to such other or additional person or persons as the Company shall have
designated to the Director in writing. If to the Director, notice shall be given to the Director
at the address of the Director appearing on the Company’s records, or to such other or additional
person or persons as the Director shall have designated to the Company in writing.
In Witness Whereof
, the Director and a duly authorized Company officer have executed
this Amended Director Retirement Agreement as of the date first written above.
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Director
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Cortland Bancorp
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By:
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Title:
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Beneficiary Designation
Cortland Bancorp
Amended Director Retirement Agreement
I, Richard B. Thompson, designate the following as beneficiary of any death benefits under
this Amended Director Retirement Agreement:
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Note:
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To name a trust as beneficiary, please provide the name of the trustee(s) and the
exact
name and date of the trust agreement.
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I understand that I may change these beneficiary designations by filing a new written
designation with the Company. I further understand that the designations will be automatically
revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our
marriage is subsequently dissolved.
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Signature:
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Richard B. Thompson
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Date:
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200___
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Received by the Company this
day of
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By:
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Title:
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12
Exhibit 10.11
Cortland Bancorp
Amended Director Retirement Agreement
This
Amended Director Retirement Agreement
(this “Agreement”) is entered into as of
this 18th day of December, 2007, by and between Cortland Bancorp (the “Company”), a bank holding
company located in Cortland, Ohio, and Timothy K. Woofter, a director of the Company (the
“Director”).
Whereas
, to encourage the Director to remain a member of the Company’s board of
directors, the Company entered into a Director Retirement Agreement with the Director dated as of
March 1, 2001, as amended February 24, 2004, providing for specified retirement benefits for the
Director after termination of director service, payable from the Company’s general assets,
Whereas
, none of the conditions or events included in the definition of the term
“golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit
Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule
359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Company, is
contemplated insofar as the Company or the Cortland Savings and Banking Company is concerned, and
Whereas
, the Company and the Director intend that this Agreement shall amend and
restate in its entirety the March 1, 2001 Director Retirement Agreement, as amended February 24,
2004.
Now Therefore
, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the
Company hereby agree as follows.
Article 1
Definitions
1.1
“
Accrual Balance
” means the liability that should be accrued by the Company under
generally accepted accounting principles (“GAAP”) for the Company’s obligation to the Director
under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by
Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate
specified hereinafter. The Accrual Balance at Normal Retirement Age shall equal the present value
of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator
for determining the Accrual Balance. The rate is based on the yield on a 20-year corporate bond
rated Aa by Moody’s, rounded to the nearest
1
/
4
%. The Plan Administrator may adjust the discount
rate to maintain the rate within reasonable standards according to GAAP.
1.2
“
Beneficiary
” means each designated person, determined according to Article 4, or the
estate of the deceased Director, entitled to benefits, if any, at the Director’s death.
1.3
“
Beneficiary Designation Form
” means the form established from time to time by the Plan
Administrator that the Director completes, signs, and returns to the Plan Administrator to
designate one or more Beneficiaries.
1.4
“
Change in Control
” means a change in control as defined in Code section 409A and rules,
regulations, and guidance of general application thereunder issued by the Department of the
Treasury, including –
(a)
Change in ownership
: a change in ownership of the Company occurs on the date any
one person or group accumulates ownership of Company stock constituting more than 50% of the
total fair market value or total voting power of Company stock,
(b)
Change in effective control
: (
x
) any one person, or more than one person acting as
a group, acquires within a 12-month period ownership of Company stock possessing 30% or more
of the total voting power of Company stock, or (
y
) a majority of the Company’s board of
directors is replaced during any 12-month period by directors whose appointment or election
is not endorsed in advance by a majority of the Company’s board of directors, or
(c)
Change in ownership of a substantial portion of assets
: a change in ownership of a
substantial portion of the Company’s assets occurs if in a 12-month period any one person or
more than one person acting as a group acquires from the Company assets having a total gross
fair market value equal to or exceeding 40% of the total gross fair market value of all of
the Company’s assets immediately before the acquisition or acquisitions. For this purpose,
gross fair market value means the value of the Company’s assets, or the value of the assets
being disposed of, determined without regard to any liabilities associated with the assets.
1.5
“
Code
” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and
guidance of general application issued by the Department of the Treasury under the Internal Revenue
Code of 1986, as amended.
1.6
“
Disability
” means, because of a medically determinable physical or mental impairment that
can be expected to result in death or that can be expected to last for a continuous period of at
least 12 months, (
x
) the Director is unable to engage in any substantial gainful activity, or (
y
)
the Director is receiving income replacement benefits for a period of at least three months under
an accident and health plan. Medical determination of disability may be made either by the Social
Security Administration or by the provider of an accident or health plan covering employees of the
Company or its subsidiaries. Upon request of the Plan Administrator, the Director must submit
proof to the Plan Administrator of the Social Security Administration’s or provider’s
determination.
1.7
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons
other than death, Disability, or Termination for Cause. Early Termination excludes a Separation
from Service governed by section 2.4.
2
1.8
“
Effective Date
” means March 1, 2001.
1.9
“
Normal Retirement Age
” means the Director’s 63
rd
birthday.
1.10
“
Plan Administrator
” or “
Administrator
” means the plan administrator described in Article
7.
1.11
“
Plan Year
” means each 12-month period from the Effective Date of this Agreement.
1.12
“
Separation from Service
” means the Director’s service as a director and independent
contractor to the Company and any member of a controlled group, as defined in Code section 414,
terminates for any reason, other than because of a leave of absence approved by the Company or the
Director’s death. For purposes of this Agreement, if there is a dispute about the status of the
Director or the date of the Director’s Separation from Service, the Company shall have the sole and
absolute right to decide the dispute unless a Change in Control shall have occurred.
1.13
“
Termination for Cause
” or “
Cause
” means the Director is not nominated by the board or
nominating committee for reelection as a director after the expiration of his current term, or the
Director is removed from the board of directors, in either case –
(a) because of the Director’s gross negligence or gross neglect of duties, or
(b) because of the Director’s commission of a felony, or commission of a misdemeanor
involving moral turpitude, or
(c) because of the Director’s fraud, disloyalty, dishonesty, or willful violation of
any law or significant policy of the Company committed in connection with the Director’s
service and resulting in an adverse effect on the Company, or
(d) because the Director is removed from service or permanently prohibited from
participating in the Company’s or the Cortland Savings and Banking Company’s affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C.
1818(e)(4) or (g)(1)].
Article 2
Lifetime Benefits
2.1 Normal Retirement
. For Separation from Service on or after Normal Retirement Age, the
Company shall pay to the Director the benefit described in this section 2.1 instead of any other
benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates
under Article 5.
2.1.1
Amount of benefit
. The annual benefit under this section 2.1 is $10,000.
