EXHIBIT 10.31.1

SEVERANCE AGREEMENT

This SEVERANCE AGREEMENT (this “Agreement”) is entered into and is effective as
of , 2015 by and between Cortland Bancorp, an Ohio corporation, and Timothy
Carney (the “Executive”), Executive Vice President and Chief Operating Officer
of Cortland Bancorp and The Cortland Savings and Banking Company (the “Bank”),
an Ohio-chartered bank and wholly owned subsidiary of Cortland Bancorp.

WHEREAS, recognizing the contributions to the profitability, growth, and
financial strength of Cortland Bancorp and the Bank that the Executive has made
and is expected to continue to make, intending to assure itself of the current
and future continuity of management and establish minimum severance benefits for
certain officers and other key employees and ensure that officers and other key
employees are not practically disabled from discharging their duties if a
proposed or actual transaction involving a change in control arises, and finally
desiring to provide additional inducement for the Executive to remain in the
employ of Cortland Bancorp and the Bank, Cortland Bancorp desires to enter into
a Severance Agreement with the Executive,

WHEREAS, Cortland Bancorp and the Executive intend that this Agreement supersede
and replace in its entirety the September 28, 2012 Severance Agreement and that
from and after the date hereof the September 28, 2012 Severance Agreement will
be of no further force or effect, and

WHEREAS, as of the effective date of this Agreement 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
Cortland Bancorp, is contemplated insofar as Cortland Bancorp or any of its
subsidiaries is concerned.

NOW THEREFORE, in consideration of these premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows.

1. Cash Benefit after a Change in Control. (a) Cash benefit. If a Change in
Control occurs, Cortland Bancorp will make a lump-sum payment to the Executive
in an amount in cash equal to 2.99 times the Executive’s compensation. For this
purpose, the Executive’s compensation means the sum of (x) the Executive’s base
salary when the Change in Control occurs, including salary deferred at the
Executive’s election, plus (y) any bonus awarded for the most recent whole
calendar year before the year in which the Change in Control occurs, regardless
of whether the bonus is paid in the year earned and regardless of whether the
bonus is vested or subject to elective deferral. The term bonus means cash or
non-cash compensation of the type that under SEC rules is required to be
reported by accelerated filers as bonus in the Summary Compensation Table,
specifically Regulation S-K Item 402 (17 CFR 229.402, currently
Item 402(c)(2)(iv)). The amount payable to the Executive hereunder will not be
reduced to account for the time value of money or discounted to present value.
Subject to section 17 of this Agreement, the payment required under this section
1(a) will be made five business days after the Change in Control occurs. If the
Executive receives payment of the benefit under this section 1(a) because of the
occurrence of a Change in Control, the Executive is not entitled to an
additional payment under this section 1(a) if an additional Change in Control
occurs thereafter.

(b) Change in Control defined. For purposes of this Agreement, the term Change
in Control means a change in control as defined in Internal Revenue Code section
409A and rules, regulations, and guidance of general application thereunder
issued by the Department of the Treasury, including –

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(1) Change in ownership: a change in ownership of Cortland Bancorp occurs on the
date any one person or group accumulates ownership of Cortland Bancorp stock
constituting more than 50% of the total fair market value or total voting power
of Cortland Bancorp stock,

(2) 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 Cortland
Bancorp stock possessing 30% or more of the total voting power of Cortland
Bancorp stock, or (y) a majority of Cortland Bancorp’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 Cortland Bancorp’s board of
directors, or

(3) Change in ownership of a substantial portion of assets: a change in
ownership of a substantial portion of Cortland Bancorp’s assets occurs if in a
12-month period any one person or more than one person acting as a group
acquires from Cortland Bancorp assets having a total gross fair market value
equal to or exceeding 40% of the total gross fair market value of all of
Cortland Bancorp’s assets immediately before the acquisition or acquisitions.
For this purpose, gross fair market value means the value of Cortland Bancorp’s
assets or the value of the assets being disposed of, determined without regard
to any liabilities associated with the assets.

