Memorandum of Understanding

6 Months Ended

Jun. 30, 2011

Memorandum of Understanding [Abstract]

Memorandum of Understanding

10.) Memorandum of Understanding

On May 26, 2009, the Board of Directors of Cortland Bancorp and Cortland Banks adopted resolutions authorizing its President and Chief Executive Officer to enter into the Memorandum of Understanding (MOU) with the Federal Reserve. The MOU was executed June 1, 2009. The Division of Financial Institutions, State of Ohio, became a party to the MOU in December 2009, when the agreement was revised. The revised MOU was executed December 31, 2009. The MOU requires the Company and Cortland Banks to obtain the Federal Reserve’s approval prior to: (i) incurring any debt; (ii) repurchasing any of its stock; or (iii) paying any dividends.

The MOU also required Cortland Banks, within specified timeframes, submission of the following plans to the Federal Reserve for its approval: (i) Cortland Banks — a plan to strengthen and improve management of the overall risk exposure of the investment portfolio; (ii) the Company and Cortland Banks — a plan to maintain an adequate capital position, (iii) the Company and Cortland Banks — a plan to strengthen board oversight of the management and operations of the Bank and (iv) Cortland Banks — a plan for 2010 to improve the Bank’s earnings and overall condition.

The provisions of the MOU shall remain effective and enforceable until stayed, modified, terminated or suspended by the Federal Reserve. The Company is substantially in compliance with the provisions of the MOU as of June 30, 2011.

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
(Fully taxable equivalent basis in thousands of dollars)

	YEAR TO DATE AS OF
	JUNE 30, 2011							DECEMBER 31, 2010							JUNE 30, 2010
	Average				Average			Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
ASSETS
Interest earning deposits and other assets	$	16,103	$	35		0.43	%	$	24,898	$	92		0.36	%	$	29,795	$	43		0.29	%
Investment securities (1) (2)		182,798		3,378		3.70	%		191,546		7,807		4.07	%		185,314		4,043		4.36	%
Loans (1) (2) (3)		258,346		7,636		5.94	%		237,624		14,765		6.21	%		240,039		7,436		6.22	%
Total interest-earning assets		457,247	$	11,049		4.85	%		454,068	$	22,664		4.99	%		455,148	$	11,522		5.08	%
Cash and due from banks		6,897							6,570							6,597
Bank premises and equipment		6,670							6,918							7,019
Other assets		20,817							19,032							19,569
Total non-interest-earning assets		34,384							32,520							33,185
Total assets	$	491,631						$	486,588						$	488,333
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits	$	72,750	$	96		0.27	%	$	69,295	$	256		0.37	%	$	69,786	$	137		0.40	%
Savings		92,388		79		0.17	%		89,049		212		0.24	%		88,267		134		0.31	%
Time		160,761		1,530		1.92	%		158,578		3,611		2.28	%		160,207		1,891		2.38	%
Total interest-bearing deposits		325,899		1,705		1.05	%		316,922		4,079		1.29	%		318,260		2,162		1.37	%
Other borrowings		48,818		706		2.92	%		58,317		2,195		3.76	%		61,061		1,177		3.89	%
Subordinated debt		5,155		45		1.78	%		5,155		93		1.81	%		5,155		45		1.73	%
Total interest-bearing liabilities		379,872	$	2,456		1.30	%		380,394	$	6,367		1.68	%		384,476	$	3,384		1.77	%
Demand deposits		63,761							61,320							60,283
Other liabilities		4,099							5,394							4,694
Shareholders’ equity		43,899							39,480							38,880
Total liabilities and Shareholders’ equity	$	491,631						$	486,588						$	488,333
Net interest income			$	8,593						$	16,297						$	8,138
Net interest rate spread (4)						3.55	%						3.31	%						3.31	%
Net interest margin (5)						3.76	%						3.59	%						3.58	%
Ratio of interest-earning assets to interest-bearing liabilities						1.20							1.19							1.18

(1)	Includes both taxable and tax exempt securities and loans.
(2)	Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%. The tax equivalent income adjustment for loans and investments is $24 and $367 for June 30, 2011, $59 and $733 for December 31, 2010 and $33 and $321 for June 30, 2010.
(3)	Includes applicable loan origination and commitment fees, net of deferred origination cost amortization.
(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 net interest income by total interest-earning assets.

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

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
(Fully taxable equivalent basis in thousands of dollars)

	QUARTER TO DATE AS OF
	June 30, 2011							MARCH 31, 2011							June 30, 2010
	Average				Average			Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
ASSETS
Interest earning deposits and other assets	$	19,553	$	18		0.39	%	$	12,614	$	17		0.52	%	$	25,320	$	20		0.33	%
Investment securities (1) (2)		177,703		1,644		3.70	%		187,949		1,734		3.70	%		190,654		2,044		4.28	%
Loans (2) (3)		259,415		3,860		5.96	%		257,266		3,775		5.91	%		238,058		3,740		6.29	%
Total interest-earning assets		456,671	$	5,522		4.84	%		457,829	$	5,526		4.85	%		454,032	$	5,804		5.12	%
Cash and due from banks		7,143							6,649							6,647
Bank premises and equipment		6,638							6,704							6,961
Other assets		21,811							19,808							20,033
Total non-interest-earning assets		35,592							33,161							33,641
Total assets	$	492,263						$	490,990						$	487,673
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits	$	71,050	$	47		0.27	%	$	74,471	$	48		0.26	%	$	70,190	$	64		0.36	%
Savings		93,461		41		0.17	%		91,303		39		0.17	%		88,992		60		0.27	%
Time		160,919		753		1.88	%		160,600		777		1.96	%		158,691		922		2.33	%
Total interest-bearing deposits		325,430		841		1.04	%		326,374		864		1.07	%		317,873		1,046		1.32	%
Other borrowings		46,322		340		2.95	%		51,342		366		2.89	%		59,222		555		3.76	%
Subordinated Debt		5,155		22		1.77	%		5,155		23		1.78	%		5,155		23		1.76	%
Total interest-bearing liabilities		376,907	$	1,203		1.28	%		382,871	$	1,253		1.33	%		382,250	$	1,624		1.70	%
Demand deposits		65,778							61,721							60,988
Other liabilities		4,518							3,675							4,466
Shareholders’ equity		45,060							42,723							39,969
Total liabilities and Shareholders’ equity	$	492,263						$	490,990						$	487,673
Net interest income			$	4,319						$	4,273						$	4,180
Net interest rate spread (4)						3.56	%						3.52	%						3.42	%
Net interest margin (5)						3.78	%						3.74	%						3.68	%
Ratio of interest-earning assets to interest-bearing liabilities						1.21							1.20							1.19

(1)	Includes both taxable and tax exempt securities and loans.
(2)	Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%. The tax equivalent income adjustment for loans and investments is $11 and $173 for June 30, 2011, $12 and $194 for March 31, 2011 and $16 and $169 for June 30, 2010.
(3)	Includes applicable loan origination and commitment fees, net of deferred origination cost amortization.
(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.

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