3
2.1.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director’s Separation from Service occurs, the Company shall pay the annual
benefit to the Director in 12 equal monthly installments on the first day of each month.
The annual benefit shall be paid to the Director for ten years.
2.2 Early Termination
. After Early Termination, the Company shall pay to the Director the
benefit described in this section 2.2 instead of any other benefit under this Agreement. However,
no benefits shall be payable if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.2 versus the benefit under section 2.4. If the Director’s
Separation from Service occurs within 12 months after a Change in Control, no benefit shall be
payable under this section 2.2 and the Director shall instead be entitled to the benefit under
section 2.4 or, if the Director first attained Normal Retirement Age, section 2.1.
2.2.1
Amount of benefit
. The annual benefit under this section 2.2 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.2.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.3 Disability Benefit
. If the Director’s Separation from Service occurs because of
Disability before Normal Retirement Age, the Company shall pay to the Director the benefit
described in this section 2.3 instead of any other benefit under this Agreement.
2.3.1
Amount of benefit
. The annual benefit under this section 2.3 is calculated as
the amount that fully amortizes the Accrual Balance existing at the end of the month
immediately before the month in which Separation from Service occurs, amortizing that
Accrual Balance over ten years and taking into account interest at the discount rate or
rates established by the Plan Administrator.
2.3.2
Payment of benefit
. Beginning with the month immediately after the month in
which the Director attains Normal Retirement Age, the Company shall pay the annual benefit
to the Director in 12 equal monthly installments on the first day of each month. The annual
benefit shall be paid to the Director for ten years.
2.4 Change in Control
. If the Director’s Separation from Service occurs within 12 months
after a Change in Control, the Company shall pay to the Director the benefit described in this
section 2.4 instead of any other benefit under this Agreement. However, no benefits shall be
payable under this Agreement if this Agreement terminates under Article 5. Neither the Director
nor the Company shall be entitled to elect in the 12-month period after a Change in Control between
the benefit under this section 2.4 versus the Early Termination benefit under section 2.2.
4
If the Director’s Separation from Service occurs within 12 months after a Change in Control, no
benefit shall be payable under section 2.2 and the Director shall instead be entitled to the
benefit under this section 2.4. But if the Director shall have attained Normal Retirement Age when
Separation from Service within 12 months after a Change in Control occurs, the Director shall be
entitled solely to the benefit provided by section 2.1, not this section 2.4.
2.4.1
Amount of benefit
. The benefit under this section 2.4 is the Accrual Balance on
the date of the Director’s Separation from Service.
2.4.2
Payment of benefit
. The Company shall pay this benefit to the Director in a
single lump sum three days after the Director’s Separation from Service.
2.5 Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or
Disability Benefit When a Change in Control Occurs
. If a Change in Control occurs while the
Director is receiving the Normal Retirement Age benefit under section 2.1, the Company shall pay
the remaining salary continuation benefits to the Director in a single lump sum three days after
the Change in Control. If a Change in Control occurs after Separation from Service but while the
Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3, the Company shall pay the
remaining salary continuation benefits to the Director in a single lump sum three days after the
Change in Control. The lump-sum payment due to the Director as a result of a Change in Control
shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when
the Change in Control occurs.
2.6 Annual Benefit Statement
. Within 120 days after the end of each Plan Year the Plan
Administrator shall provide or cause to be provided to the Director an annual benefit statement
showing benefits payable or potentially payable to the Director under this Agreement. Each annual
benefit statement shall supersede the previous year’s annual benefit statement. If there is a
contradiction between this Agreement and the annual benefit statement concerning the amount of a
particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4
hereof, the amount of the benefit determined under the Agreement shall control.
2.7 Savings Clause Relating to Compliance with Code Section 409A
. If any provision of this
Agreement would subject the Director to additional tax or interest under Code section 409A, the
Company shall reform the provision. However, the Company shall maintain to the maximum extent
practicable the original intent of the applicable provision without subjecting the Director to
additional tax or interest, and the Company shall not be required to incur any additional
compensation expense as a result of the reformed provision.
2.8 One Benefit Only
. Despite anything to the contrary in this Agreement, the Director and
Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the
first event to occur that is dealt with by this Agreement. Except as provided in section 2.5 or
Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the
Director or Beneficiary to other or additional benefits under this Agreement.
5
Article 3
Death Benefits
3.1 Death Before Normal Retirement Age and Before Separation from Service
. If the Director
dies before Normal Retirement Age and before Separation from Service, 30 days after the Director’s
death the Company shall pay to the Director’s Beneficiary in a single lump sum an amount equal to
the Accrual Balance on the date of the Director’s death.
3.2 Death After Normal Retirement Age but Before Separation from Service
. If the Director
dies after Normal Retirement Age but before Separation from Service, the Company shall for a period
of ten years pay to the Director’s Beneficiary the Normal Retirement Benefit specified in section
2.1.
3.3 Death Before Normal Retirement Age but After Separation from Service
. (a)
After payments
begin
. If, a Separation from Service before Normal Retirement Age having previously occurred, the
Director dies after Early Termination benefits under section 2.2 or Disability benefits under
section 2.3 begin but before receiving all such payments, the Company shall pay the remaining
benefits to the Director’s Beneficiary at the same time and in the same amounts the payments would
have been made to the Director had the Director survived.
(b)
Before payments begin
. If, a Separation from Service before Normal Retirement Age having
previously occurred, the Director is entitled at Normal Retirement Age to the Early Termination
benefit under section 2.2 or the Disability benefit under section 2.3 but dies before the benefit
payments begin, the Company shall pay to the Director’s Beneficiary the Early Termination benefit
under section 2.2 or the Disability benefit under section 2.3, as the case may be, but the benefit
payments shall begin on the first day of the month immediately after the month in which the
Director’s death occurs.
3.4 Death After Separation from Service After Normal Retirement Age
. (a)
After payments
begin
. If, a Separation from Service on or after Normal Retirement Age having previously occurred,
the Director dies after benefit payments under section 2.1 begin but before receiving all such
payments, the Company shall pay the remaining benefits to the Director’s Beneficiary at the same
time and in the same amounts the payments would have been made to the Director had the Director
survived.
(b)
Before payments begin
. If, a Separation from Service on or after Normal Retirement Age
having previously occurred, the Director is entitled to the benefit under section Article 2.1 but
dies before the benefit payments begin, beginning with the month immediately after the month in
which the Director’s death occurs the Company shall pay to the Director’s Beneficiary the Normal
Retirement benefit under section 2.1.
Article 4
Beneficiaries
4.1 Beneficiary Designations
. The Director shall have the right to designate at any time a
Beneficiary to receive any benefits payable under this Agreement after the Director’s
6
death. The Beneficiary designated under this Agreement may be the same as or different from the
beneficiary designation under any other benefit plan of the Company in which the Director
participates.