2. Additional Benefits after Employment Termination. (a) If the Executive’s
employment terminates involuntarily but without Cause or voluntarily but with
Good Reason, in either case within 24 months after a Change in Control, Cortland
Bancorp will provide at Cortland Bancorp’s expense and on behalf of the
Executive a benefit consisting of reimbursement by Cortland Bancorp of a portion
of the Executive’s cost to continue medical, dental, accident, disability, and
life insurance coverage substantially identical to the coverage maintained for
the Executive at termination, except to the extent coverage may be changed in
its application to all employees, including reimbursement of a portion of the
Executive’s cost to obtain coverage under Title X of the Consolidated Omnibus
Budget Reconciliation Act of 1985 (COBRA) [Pub. L. 99-272, 100 Stat. 82].
Regardless of whether it is sufficient to reimburse the Executive’s entire
monthly cost for continued medical, dental, accident, disability, and life
insurance coverage, the amount of the Employer’s reimbursement under this
section 2(a) is equal to the monthly medical, dental, accident, disability, and
life insurance premium cost incurred by Cortland Bancorp and the Bank on account
of the Executive’s participation in Cortland Bancorp and the Bank’s medical,
dental, accident, disability, and life insurance plan in the month immediately
before the month in which the Executive’s employment terminated. If providing
the medical, dental, accident, disability, and life insurance coverage
reimbursement benefit would result in Cortland Bancorp or any of its affiliates
breaching the terms of any insurance policy with an applicable insurer or
incurring any penalty or additional tax for failing to comply with any
applicable law, instead of receiving the insurance coverage reimbursement
benefit the Executive will be entitled to elect continuation coverage under
COBRA section 4980B(f) and, beginning with the first payroll period after the
first day of the seventh month after the month in which the Executive’s
employment terminates, Cortland Bancorp will pay to the Executive a monthly cash
amount equal to the monthly premium amount the Employer would have paid for the
Executive’s medical, dental, accident, disability, and life coverage had the
Executive remained actively employed, less any applicable tax withholdings (each
such payment, an “Employer Payment”). The first Employer Payment will include
the amount that the Executive would have received in the seven-month period
after the date of employment termination had the Executive otherwise received
the Employer Payments during the seven-month period. Any benefit provided by
Cortland Bancorp in accordance with the preceding sentences after employment
termination will not count toward the medical and dental plan’s obligation to
provide continuation coverage under COBRA or any applicable provision of
Cortland Bancorp and the Bank’s health plans that provide for continuing
coverage for the Executive, and the last day of the post-termination period in
which the Executive is entitled to the benefit under this section will be deemed

 

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to be the date of the Executive’s “qualifying event” for purposes of COBRA,
provided that if application of this sentence would result in Cortland Bancorp
or any of its affiliates incurring any penalty or additional tax for failing to
comply with any applicable law, this section will be applied without giving
effect to this sentence.

(b) Cortland Bancorp’s obligation to pay benefits under section 2(a) will
terminate on the first to occur of (x) the date the Executive becomes eligible
for medical, dental, accident, disability, and life insurance coverage under
plans provided by another employer, (y) the Executive’s death, or (z) 36 months
after the Executive’s employment terminates. Termination of the benefit under
section 2(a) does not, however, relieve Cortland Bancorp of its obligation to
make a reimbursement payment due but not yet paid to the Executive. Section 2
will not be interpreted to limit any benefits to which the Executive or the
Executive’s dependents or beneficiaries may be entitled under any of Cortland
Bancorp and the Bank’s employee benefit plans, agreements, programs, or
practices after the Executive’s employment termination, including without
limitation retiree medical benefits.

(c) Involuntary termination with Cause defined. For purposes of this Agreement,
involuntary termination of the Executive’s employment is an involuntary
termination with Cause if any of the following occur –

(1) an act of fraud, embezzlement, or theft while employed by Cortland Bancorp
or the Bank, or conviction of or plea of no contest to a felony or conviction of
or plea of no contest to a misdemeanor involving moral turpitude, or the actual
incarceration of the Executive for 45 consecutive days or more, or

(2) gross negligence, insubordination, disloyalty, or dishonesty in the
performance of duties as an officer of Cortland Bancorp or the Bank; willful or
reckless failure to adhere to Cortland Bancorp’s or the Bank’s written policies;
intentional wrongful damage to the business or property of Cortland Bancorp or
the Bank, including, without limitation, its reputation, which in Cortland
Bancorp’s sole judgment causes material harm to Cortland Bancorp or the Bank;
breach of fiduciary duties to Cortland Bancorp and its stockholders, whether in
the Executive’s capacity as an officer or as a director of Cortland Bancorp or
the Bank,

(3) removal of the Executive from office or permanent prohibition of the
Executive from participating in the Bank’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), or

(4) intentional wrongful disclosure of secret processes or confidential
information of Cortland Bancorp or the Bank, which in Cortland Bancorp’s sole
judgment causes material harm to Cortland Bancorp or the Bank, or

(5) any actions that cause the Executive to be terminated for cause under any
employment agreement existing on the date hereof or hereafter entered into
between the Executive and Cortland Bancorp or the Bank, or

(6) the occurrence of any event that results in the Executive being excluded
from coverage, or having coverage limited for the Executive as compared to other
executives of Cortland Bancorp or the Bank, under a blanket bond or other
fidelity or insurance policy covering directors, officers, or employees.

 

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For purposes of this Agreement, no act or failure to act on the Executive’s part
will be considered intentional if it is due primarily to an error in judgment or
negligence. An act or failure to act on the Executive’s part is intentional if
it is not in good faith and if it is without a reasonable belief that the action
or failure to act is in Cortland Bancorp’s best interests. Any act or failure to
act based upon authority granted by resolutions duly adopted by the board of
directors or based upon the advice of counsel for Cortland Bancorp is
conclusively presumed to be in good faith and in Cortland Bancorp’s best
interests.

