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:
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 6th 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.
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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:
•
historical experience;
•
economic conditions;
•
regular reviews of delinquencies and loan portfolio quality;
•
industry concentrations;
•
and results of regulatory examinations.
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.
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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:
•
Actual or anticipated variations in earnings;
•
Changes in analysts recommendations or projections;
•
Operating and stock performance of other companies deemed to be peers;
•
News reports of trends, concerns and other issues related to the financial services industry;
•
Low volume of stock trades.
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.
Item 1B. Unresolved Staff Comments - N/A
Item 2.
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.
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.
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Item 4.
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:
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.
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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:
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
(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.
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PART II (CONTINUED)
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
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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.
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.
(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.
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.
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.
IV-2
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part of this report:
Item 15(b). Exhibits
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)
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