4.2 Beneficiary Designation: Change
. The Director shall designate a Beneficiary by completing
and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its
designated agent. The Director’s Beneficiary designation shall be deemed automatically revoked if
the Beneficiary predeceases the Director or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by
completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and
the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance
by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations
previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last
Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before
the Director’s death.
4.3 Acknowledgment
. No designation or change in designation of a Beneficiary shall be
effective until received, accepted, and acknowledged in writing by the Plan Administrator or its
designated agent.
4.4 No Beneficiary Designation
. If the Director dies without a valid beneficiary designation,
or if all designated Beneficiaries predecease the Director, then the Director’s spouse shall be the
designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the
personal representative of the Director’s estate.
4.5 Facility of Payment
. If a benefit is payable to a minor, to a person declared
incapacitated, or to a person incapable of handling the disposition of his or her property, the
Company may pay such benefit to the guardian, legal representative, or person having the care or
custody of the minor, incapacitated person, or incapable person. The Company may require proof of
incapacity, minority, or guardianship as it may deem appropriate before distribution of the
benefit. Distribution shall completely discharge the Company from all liability for the benefit.
Article 5
General Limitations
5.1 Termination for Cause
. Despite any contrary provision of this Agreement, the Company
shall not pay any benefit under this Agreement and this Agreement shall terminate if the Director’s
Separation from Service is the result of Termination for Cause. Likewise, no benefits shall be
paid under the Split Dollar Agreement and Endorsement, as amended, between the Company and the
Director and the Split Dollar Agreement and Endorsement, as amended, also shall terminate if
Separation from Service is the result of Termination for Cause. The board of directors or a duly
authorized committee of the board shall have the sole and absolute right to determine whether the
bases for denial of benefits for cause exist. Benefits may be denied for cause regardless of
whether the Director continued to serve as a director after the board or committee made its
determination not to nominate the Director for reelection.
7
5.2 Misstatement
. The Company shall not pay any benefit under this Agreement if the Director
has made any material misstatement of fact on any application for life insurance purchased by the
Company.
5.3 Removal
. If the Director is removed or permanently prohibited from participating in the
Company’s or the Cortland Savings and Banking Company’s affairs by an order issued under section
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all
obligations of the Company under this Agreement shall terminate as of the effective date of the
order, and the Split Dollar Agreement and Endorsement, as amended, also shall terminate.
5.4 Default
. Despite any contrary provision of this Agreement, if the Company or the Cortland
Savings and Banking Company is in “default” or “in danger of default,” as those terms are defined
in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this
Agreement shall terminate.
5.5 FDIC Open-Bank Assistance
. All obligations under this Agreement shall terminate, except
to the extent determined that continuation of the contract is necessary for the continued operation
of the Cortland Savings and Banking Company, when the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the Cortland Savings and Banking Company
under the authority contained in section 13(c) of the Federal Deposit Insurance Act. 12 U.S.C.
1823(c). Any rights of the parties that have already vested shall not be affected by such action,
however.
Article 6
Claims and Review Procedures
6.1 Claims Procedure
. The Company shall notify any person or entity that makes a claim for
benefits under this Agreement (the “Claimant”) in writing, within 90 days of Claimant’s written
application for benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (
w
) the specific reasons for such denial, (
x
) a specific
reference to the provisions of the Agreement on which the denial is based, (
y
) a description of any
additional information or material necessary for the Claimant to perfect his or her claim, and a
description of why it is needed, and (
z
) an explanation of the Agreement’s claims review procedure
and other appropriate information as to the steps to be taken if the Claimant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may extend the time for
up to an additional 90 days.
6.2 Review Procedure
. If the Claimant is determined by the Company not to be eligible for
benefits, or if the Claimant believes that he or she is entitled to greater or different benefits,
the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a
petition for review with the Company within 60 days after receipt of the notice issued
8
by the Company. Said petition shall state the specific reasons, which the Claimant believes
entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt
by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Company verbally or in writing, and the Claimant
(or counsel) shall have the right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the 60-day period, stating specifically the basis of its
decision, written in a manner to be understood by the Claimant and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period
is not sufficient, the decision may be deferred for up to another 60 days at the election of the
Company, but notice of this deferral shall be given to the Claimant.
Article 7
Administration of Agreement
7.1 Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator
consisting of the Company’s board of directors or such committee or person(s) as the board shall
appoint. The Director may be a member of the Plan Administrator. The Plan Administrator shall
also have the discretion and authority to (
x
) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Agreement and (
y
) decide or resolve any and
all questions, including interpretations of this Agreement, as may arise in connection with the
Agreement.
7.2 Agents
. In the administration of this Agreement, the Plan Administrator may employ agents
and delegate to them such administrative duties as it sees fit (including acting through a duly
appointed representative), and may from time to time consult with counsel, who may be counsel to
the Company.
7.3 Binding Effect of Decisions
. The decision or action of the Plan Administrator about any
question arising out of the administration, interpretation, and application of the Agreement and
the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Agreement. No Director or Beneficiary shall be deemed to have
any right, vested or nonvested, regarding the continued use of any previously adopted assumptions,
including but not limited to the discount rate and calculation method employed in the determination
of the Accrual Balance.
7.4 Indemnity of Plan Administrator
. The Company shall indemnify and hold harmless the
members of the Plan Administrator against any and all claims, losses, damages, expenses, or
liabilities arising from any action or failure to act with respect to this Agreement, except in the
case of willful misconduct by the Plan Administrator or any of its members.
7.5 Company Information
. To enable the Plan Administrator to perform its functions, the
Company shall supply full and timely information to the Plan Administrator on all matters relating
to the date and circumstances of the retirement, Disability, death, or Separation from Service of
the Director, and such other pertinent information as the Plan Administrator may reasonably
require.
9
Article 8
Miscellaneous
8.1 Amendment and Termination
. This Agreement may be amended solely by a written agreement
signed by the Company and by the Director. Except as provided in Article 5, this Agreement may be
terminated solely by a written agreement signed by the Company and by the Director.
8.2 Binding Effect
. This Agreement shall bind the Director and the Company, and their
beneficiaries, survivors, executors, successors, administrators, and transferees.
8.3 No Guarantee of Service
. This Agreement is not a contract for services. It does not give
the Director the right to remain a Director of the Company nor does it interfere with the right of
the Company’s shareholders not to re-elect the Director or the right of shareholders or the Board
to remove an individual as a director of the Company. The Agreement also does not require the
Director to remain a director or interfere with the Director’s right to terminate service at any
time.
8.4 Non-Transferability
. Benefits under this Agreement may not be sold, transferred,
assigned, pledged, attached, or encumbered.