(d) Voluntary termination with Good Reason defined. For purposes of this
Agreement, a voluntary termination by the Executive is a voluntary termination
with Good Reason if the conditions stated in both clauses (x) and (y) are
satisfied –

(x) a voluntary termination by the Executive is a voluntary termination with
Good Reason if any of the following occur without the Executive’s advance
written consent, and the term Good Reason means the occurrence of any of the
following without the Executive’s advance written consent –

1) a material diminution of the Executive’s base salary,

2) a material diminution of the Executive’s authority, duties, or
responsibilities,

3) a material diminution in the authority, duties, or responsibilities of the
supervisor to whom the Executive is required to report,

4) a material diminution in the budget over which the Executive retains
authority,

5) a material change in the geographic location at which the Executive must
perform services, or

6) any other action or inaction that constitutes a material breach by Cortland
Bancorp of this Agreement.

(y) the Executive must give notice to Cortland Bancorp of the existence of one
or more of the conditions described in clause (x) within 90 days after the
initial existence of the condition, and Cortland Bancorp has 30 days thereafter
to remedy the condition. In addition, the Executive’s voluntary termination
because of the existence of one or more of the conditions described in clause
(x) must occur within 24 months after the initial existence of the condition.

3. Gross-Up for Taxes. (a) Additional payment to account for excise taxes. If
the Executive receives change-in-control benefits under this Agreement and
acceleration of benefits under any other benefit, compensation, or incentive
plan or arrangement with Cortland Bancorp or the Bank (collectively, the “Total
Benefits”), and if any part of the Total Benefits is subject to the Excise Tax
under Internal Revenue Code sections 280G and 4999 (the “Excise Tax”), at the
same time Cortland pays the cash severance benefit to the Executive under
section 1 Cortland Bancorp will pay to the Executive the following additional
amounts, consisting of (x) a payment equal to the Excise Tax payable by the
Executive under section 4999 on the Total Benefits (the “Excise Tax Payment”)
and (y) a payment equal to 80% of the difference between (w) a full gross-up
amount (including the Excise Tax Payment) that would provide to the Executive
the Excise Tax Payment net of all income, payroll, and excise taxes and (v) the
Excise Tax Payment. Together, the additional amounts described in clauses
(x) and (y) are referred to in this Agreement as the “Gross-Up Payment Amount.”
Payment of the Gross-Up Payment Amount is in addition to the benefits set forth
in section 1 and section 2.

Calculating the excise tax. For purposes of determining whether any of the Total
Benefits are subject to the Excise Tax and for purposes of determining the
amount of the Excise Tax –

 

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  1) Determination of “parachute payments” subject to the Excise Tax: any other
payments or benefits received or to be received by the Executive in connection
with a Change in Control or the Executive’s termination of employment (whether
under the terms of this Agreement or any other agreement or any other benefit
plan or arrangement with Cortland Bancorp, the Bank, any person whose actions
result in a Change in Control, or any person affiliated with Cortland Bancorp,
the Bank, or such person) will be treated as “parachute payments” within the
meaning of Internal Revenue Code section 280G(b)(2) and all “excess parachute
payments” within the meaning of section 280G(b)(1) will be treated as subject to
the Excise Tax, unless in the opinion of the certified public accounting firm
that is retained by Cortland Bancorp as of the date immediately before the
Change in Control (the “Accounting Firm”) the other payments or benefits do not
constitute (in whole or in part) parachute payments, or the excess parachute
payments represent (in whole or in part) reasonable compensation for services
actually rendered within the meaning of Internal Revenue Code section 280G(b)(4)
in excess of the “base amount” (as defined in Internal Revenue Code section
280G(b)(3)), or are otherwise not subject to the Excise Tax,

 

  2) Calculation of benefits subject to the Excise Tax: the amount of the Total
Benefits that will be treated as subject to the Excise Tax is equal to the
lesser of (x) the total amount of the Total Benefits reduced by the amount of
such Total Benefits that in the opinion of the Accounting Firm are not parachute
payments, or (y) the amount of excess parachute payments within the meaning of
section 280G(b)(1) (after applying clause (1), above), and

 

  3) Value of noncash benefits and deferred payments: the value of any noncash
benefits or any deferred payment or benefit will be determined by the Accounting
Firm according to the principles of Internal Revenue Code sections 280G(d)(3)
and (4).

Assumed marginal income tax rate. For purposes of determining the Gross-Up
Payment Amount, the Executive is deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar years in which
the Gross-Up Payment Amount is to be made and state and local income taxes at
the highest marginal rate of taxation in the state and locality of the
Executive’s residence on the date of termination of employment, net of the
reduction in federal income taxes that can be obtained from deduction of state
and local taxes (calculated by assuming that any reduction under Internal
Revenue Code section 68 in the amount of itemized deductions allowable to the
Executive applies first to reduce the amount of state and local income taxes
that would otherwise be deductible by the Executive, and applicable federal FICA
and Medicare withholding taxes).

Return of reduced Excise Tax payment or payment of additional Excise Tax. If the
Excise Tax is later determined to be less than the amount taken into account
hereunder when the Executive’s employment terminated, the Executive will repay
to Cortland Bancorp – when the amount of the reduction in Excise Tax is finally
determined – the portion of the Gross-Up Payment Amount attributable to the
reduction (plus that portion of the Gross-Up Payment Amount attributable to the
Excise Tax, federal, state, and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment Amount being repaid by the
Executive to the extent that the repayment results in a reduction in Excise Tax,
FICA and Medicare withholding taxes and/or a federal, state, or local income tax
deduction).

If the Excise Tax is later determined to be more than the amount taken into
account hereunder when the Executive’s employment terminated (due, for example,
to a payment whose existence or amount cannot be determined at the time of the
Gross-Up Payment Amount), Cortland Bancorp will make an additional payment to
the Executive for that excess (plus any interest, penalties or additions payable
by the Executive for the excess) when the amount of the excess is finally
determined.

 

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(b) Responsibilities of the Accounting Firm and Cortland Bancorp. Determinations
will be made by the Accounting Firm. Subject to the provisions of section 3(a),
all determinations required to be made under this section 3(b) – including
whether and when a Gross-Up Payment Amount is required, the amount of the
Gross-Up Payment Amount, and the assumptions to be used to arrive at the
determination (collectively, the “Determination”) – will be made by the
Accounting Firm, which will provide detailed supporting calculations both to
Cortland Bancorp and the Executive within 15 business days after receipt of
notice from Cortland Bancorp or the Executive that there has been a Gross-Up
Payment Amount, or such earlier time as is requested by Cortland Bancorp.

Fees and expenses of the Accounting Firm and agreement with the Accounting Firm.
All fees and expenses of the Accounting Firm will be borne solely by Cortland
Bancorp. Cortland Bancorp will enter into any agreement requested by the
Accounting Firm for its services hereunder.

Accounting Firm’s opinion. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, the Accounting Firm will furnish the Executive with
a written opinion to that effect and to the effect that failure to report Excise
Tax, if any, on the Executive’s applicable federal income tax return will not
result in the imposition of a negligence or similar penalty.

Accounting Firm’s Determination is binding; underpayment and overpayment. The
Determination by the Accounting Firm is binding on Cortland Bancorp and the
Executive. Because of the uncertainty when the Determination is made about
whether any of the Total Benefits will be subject to the Excise Tax, it is
possible that a Gross-Up Payment Amount that should have been made will not have
been made by Cortland Bancorp (“Underpayment”), or that a Gross-Up Payment
Amount will be made that should not have been made by Cortland Bancorp
(“Overpayment”). If after a Determination by the Accounting Firm the Executive
is required to make a payment of additional Excise Tax, the Accounting Firm will
determine the amount of the Underpayment. The Underpayment (together with
interest at the rate provided in Internal Revenue Code section 1274(d)(2)(B))
will be paid promptly by Cortland Bancorp to or for the benefit of the
Executive. If the Gross-Up Payment Amount exceeds the amount necessary to
reimburse the Executive for the Excise Tax according to section 2(a), the
Accounting Firm will determine the amount of the Overpayment. The Overpayment
(together with interest at the rate provided in Internal Revenue Code section
1274(d)(2)(B)) will be paid promptly by the Executive to or for the benefit of
Cortland Bancorp. Provided that the Executive’s expenses are reimbursed by
Cortland Bancorp, the Executive will cooperate with any reasonable requests by
Cortland Bancorp in any contests or disputes with the Internal Revenue Service
relating to the Excise Tax.

Accounting Firm conflict of interest. If the Accounting Firm is serving as
accountant or auditor for the individual, entity, or group effecting the Change
in Control, the Executive may appoint another nationally recognized public
accounting firm to make the Determinations required hereunder (in which case the
term “Accounting Firm” as used in this Agreement refers to the accounting firm
appointed by the Executive).

4. Termination for Which No Benefits Are Payable. The Executive is not entitled
to benefits under this Agreement if the Executive’s employment terminates with
Cause, if the Executive dies while actively employed by Cortland Bancorp or the
Bank, or if the Executive becomes totally disabled while actively employed by
Cortland Bancorp or the Bank. For purposes of this Agreement the term totally
disabled means that because of injury or sickness the Executive is unable to
perform the Executive’s duties. The benefits, if any, payable to the Executive
or the Executive’s beneficiary or estate relating to the Executive’s death or
disability will be determined solely by such benefit plans or arrangements as
Cortland Bancorp or the Bank may have with the Executive relating to death or
disability, not by this Agreement. This section 4 does not apply to or operate
to prevent payment of special compensation to which the Executive is entitled
under section 19 after employment termination.