8.5 Successors
;
Binding Agreement
. By an assumption agreement in form and substance
satisfactory to the Director, the Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform this Agreement had no
succession occurred.
8.6 Tax Withholding
. The Company shall withhold any taxes that are required to be withheld
from the benefits provided under this Agreement.
8.7 Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of
the State of Ohio, except to the extent preempted by the laws of the United States of America.
8.8 Unfunded Arrangement
. The Director and Beneficiary are general unsecured creditors of the
Company for the payment of benefits under this Agreement. The benefits represent the mere promise
by the Company to pay benefits. The rights to benefits are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director’s life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
8.9 Entire Agreement
. This Agreement and the Split Dollar Agreement and Endorsement, as
amended, constitute the entire agreement between the Company and the Director concerning the
subject matter hereof. No rights are granted to the Director under this Agreement other than those
specifically set forth herein. This Agreement amends and restates in
10
\
its entirety the Director Retirement Agreement dated as of March 1, 2001, as amended February 24,
2004.
8.10 Severability
. If any provision of this Agreement is held invalid, such invalidity shall
not affect any other provision of this Agreement not held invalid, and each such other provision
shall continue in full force and effect to the full extent consistent with law. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such
provision, and the remainder of such provision, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent with law.
8.11 Captions and Counterparts
. Captions and section headings in this Agreement are included
solely for convenience of reference and shall not affect the meaning or interpretation of any
provision of this Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one and the same
instrument.
8.12 Notices
. All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, return receipt requested, with postage prepaid, to the following addresses or to
such other address as either party may designate by like notice. If to the Company, notice shall
be given to the board of directors, Cortland Bancorp, 194 W. Main Street, P.O. Box 98, Cortland,
Ohio 44410-1466, or to such other or additional person or persons as the Company shall have
designated to the Director in writing. If to the Director, notice shall be given to the Director
at the address of the Director appearing on the Company’s records, or to such other or additional
person or persons as the Director shall have designated to the Company in writing.
In Witness Whereof
, the Director and a duly authorized Company officer have executed
this Amended Director Retirement Agreement as of the date first written above.
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Director
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Cortland Bancorp
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By:
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Timothy K. Woofter
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Title:
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11
Beneficiary Designation
Cortland Bancorp
Amended Director Retirement Agreement
I, Timothy K. Woofter, designate the following as beneficiary of any death benefits under this
Amended Director Retirement Agreement:
Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the
exact
name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new written
designation with the Company. I further understand that the designations will be automatically
revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our
marriage is subsequently dissolved.
Signature:
Timothy K. Woofter
Date:
, 200___
Received
by the Company this
day of
,
200 ___.
By:
Title:
12
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 in
Internal
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 the
Internal 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 in
Internal Control-Integrated Framework
issued 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 in
Internal Control-Integrated Framework
issued 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 on
interest-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” for
forward-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 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.
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 and
year-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
³
100,000
|
|
|
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 and
mortgage-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 a
lock-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 the
20-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 the
long-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, (Forms
10-Q),
an
annual report (Form 10-K), current reports on
Form 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
|
|
|
|
|
|
|
|
|
|
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Fourth Quarter
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$
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19.79
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$
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16.99
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$
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0.41
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Third Quarter
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19.79
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17.91
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0.21
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Second Quarter
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21.12
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18.85
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0.21
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First Quarter
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21.92
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19.98
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0.21
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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 or
E-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
Exhibit 14
Cortland Banks
Code of Ethics
(Revised and Adopted by the Board of Directors August 10, 2004)
This Code supersedes and replaces any prior communications, policies, rules, practices, standards
and/or guidelines to the contrary, whether written or oral. To the extent there are any conflicts
with the Employee Handbook, the language of this Code controls.
Introduction
This Code consists of basic standards of business practice for Cortland Banks (Here-in-after
being referred to as “the Bank”, “the Company”, “the Corporation”) as well as professional and
personal conduct. Such standards require honesty and candor in our activities, including the
observance of the spirit and the letter of the law. As set forth below, these standards have both
personal and corporate implications.
This Code of Business Conduct and Ethics covers a wide range of business practices and
procedures. It does not cover every issue that may arise, but it sets out basic principles to
guide all employees of the Company. All of our employees must conduct themselves accordingly and
seek to avoid even the appearance of improper behavior. As necessary, the Code should also be
provided to and followed by the Company’s agents and representatives, including consultants.
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•
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Always ask first, act later:
If you are unsure of what to do in any situation,
seek guidance
before you act.
You should contact the Director of Human Resources.
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•
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If a law conflicts with a policy in this Code, you must comply with the law; however, if
a local custom or policy conflicts with this Code, you must comply with the Code. If you
have any questions about these conflicts, you should
contact the Director of Human
Resources on
how to handle the situation.
|
Those who violate the standards in this Code will be subject to
the Bank’s disciplinary action
procedure which can be found in the “
Cortland Banks Employee Handbook”.
Cortland Banks
retains complete discretion as to the type of disciplinary action taken and may deviate from the
normal procedure due to the nature and severity of the violation whenever the Company deems it
appropriate.
Violation of the Cortland Banks Code of Business Conduct and Ethics Policy may result in the
following discipline, up to and including discharge.
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a)
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The issuance of a verbal warning for the first occurrence of a lesser offense (e.g.,
abusing personal telephone call privileges, tardiness, absenteeism, personal appearance).
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b)
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A written disciplinary warning that outlines performance expectations and consequences.
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c)
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Suspension
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d)
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Discharge
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If you are in a situation, which you believe may violate or lead to a violation of this Code,
follow the guidelines described in number 36 on page 57 of this Code.
1. Compliance with Laws, Rules and Regulations
Obeying the law, both in letter and in spirit, is the foundation on which this Company’s
ethical standards are built. All employees must respect and obey the laws of the cities and states
in which we operate and the United State of America. Although not all employees are expected to
know the details of these laws, it is important to know enough to determine when to seek advice
from supervisors, managers, or other appropriate personnel.
The Company holds information and training sessions to promote compliance with laws, rules and
regulations, including insider-trading laws.
Because the Corporation is judged by the collective performance and public perception of its
employees, you must always act in a manner that merits public trust and confidence. The following
are our basic principles of personal conduct:
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•
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You must not take any action, either personally or on behalf of the Corporation, which
will violate any law or regulation affecting our business.
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•
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You must perform your assigned duties to the best of your ability and in the best
interests of the Corporation, its customers, associates and shareholders.
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•
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You must avoid all circumstances that could produce conflicts or the appearance of
conflicts between your personal interests and those of the Corporation.
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You must comply with security and safety procedures established by the Corporation.
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You must adhere to and fully comply with all of the Corporation’s policies and
procedures, including the Code, the Policy and the Employee Handbook.