 

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5. Term of Agreement. The initial term of this Agreement is three years,
commencing on the effective date of this Agreement first written above. On the
first anniversary of the effective date of this Agreement and on each
anniversary thereafter this Agreement will extend automatically for one
additional year, unless Cortland Bancorp’s board of directors gives notice to
the Executive in writing at least 90 days before the anniversary that the term
of this Agreement will not be extended. If the board of directors determines not
to extend the term, the board will promptly notify the Executive. References
herein to the term of this Agreement mean the initial term and extensions of the
initial term. Unless terminated earlier, this Agreement terminates when the
Executive attains age 65. If the board of directors decides not to extend the
term of this Agreement, this Agreement nevertheless remains in force until its
term expires.

6. This Agreement Is Not an Employment Contract. The parties hereto acknowledge
and agree that this Agreement is not a management or employment agreement and
that nothing in this Agreement gives the Executive any rights or impose any
obligations to continued employment by Cortland Bancorp or the Bank or successor
of Cortland Bancorp.

7. Payment of Legal Fees. Cortland Bancorp is aware that after a Change in
Control management could cause or attempt to cause Cortland Bancorp to refuse to
comply with its obligations under this Agreement, or could institute or cause or
attempt to cause Cortland Bancorp to institute litigation seeking to have this
Agreement declared unenforceable, or could take or attempt to take other action
to deny the Executive the benefits intended under this Agreement. In these
circumstances the purpose of this Agreement would be frustrated. Cortland
Bancorp desires that the Executive not be required to incur expenses associated
with the enforcement of rights under this Agreement, whether by litigation or
other legal action, because the cost and expense thereof would substantially
detract from the benefits intended to be granted to the Executive hereunder.
Cortland Bancorp desires that the Executive not be forced to negotiate
settlement of rights under this Agreement under threat of incurring expenses.
Accordingly, if after a Change in Control it appears to the Executive that
(x) Cortland Bancorp has failed to comply with any of its obligations under this
Agreement or (y) Cortland Bancorp or any other person has taken any action to
declare this Agreement void or unenforceable, or instituted any litigation or
other legal action designed to deny, diminish, or to recover from the Executive
the benefits intended to be provided to the Executive hereunder, Cortland
Bancorp irrevocably authorizes the Executive from time to time to retain counsel
of the Executive’s choice, at Cortland Bancorp’s expense as provided in this
section 7, to represent the Executive in the initiation or defense of any
litigation or other legal action, whether by or against Cortland Bancorp or any
director, officer, stockholder, or other person affiliated with Cortland
Bancorp, in any jurisdiction. Regardless of any existing or previous
attorney-client relationship between Cortland Bancorp and any counsel chosen by
the Executive under this section 7, Cortland Bancorp irrevocably consents to the
Executive entering into an attorney-client relationship with that counsel, and
Cortland Bancorp and the Executive agree that a confidential relationship exists
between the Executive and that counsel. The fees and expenses of counsel
selected from time to time by the Executive will be paid or reimbursed to the
Executive by Cortland Bancorp on a regular, periodic basis upon presentation by
the Executive of a statement or statements prepared by counsel in accordance
with counsel’s customary practices, whether suit is brought or not, and
regardless of whether incurred in trial, bankruptcy, or appellate proceedings.
Cortland Bancorp’s payment or reimbursement of the Executive’s counsel’s fees
and expenses must occur on or before the last day of the Executive’s tax year
immediately after the Executive’s tax year in which the expense is incurred. If
the Executive is a “specified employee” for purposes of Internal Revenue Code
section 409A on the date of termination, payment under this section 7 will be
made on the first day of the seventh month after the month in which the
Executive’s termination

 

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occurs. Interest will accrue on the payment from the date of termination through
the date of payment at the Prime Rate of Interest in effect on the date of
termination and as reported in the Wall Street Journal. The six-month delay
applies if and only if an exemption from the six-month delay requirement of
Internal Revenue Code section 409A is not available. The Executive’s right to
payment or reimbursement under this section 7 is not subject to liquidation or
exchange for another benefit. Cortland Bancorp’s obligation to make
reimbursement payments will not apply later than the Executive’s remaining
lifetime (or, if longer, through the 20th anniversary of the effective date of
this Agreement). The legal fee reimbursements are intended to satisfy the
requirements for “reimbursement or in-kind benefit plans” described in Treasury
Regulation section 1.409A-3(i)(1)(iv)(A) and will be administered to satisfy
those requirements. Cortland Bancorp’s obligation to pay the Executive’s legal
fees under this section 7 operates separately from and in addition to any legal
fee reimbursement obligation Cortland Bancorp may have with the Executive under
any separate severance, employment, salary continuation, or other agreement.
Despite anything in this Agreement to the contrary, however, Cortland Bancorp is
not required to pay or reimburse the Executive’s legal expenses if doing so
violates section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)]
and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

8. Withholding of Taxes. Cortland Bancorp may withhold from any benefits payable
under this Agreement all federal, state, local or other taxes as may be required
by law, governmental regulation, or ruling.

9. Successors and Assigns. (a) This Agreement is binding on Cortland Bancorp’s
successors. This Agreement is binding upon and enforceable by Cortland Bancorp
and any successor to Cortland Bancorp, including any persons acquiring directly
or indirectly all or substantially all of the business or assets of Cortland
Bancorp by purchase, merger, consolidation, reorganization, or otherwise. But
this Agreement and Cortland Bancorp’s obligations under this Agreement are not
otherwise assignable, transferable, or delegable by Cortland Bancorp. By
agreement in form and substance satisfactory to the Executive, Cortland Bancorp
will require any successor to all or substantially all of the business or assets
of Cortland Bancorp expressly to assume and agree to perform this Agreement in
the same manner and to the same extent Cortland Bancorp would be required to
perform had no succession occurred.

(b) This Agreement is enforceable by the Executive’s heirs. This Agreement
inures to the benefit of and is enforceable by the Executive’s personal or legal
representatives, executors, administrators, successors, heirs, distributes, and
legatees.

(c) This Agreement is personal. This Agreement is personal in nature. The
Executive’s right to receive payments hereunder is not assignable or
transferable, whether by pledge, creation of a security interest, or otherwise,
except for a transfer by Executive’s will or by the laws of descent and
distribution. If the Executive attempts an assignment or transfer that is
contrary to this section 9, Cortland Bancorp has no liability to pay any amount
to the assignee or transferee.

10. Notices. Any notice under this Agreement will be deemed to have been
effectively made or given if in writing and personally delivered, delivered by
mail properly addressed in a sealed envelope, postage prepaid by certified or
registered mail, delivered by a reputable overnight delivery service, or sent by
facsimile. Unless otherwise changed by notice, notice is properly addressed to
the Executive if addressed to the address of the Executive on the books and
records of Cortland Bancorp at the time of the delivery of the notice, and
properly addressed to Cortland Bancorp if addressed to the Board of Directors,
Cortland Bancorp, 194 West Main Street, Cortland, Ohio 44410, Attention:
Corporate Secretary.

 

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11. Captions and Counterparts. The headings and subheadings used in this
Agreement are included solely for convenience and do not affect the
interpretation of this Agreement. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together constitute one and the same agreement.

12. Amendments and Waivers. No provision of this Agreement may be modified,
waived, or discharged unless the waiver, modification, or discharge is agreed to
in a writing signed by the Executive and by Cortland Bancorp. No waiver by
either party hereto at any time of any breach by the other party hereto or
waiver of compliance with any condition or provision of this Agreement to be
performed by the other party is a waiver of other provisions or conditions at
the same or at any other time.

13. Severability. The provisions of this Agreement are severable. The invalidity
or unenforceability of any provision does not affect the validity or
enforceability of the other provisions of this Agreement. Any provision held to
be invalid or unenforceable will be reformed to the extent (and only to the
extent) necessary to make it valid and enforceable.

14. Governing Law. The validity, interpretation, construction, and performance
of this Agreement are governed by and construed in accordance with the
substantive laws of the State of Ohio, without giving effect to the principles
of conflict of laws of the State of Ohio.

15. Entire Agreement. This Agreement constitutes the entire agreement between
Cortland Bancorp and the Executive concerning the subject matter. No rights are
granted to the Executive under this Agreement other than those specifically set
forth. No agreements or representations, oral or otherwise, expressed or implied
concerning the subject matter have been made by either party that are not set
forth expressly in this Agreement. From and after the date of this Agreement the
September 28, 2012 Severance Agreement is of no further force or effect.

16. No Mitigation Required. Cortland Bancorp hereby acknowledges that it will be
difficult and could be impossible (x) for the Executive to find reasonably
comparable employment after termination and (y) to measure the amount of damages
the Executive suffers because of termination. Additionally, Cortland Bancorp
acknowledges that its general severance pay plans do not provide for mitigation,
offset, or reduction of any severance payment received thereunder. Cortland
Bancorp further acknowledges that the payment of benefits by Cortland Bancorp
under this Agreement is reasonable and will be liquidated damages. The Executive
is not required to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, nor will any profits,
income, earnings, or other benefits from any source whatsoever create any
mitigation, offset, reduction, or any other obligation on the part of the
Executive hereunder or otherwise.