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You must respect the confidentiality of information obtained in the course of business,
including information related to the financial affairs of customers or to the investment
value of any business enterprise.
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•
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You must exercise absolute candor and fully cooperate in providing facts and information
in connection with company investigations, or if requested of you by management or other
authorized persons, to the fullest extent permitted by law.
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•
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You must not use corporate resources or your corporate position in pursuit of personal
interests that violate the Documents or any law or regulation.
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Some specific examples of prohibited conduct are set forth in the Employee Handbook for your
guidance, but such examples are not meant to be all-inclusive.
A “conflict of interest” exists when a person’s private interest interferes in any way with
the interests of the Company. A conflict situation can arise when an employee, officer or director
takes actions or has interests that may make it difficult to perform his or her Company work
objectively and effectively. Conflicts of interest may also arise when an employee, officer or
Director, or members of his or her family, receives improper personal benefits as a result of his
or her position in the Company.
Loans to, or guarantees of obligations of, employees and their family members may create
conflicts of interest.
It is almost always a conflict of interest for a Company employee to work
simultaneously for a competitor, customer or supplier. You are not allowed to work for a
competitor as a consultant or board member. The best policy is to avoid any direct or indirect
business connections with our customers, suppliers or competitors, except on our behalf.
Conflicts of interest are prohibited as a matter of Company policy. Conflicts of interest may
not always be clear-cut, so if you have a question, you should consult with higher levels of
management or the Director of Human Resources. Any employee, officer or director who becomes aware
of a conflict or potential conflict should bring it to the attention of a supervisor, manager or
other appropriate person or consult the procedures described in Section 35 & 36 of this Code.
You must avoid conflicts between personal interests and the interests of Cortland Banks, or
even the appearance of such conflicts. You must not act on behalf of Cortland Banks in any
transaction involving persons or organizations with which you, or a family member
( 1 )
,
have any financial or residual interest, other than through a compensation or similar plan
sponsored by Cortland Banks.
Defined broadly, a conflict of interest includes any situation in which you are engaged in two
or more activities or relationships that, to some degree, are incompatible. Such situations might
include activities, conduct or investments that could conflict with your duty to Cortland Banks, or
that could adversely affect your judgment or job performance. The appearance of a conflict of
interest can often be as detrimental as a conflict itself. You should exercise sound judgment
before committing to any activity or participating in any transaction that could potentially be a
conflict. In general, you should consider the following factors to avoid conflict of interest
situations:
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•
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Perception — Could the activity or transaction be perceived as a conflict of interest or
a potential conflict by others, including associates, customers, suppliers, competitors,
regulators or the public? If all the facts of the activity or transaction were made public,
would you or the Corporation be embarrassed?
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•
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Intent — Is the activity or transaction being offered in an attempt to influence your
judgment?
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•
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Impact — Will the Corporation be disadvantaged if you participate in the activity or
transaction?
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•
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Objectivity — Will participation in the activity or transaction in any way affect your
ability to be objective with regard to any decision concerning a customer, associate or
supplier?
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•
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Time considerations — Will the time required for the activity or transaction interfere
with your ability to effectively carry out your job responsibilities at Cortland Banks?
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1
As used in the Cortland Banks Code of Ethics, “family member” means your spouse, child,
an adopted child, mother, father, sister, brother, grandparent, grandchild, sibling, aunt, uncle,
first cousin, sister-in-law, brother-in-law, mother-in-law, father-in-law, daughter-in-law,
son-in-law, or “step” relationship or a legal guardian, or other person who stands in place of a
parent. “Family member” may be defined differently in other policies that are incorporated by
reference into the Code.
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4.
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Work conflicts and outside activities.
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If you decide to pursue additional employment, engage in an independent business venture or
perform services for another business organization, you must disclose such activities to the
Director of Human Resources, both verbal and in writing and obtain his or her
pre-approval
to avoid any potential conflicts. You must not pursue such activities during Cortland Banks
business hours or allow any outside business, civic or charitable activities to interfere with your
job performance.
A conflict of interest may arise when you or one of your family members is a significant
shareholder, director, officer, employee, consultant or agent of an organization that is a
competitor, or that has current or prospective business with Cortland Banks as a customer, supplier
or contractor. In such event, you must take steps to protect confidential information, remove
yourself from situations where conflicts may arise and otherwise take steps to ensure that outside
activities do not conflict with or impair your ability to perform your responsibilities for
Cortland Banks and do not adversely affect the integrity, goodwill or public perception of Cortland
Banks.
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5.
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Outside Directorships of Employees.
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Although you are encouraged to take part in community and charitable activities, due to the
time demands and potential conflicts of interest, you are required to advise your manager and the
Director of Human Resources before serving on a board of a nonprofit organization. Directorships
that will involve significant time away from the Corporation or that might otherwise interfere with
efficient performance of normal duties or pose a conflict of interest, require the written approval
of your manager and the Director of Human Resources.
If you wish to serve as a director of any for-profit organization, you must first submit your
request to the Director of Human Resources who will submit the request for review and disposition
by the Bank’s Senior/ Executive Management Committee.
You should avoid directorships that might pose a conflict of interest or create the appearance
of a conflict of interest. If an apparent or actual conflict of interest develops and cannot be
immediately resolved, you must withdraw promptly from service as a director of the outside
corporation or organization. You should also be aware that you have sole responsibility for your
actions and that the Corporation does not provide indemnification for associates who serve as
directors of outside entities unless such service is at the specific written direction of an
authorized representative of Cortland Banks.
You are to abstain from, and not be physically present during, negotiations, preparations,
recommendations or approvals of any extensions of credit or other business transactions between any
company in the Cortland Banks family and any outside organization on whose board of directors you
sit.
Employees who have access to confidential information are not permitted to use or share that
information for stock trading purposes or for any other purpose except the conduct of our business.
All non-public information about the Company should be considered confidential information. To
use non-public information for personal financial benefit or to “tip” others who might make an
investment decision on the basis of this information is not only unethical but also illegal.
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7.
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Corporate Opportunities
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Employees, officers and directors are prohibited from taking for themselves personally
opportunities that are discovered through the use of corporate property, information or position.
No employee may use corporate property, information, or position for improper personal gain; and no
employee may compete with the Company directly or indirectly. Employees, officers and directors
owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises.
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8.
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Competition and Fair Dealing
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We seek to outperform our competition fairly and honestly. We seek competitive advantages
through superior performance, never through unethical or illegal business practices. Stealing
proprietary information, possessing trade secret information that was obtained without the owner’s
consent, or inducing such disclosures by past or present employees of other companies is
prohibited. Each employee should endeavor to respect the rights of and deal fairly with the
Company’s customers, suppliers, competitors and employees. No employee should take unfair
advantage of anyone though manipulation, concealment, abuse of privileged information,
misrepresentation of material facts, or any other intentional unfair-dealing practice.
To maintain the Company’s valuable reputation, compliance with our quality processes and
safety requirements is essential. In the context of ethics, quality requires that our products and
services be designed and manufactured to meet our obligations to customers. All inspection and
testing documents must be handled in accordance with all applicable regulations.
Please discuss with the Director of Human Resources any gifts or plans which you are not certain
are appropriate.
Always ask first, act later:
If you are unsure of what to do in any
situation, seek guidance from the Director of Human Resources
before you act.
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9.
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Business and Entertainment
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The purpose of business entertainment and gifts in a commercial setting is to create good will
and sound working relationships, not to gain unfair advantage with customers. No gift or
entertainment should ever be offered, given, provided or accepted by any Company employee, family
member of an employee or agent unless it: (1) is not a cash gift, (2) is consistent with customary
business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff and
(5) does not violate any laws or regulations.
Hospitality
You must not accept hospitality or entertainment that is:
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solicited;
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lavish or unusual;
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not a normal or customary type of amenity;
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or an expense reimbursed by a customer or supplier that the Corporation
would not pay.
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In addition, you should consider the following:
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Reciprocity. Are you in a position where you could provide reciprocal
hospitality at Cortland Banks expense? You should consider not only the
nature of the hospitality being offered, but also the organizational stature
of the person making the offer.
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•
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Reasonableness. Is the nature of the hospitality being offered typical for
the size and status of the customer or supplier relationship? The type of
hospitality being offered should be customary and appropriate with regard to
your job responsibilities.
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You are encouraged to discuss the appropriateness of any offer of hospitality, given the
circumstances, with your manager. If there remains any question as to the appropriateness of such
offer, the matter should be directed to the Director of Human Resources.
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10.
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Supplier relationships.
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If you are authorized to approve or award orders, contracts and commitments to suppliers of
goods or services, you must do so based on objective business standards to avoid any real or
perceived personal favoritism. Cortland Banks business of this nature must be conducted strictly on
an arm’s-length basis with due regard to Cortland Banks policies involving, community reinvestment
and other business considerations.
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11.
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Discrimination and Harassment
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The diversity of the Company’s employees is a tremendous asset. We are firmly committed to
providing equal opportunity in all aspects of employment and will not tolerate any illegal
discrimination or harassment of any kind. Examples include derogatory comments based on racial or
ethnic characteristics and unwelcome sexual advances. Employees should immediately report any
improper discrimination or harassment to the appropriate supervisor and/or the Director of Human
Resources.
The Company strives to provide each employee with a safe and healthy work environment. Each
employee has responsibility for maintaining a safe and healthy workplace for all employees by
following safety and health rules and practices and reporting accidents, injuries and unsafe
equipment, practices or conditions.
Violence and threatening behavior are not permitted. Employees should report to work in
condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of
illegal drugs in the workplace will not be tolerated and may result in disciplinary action, up to
and including dismissal.
The Company requires honest and accurate recording and reporting of information in order to
make responsible business decisions. For example, only the true and actual number of hours worked
should be reported.
Many employees regularly use business expense accounts, which must be documented and recorded
accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or
your controller.
All of the Company’s books, records, accounts and financial statements must be maintained in
reasonable detail, must appropriately reflect the Company’s transactions and must conform both to
applicable legal requirements and to the Company’s system of internal controls. Unrecorded or “off
the books” funds or assets should not be maintained unless permitted by applicable law or
regulation.
Business records and communications often become public, and we should avoid exaggeration,
derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can
be misunderstood. This applies equally to e-mail, internal memos, and formal reports. Records
should always be retained or destroyed according to the Company’s record retention policies. In
accordance with those policies, in the event of litigation or governmental investigation please
consult the Company’s Legal Counsel.
Employees must maintain the confidentiality of confidential information entrusted to them by
the Company or its customers, except when disclosure is authorized by the General Counsel or
required by laws or regulations. Confidential information includes all non-public information that
might be of use to competitors, or harmful to the Company or its customers, if disclosed. It also
includes information that suppliers and customers have entrusted to us. The obligation to preserve
confidential information continues even after employment ends.
Confidentiality is a fundamental principle of our business that is particularly applicable to
nonpublic information concerning Cortland Banks and to information received by Cortland Banks from
a customer or supplier for an express business purpose. It applies with equal force to oral or
informal communications as well as to written, printed or computer-generated information.
Specific corporate policies exist regarding the use of information and adequate control of
critical and secured information. These policies include the General Policy on Insider Trading,
the
Corporate Information Security Policy and the Privacy Policy for Consumers.
You must be familiar
with these policies and understand how such policies impact your work.
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15.
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Cortland Banks information.
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Nonpublic information regarding Cortland Banks is to be conveyed to others only on a
reasonable need-to-know basis that furthers a legitimate business purpose of Cortland Banks.
Information is to be conveyed with the express understanding that the information is confidential
and is to be used solely for the limited purpose for which it was received and given. Unless
otherwise instructed, you must treat internal Cortland Banks activities and plans as confidential,
to be disseminated within the internal structure of Cortland Banks only on a need-to-know basis.
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16.
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Customer information.
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Cortland Banks subscribes to extremely high standards of protection for personally
identifiable confidential information obtained from or about a customer, and recognizes its
obligation to keep such customer information secure and confidential. Such confidential information
may include account balances and transaction data, financial condition, and anticipated changes in
management, business plan, or financial projections.
The Corporation’s comprehensive Privacy Policy
for Consumers
covers consumer customer information and is provided to consumer customers as
required by law.
It is the policy of Cortland Banks to provide customer information to outside companies only
in order to conduct our business, comply with applicable law, protect against fraud or other
suspected illegal activity, provide products and services to our customers, provide a good customer
experience or comply with a customer’s request. Information shared will be limited to that needed
or legally required and subject to confidentiality agreements, where applicable. In addition, you
are authorized to access customer information only for legitimate business purposes on a
need-to-know basis. You are responsible for understanding your obligations to protect the
confidentiality and security of customer information. Cortland Banks provides employee training, as
appropriate, to help you understand your obligations with respect to confidentiality of customer
information.
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17.
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Supplier information.
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Confidential competitive information submitted to Cortland Banks in connection with the
purchase of products or services must be maintained in strictest confidence in order to avoid
giving or receiving any improper competitive advantage with respect to any supplier.
Information and communications on the Corporation’s private computer systems are subject to
review, monitoring and recording at any time without notice or permission. Unauthorized use or
access may be subject to prosecution or disciplinary action.
Additional information regarding
associate privacy is set forth in the Employee Handbook.
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19.