17. Internal Revenue Code Section 409A. Cortland Bancorp and the Executive
intend that their exercise of authority or discretion under this Agreement
comply with section 409A of the Internal Revenue Code of 1986. If when the
Executive’s employment terminates the Executive is a specified employee, as
defined in section 409A of the Internal Revenue Code of 1986, and if any
payments or benefits under this Agreement will result in additional tax or
interest to the Executive because of section 409A, then despite any provision of
this Agreement to the contrary the Executive is not entitled to the payments or
benefits until the earliest of (x) the date that is at least six months after
termination of the Executive’s employment for reasons other than the Executive’s
death, (y) the date of the Executive’s death, or (z) any earlier date that does
not result in additional tax or interest to the Executive under section 409A. As
promptly as possible after the end of the period during which payments or
benefits are delayed under this provision, the entire amount of the delayed
payments will be paid to the Executive in a single lump sum. If any provision of
this Agreement does not satisfy the requirements of section 409A, the provision

 

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will nevertheless be applied in a manner consistent with those requirements. If
any provision of this Agreement would subject the Executive to additional tax or
interest under section 409A, Cortland Bancorp will reform the provision.
However, Cortland Bancorp will maintain to the maximum extent practicable the
original intent of the applicable provision without subjecting the Executive to
additional tax or interest, and Cortland Bancorp is not required to incur any
additional compensation expense as a result of the reformed provision.
References in this Agreement to section 409A of the Internal Revenue Code of
1986 include rules, regulations, and guidance of general application issued by
the Department of the Treasury under Internal Revenue Code section 409A.

18. No Violation of Golden Parachute Rules. Cortland Bancorp, the Bank, and the
Executive acknowledge and agree that any payment to the Executive under this
Agreement and any agreement to make a payment to the Executive are or may be
subject to the golden parachute limitations of 12 U.S.C. 1828(k) and FDIC rules
at 12 C.F.R. Part 359. Cortland Bancorp, the Bank, and the Executive acknowledge
and agree that if any payment or agreement to make a payment under this
Agreement would be considered a golden parachute payment under 12 C.F.R.
359.1(f), neither Cortland Bancorp nor the Bank has a contractual or other
obligation to make the payment to the Executive, and the agreement to make the
payment is void, unless (x) the payment receives the prior approval of the
appropriate Federal banking agency, if required at that time by 12 U.S.C.
section 1828(k), 12 C.F.R. Part 359, or other federal or state laws, rules or
regulations, and (y) the obligation and the payment comply in all other respects
with 12 U.S.C. section 1828(k), 12 C.F.R. Part 359, and other federal and state
laws, rules or regulations, to the extent applicable at the time.

19. Restrictions on the Executive’s Post-Employment Activities. The restrictions
in this section 19 have been negotiated, presented to, and accepted by the
Executive contemporaneous with the offer and acceptance by the Executive of this
Agreement. Cortland Bancorp’s decision to enter into this Agreement is
conditioned upon the Executive’s agreement to be bound by the restrictions
contained in this section 19.

(a) Promise of no solicitation. The Executive promises and agrees that during
the Restricted Period (as defined below) and in the Restricted Territory (as
defined below) the Executive will1:

1. not directly or indirectly solicit or attempt to solicit any Customer (as
defined below) to accept or purchase Financial Products or Services (as defined
below) of the same nature, kind, or variety as provided to the Customer by the
Bank during the two years immediately before the Executive’s employment
termination with the Bank,

2. not directly or indirectly influence or attempt to influence any Customer,
joint venturer, or other business partner of the Bank to alter that person or
entity’s business relationship with the Bank in any respect, and

3. not accept the Financial Products or Services business of any Customer or
provide Financial Products or Services to any Customer on behalf of anyone other
than the Bank.

(b) Promise of no competition. The Executive promises and agrees that during the
Restricted Period in the Restricted Territory the Executive will not engage,
undertake, or participate in the business of providing, selling, marketing, or
distributing Financial Products or Services of a similar nature, kind, or

 

1 

For example, the promise of no solicitation applies if the Executive is
conducting prohibited business in the Restricted Territory or if the entity
with, for, or to whom the Executive is conducting prohibited business is located
within the Restricted Territory.

 

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variety (x) as offered by the Bank to Customers during the two years immediately
before the Executive’s employment termination with the Bank, or (y) as offered
by the Bank to any of its Customers during the Restricted Period.2 Subject to
the above provisions and conditions of this subparagraph (b), the Executive
promises that during the Restricted Period the Executive will not become
employed by or serve as a director, partner, consultant, agent, or owner of 5%
or more of the outstanding stock of or contractor to any entity providing these
prohibited Financial Products or Services that is located in or conducts
business in the Restricted Territory.