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Protection and Proper Use of Company Assets
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All employees should endeavor to protect the Company’s assets and ensure their efficient use.
Theft, carelessness, and waste have a direct impact on the Company’s profitability. Any suspected
incident of fraud or theft should be immediately reported for investigation. Company equipment
should not be used for non-Company business, though incidental personal use may be permitted.
The obligation to protect the Company’s assets includes its proprietary information.
Proprietary information includes intellectual property such as trade secrets, patents, trademarks,
and copyrights, as well as business, marketing, and service plans, engineering and manufacturing
ideas, designs, databases, records, salary information and any unpublished financial data and
reports. Unauthorized use or distribution of this information would violate Company policy. It
could also be illegal and result in civil or even criminal penalties. All employees should do
their best to make sure that Company property under their control is properly used and protected by
adequate controls and safeguards.
Proper use of Cortland Banks assets and appropriate recording and documentation of such use is
essential to the financial soundness and integrity of Cortland Banks. You must not misuse
(including inappropriate Internet usage) or remove from our facilities furnishings, equipment,
technology or supplies, unless specifically authorized. Further, you must not use Cortland Banks
assets, or your position, for personal gain or another’s advantage. Additional information
regarding your use of the
Internet and intranet is set forth in the Employee Handbook.
This policy applies equally to property created, obtained or copied by Cortland Banks for its
exclusive use, such as computer software, customer lists or information, databases, data processing
systems, files, reference materials, reports, and the like. Neither originals nor copies may be
used for any purpose other than Cortland Banks business.
Any assets you create and any tangible contributions you make to the development and
implementation of Cortland Banks assets, whether directly or indirectly, while employed within
Cortland Banks are Cortland Banks property and remain its property even if you leave employment
with Cortland Banks.
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20.
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Intellectual property.
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Cortland Banks owns all rights, title and interest in intellectual property, including
inventions, improvements, works of authorship, ideas, data, processes, computer software programs,
and discoveries, conceived or developed by you during your term of employment, relating to actual
or anticipated business of, or research or development by, Cortland Banks. You must disclose all
intellectual property promptly to your manager and execute all documents and do all things
necessary to assist Cortland Banks, at the Corporation’s expense, in obtaining protection for
intellectual property.
The Corporation has a long-standing record retention policy to prevent, when appropriate, the
destruction of records that would normally be purged in the ordinary course of business. References
in this section to “company records” include all recorded information, regardless of medium or
characteristics (for example, paper, microfilm, magnetic disks/tapes, electronic or optical),
whether centrally stored or retained as desk files at your work areas. “Company records” does not
include customer records that may be subject to subpoenas in actions, proceedings or investigations
not involving the Corporation. Such customer records are produced and retained in accordance with
policies and procedures that are separate from this Code.
Company records that might normally be destroyed under the Corporation’s standard Records
Retention Schedule must not be destroyed if those records are relevant to a pending, threatened or
reasonably anticipated legal or administrative action or proceeding against or by the Corporation
or internal, regulatory or governmental investigation involving the Corporation (for purposes of
this section, collectively referred to as “Actions”). In general, this means you must cease record
destruction (and prevent others from destroying records) if you are aware or are notified that:
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there is an Action that may reasonably require production of company records;
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company records are covered by a request for production, subpoena or similar request; or
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the Corporation is voluntarily cooperating with governmental or regulatory authorities
or other outside parties in any action, proceeding or investigation that may reasonably
require production of company records.
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If there is any question as to whether a particular record should be maintained, written
approval must be obtained from the Bank’s Legal Counsel representative prior to its destruction.
Company records destroyed after the Corporation is on notice of an Action may result in
penalties to the Corporation and to the individuals involved.
Anyone who embezzles steals or willfully misappropriates any monies, funds or anything of
value from Cortland Banks may be subject to fine, imprisonment, restitution payment and other such
actions conferred by law or Cortland Banks policy, in addition to disciplinary action.
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23.
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Official documentation.
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You must not use official Cortland Banks stationery, the corporate brand or other official
documentation or use the name “Cortland Banks” for any personal or nonofficial purpose since such
use implies endorsement by Cortland Banks. Cortland Banks hereby disclaims any and all implied
endorsements that may appear to result from a violation of this section.
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24.
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Personal financial responsibility
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You should conduct your financial affairs in a responsible and prudent manner, so as to be
above criticism.
You may not personally borrow money from or lend to suppliers, customers or other associates
unless such loan is to or from a family member or from an institution normally in the business of
lending, and there is no conflict of interest. You may make an occasional loan of nominal value
(such as for lunch) to another employee as long as no interest is charged.
Certain borrowing from correspondent banks must be reported to the Office of the Corporate
Secretary. Those specific individuals who must report such borrowing will be advised directly by
the Office of the Corporate Secretary.
You are responsible for the accurate and timely reporting of expenses. All expenditures must
be ordinary and necessary to accomplish expected business purposes, include required approvals and
be in accordance with existing expense policies. Further, you must not use your business credit
card for any purpose other than appropriate business expenses.
Unless specifically authorized by Cortland Banks, you may not accept personal fees or
commissions in connection with any transaction on behalf of Cortland Banks.
You must not take any action, either personally or on behalf of the Corporation that will
violate any law, regulation or internal policy.
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26.
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Anti-money laundering compliance
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Cortland Banks will cooperate fully, in accordance with applicable laws, with the efforts of
law enforcement agencies to prevent, detect and prosecute money laundering and the financing of
terrorism. The Corporation will not knowingly do business with existing or prospective customers
(for purposes of this section, collectively referred to as “customers”) whose money is believed to
be derived from or used to support criminal or terrorist activity. If the Corporation becomes aware
of facts that lead to the reasonable presumption that a customer is engaged in such activities or
that a customer’s transactions are themselves criminal in purpose, appropriate measures, consistent
with the law, will be taken. Such measures could include, for example, terminating business
dealings with the customer, closing or freezing the customer’s accounts, and filing reports with
governmental authorities.
You must make reasonable efforts to determine the true identity of all customers of the
Corporation’s products and services to help keep the global financial and trading systems from
being used as a channel for financing crime and terrorism. Business transactions will not be
conducted with customers who fail to provide appropriate evidence of their identity, or who seek to
deceive regulatory or law enforcement agencies by providing altered, incomplete or misleading
information. It is vital for all associates to understand fully those actions that may constitute a
violation of applicable anti-money laundering statutes and to report any potential violation in the
manner set forth in the appropriate Anti-Money Laundering Compliance procedures.
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27.
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The Bank Bribery Act Policy
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Each employee is required to sign THE BANK BRIBERY ACT POLICY upon their hire at Cortland
Banks. This policy is reviewed and updated annually by the Board of Directors. Refer to your
signed document copy or the updated copy that is in your Employee Handbook for further details.
Remember, please discuss with the Director of Human Resources any gifts or plans which you are
not certain are appropriate.
Always ask first, act later:
If you are unsure of what to
do in any situation, seek guidance from the Director of Human Resources
before you act.
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28.
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Bribes and other improper payments.
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You may not utilize, either directly or indirectly, Cortland Banks funds or property for any
unlawful or improper use. Accordingly, you must not give any bribes, kickbacks, promises or any
other thing of value to any person or entity or accept any such thing of value from any person or
entity to obtain or retain business or for any reason whatsoever. In addition, you shall not make
any unlawful preferential extension of credit to any officer, customer, director or principal
shareholder of any customer or prospective customer. This policy should not be construed to limit
the use of Cortland Banks funds and other assets in the ethical pursuit of acquiring additional
business for Cortland Banks in the normal course of business.
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29.
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Foreign Corrupt Practices Act.
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You must not give or promise to give money or anything of value to any executive, official or
employee of any government, governmental agency, political party (including candidates for
political office) or other organization if it could reasonably be construed as being intended to
influence a Cortland Banks business relationship with such entity. Such payments must not be made
by you or any agent of Cortland Banks to obtain or retain business or secure any improper
advantage.
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30.
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Political Contributions and Committees
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It is the policy of Cortland Banks to encourage informed participation in governmental,
regulatory and elective processes. You may elect to make personal political contributions, either
directly or through political action committees as prescribed and permitted by applicable local,
state and federal laws, as well as the laws of any applicable jurisdiction outside of the United
States.
Federal statutes make it unlawful for a national bank to make any contribution or
expenditure
through the use of funds, services, property or other resources in conjunction with any federal,
state or local election. Additionally, corporations are also restricted from making campaign
contributions and expenditures in federal elections and in many states.
Certain broker-dealer associates and other associates who may refer municipal securities
business to the Cortland Banks are subject to additional conditions regarding political
contribution and volunteer activities.
You must avoid political committee involvement that might pose a conflict of interest or
create the appearance of a conflict of interest. If an apparent or actual conflict of interest
develops and cannot be immediately resolved, you must withdraw promptly from service as a committee
member or officer of the political committee or organization. You should also be aware that you
have sole responsibility for your actions and that the Corporation does not provide indemnification
for associates who serve as committee members, officers, and directors of outside entities unless
such service is at the specific written direction of an authorized representative of Cortland
Banks.
You are to abstain from, and not be physically present during, negotiations, preparations,
recommendations or approvals of any extensions of credit or other business transactions between any
company in the Cortland Banks family and any outside organization on whose committee or board of
directors you sit.
These employees should consult their manager and the Director of Human Resources for specific
guidance.
To ensure the integrity and objectivity of its consolidated financial statements,
Cortland
Banks has established internal accounting and operating controls and procedures, including
disclosure controls and procedures and a Disclosure Committee.
All associates responsible for the
preparation of the Corporation’s financial statements, or who provide information as part of that
process (including the Corporation’s principal executive officer, principal financial officer and
principal accounting officer), must maintain and adhere to these controls so that all underlying
transactions, both within Cortland Banks and with third parties, are properly documented, recorded
and reported. Further, all employees have the responsibility to promote full, fair, accurate,
timely and understandable disclosure in reports and documents that Cortland Banks files with, or
submits to, the Securities and Exchange Commission and in other public communications made by the
Corporation.
The Audit Committee of the Board of Directors has established procedures for the receipt,
retention and treatment of complaints regarding accounting, internal accounting controls, or
auditing matters.
You may raise any such concerns to the Director of Human Resources.
The procedure
mandated by the Audit Committee ensures that these complaints can be submitted anonymously and in
complete confidence.
You must cooperate fully with any investigation, internal audit, external audit or regulatory
examination. If you become aware that you are or have been the subject of any external
investigation, you must immediately inform your manager, unless otherwise prohibited by law,
regulation or the investigating authority.
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33.
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Payments to Government Personnel
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The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or
indirectly, to officials of foreign governments or foreign political candidates in order to obtain
or retain business. It is strictly prohibited to make illegal payments to government officials of
any country.
In addition, the U.S. government has a number of laws and regulations regarding business
gratuities, which may be accepted by U.S. government personnel. The promise, offer or delivery to
an official or employee of the U.S. government of a gift, favor or other gratuity in violation of
these rules would not only violate Company policy but could also be a criminal offense. State and
local governments, as well as foreign governments, may have similar rules. The Company’s in-house
legal council can provide guidance to you in this area.
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34.
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Waivers of the Code of Business Conduct and Ethics
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The Company discourages waivers of this Code except in extraordinary circumstances. Any
waiver of this Code for executive officers or directors may be made only by the Board or by Audit
committee and if required will be promptly disclosed by law or stock exchange regulation.
Employees will acknowledge their review and acceptance or provisions of this Policy by signing an
“Acknowledgement Statement.”
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35.
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Reporting any Illegal or Unethical Behavior
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Employees are encouraged to talk to supervisors, managers or other
appropriate personnel when in doubt about the best course of action in
a particular situation. It is the policy of the Company not to allow
retaliation for reports of misconduct by others made in good faith by
employees. Employees are expected to cooperate in internal
investigations of misconduct.
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36.
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Compliance Procedures
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We must all work to ensure prompt and consistent action against violations of this Code.
However, in some situations it is difficult to know if a violation has occurred. Since we cannot
anticipate every situation that will arise, it is important that we have a way to approach a new
question or problem. These are the steps to keep in mind:
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Make sure you have all the facts
. In order to reach the right solutions, we
must be as fully informed as possible.
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Ask yourself: What specifically am I being asked to do? Does it seem unethical or
improper?
This will enable you to focus on the specific question you are faced with,
and the alternatives you have. Use your judgment and common sense; if something seems
unethical or improper, it probably is.
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Clarify your responsibility and role.
In most situations, there is shared
responsibility. Are your colleagues informed? It may help to get others involved and
discuss the problem.
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Discuss the problem with your supervisor.
This is the basic guidance for all
situations. In many cases, your supervisor will be more knowledgeable about the question,
and will appreciate being brought into the decision-making process. Remember that is your
supervisor’s responsibility to help solve problems.
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Seek help from Company resources.
In the rare case where it may not be
appropriate to discuss an ethics issue with your supervisor or where you do not feel
comfortable approaching your supervisor with your question, discuss it locally with your
facility or office manager or your Human Resources manager.
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You may report ethical violations in confidence and without fear of retaliation.
If your situation requires that your identity be kept secret, your anonymity will be
protected. The Company does not permit retaliation of any kind against employees for good
faith reports of ethical violations.
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Always ask first, act later:
If you are unsure of what to do in any situation,
seek guidance
before you act.
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