(c) Promise of no raiding/hiring. The Executive promises and agrees that during
the Restricted Period the Executive will not solicit or attempt to solicit and
will not encourage or induce in any way any employee, joint venturer, or
business partner of Cortland Bancorp or the Bank to terminate an employment or
contractual relationship with Cortland Bancorp or the Bank. The Executive agrees
that the Executive will not hire any person employed by Cortland Bancorp or the
Bank during the two-year period before the Executive’s employment termination
with the Bank or any person employed by Cortland Bancorp or the Bank during the
Restricted Period.

(d) Promise of no disparagement. The Executive promises and agrees that during
the Restricted Period the Executive will not cause statements to be made
(whether written or oral) that reflect negatively on the business reputation of
Cortland Bancorp or the Bank. Cortland Bancorp and the Bank likewise promise and
agree that during the Restricted Period Cortland Bancorp and the Bank will not
cause statements to be made (whether written or oral) that reflect negatively on
the reputation of the Executive.

(e) Acknowledgment. The Executive and Cortland Bancorp acknowledge and agree
that the provisions of this section 19 have been negotiated and carefully
determined to be reasonable and necessary for the protection of legitimate
business interests of Cortland Bancorp and the Bank. Both parties agree that a
violation of section19 is likely to cause immediate and irreparable harm that
will give rise to the need for court ordered injunctive relief. If a breach or
threatened breach by the Executive of any provision of this Agreement occurs,
Cortland Bancorp, including its successors and assigns, is entitled to obtain an
injunction without bond restraining the Executive from violating the terms of
this Agreement and to institute an action against the Executive to recover
damages from the Executive for the breach. These remedies for default or breach
are in addition to any other remedy or form of redress provided under Ohio law.
The parties acknowledge that the provisions of this section 19 survive
termination of the employment relationship and are enforceable by Cortland
Bancorp and Cortland Bancorp’s successors and assigns. The parties agree that if
any of the provisions of this section 19 are deemed unenforceable by a court of
competent jurisdiction, the unenforceable provisions may be stricken as
independent clauses by the court in order to enforce the remaining territory
restrictions and that the intent of the parties is to afford the broadest
restriction on post-employment activities as set forth in this Agreement.
Without limiting the generality of the foregoing, without limiting the remedies
available to Cortland Bancorp for violation of this Agreement, and without
constituting an election of remedies, if the Executive violates any of the terms
of section 19 the Executive forfeits on the Executive’s own behalf and that of
beneficiary(ies) any rights to and interest in any severance or other benefits
under this Agreement or other contract the Executive has with Cortland Bancorp
or the Bank.

(f) Definitions: 1. “Restricted Period,” as used herein, means the one-year
period immediately after the Executive’s termination and/or separation of
employment with Cortland Bancorp or the Bank, regardless of the reason for
termination and/or separation and regardless of whether the term of

 

2 

For example, the promise of no competition applies if the Executive is
conducting prohibited business in the Restricted Territory or if the entity
with, for, or to whom the Executive is conducting prohibited business is located
within the Restricted Territory.

 

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this Agreement has expired before the Executive’s employment termination or
expires under section 5 during the one-year period immediately after the
Executive’s termination and/or separation of employment with the Bank. The
Restricted Period will be extended in an amount equal to any time period during
which a violation of section 19 of this Agreement is proven.

2. “Restricted Territory,” as used herein, means all of Trumbull, Portage, and
Mahoning Counties in Ohio.

3. “Customer,” as used herein, means any individual, joint venturer, entity of
any sort, or other business partner of Cortland Bancorp or the Bank with, for,
or to whom Cortland Bancorp or the Bank has provided Financial Products or
Services during the last two years of the Executive’s employment with Cortland
Bancorp or the Bank, or any individual, joint venturer, entity of any sort, or
business partner whom Cortland Bancorp or the Bank has identified as a
prospective customer of Financial Products or Services within the last two years
of the Executive’s employment with Cortland Bancorp or the Bank.

4. “Financial Products or Services,” as used herein, means any product or
service that a financial institution or a financial holding company could offer
by engaging in any activity that is financial in nature or incidental to such a
financial activity under section 4(k) of the Bank Holding Company Act of 1956
and that is offered by Cortland Bancorp or the Bank or an affiliate on the date
of the Executive’s employment termination, including, but not limited to,
banking activities and activities that are closely related and a proper incident
to banking, or other products or services of the type of which the Executive was
involved during the Executive’s employment with Cortland Bancorp or the Bank.

(g) Special compensation. Because the Executive may be subject to the
post-employment restrictions of this section 19 without also being entitled to
Change-in-Control benefits under this Agreement, Cortland Bancorp hereby agrees
that the Executive is entitled to one times compensation, as the term
compensation is defined in section 1(a), under this section 19(g), payable in a
single lump sum, without reduction to account for the time value of money or
discounting to present value, except that the Executive is not entitled to any
compensation under this section 19(g) if (x) the Executive is entitled to
receive or has received Change-in-Control compensation under this Agreement or
(y) the Executive’s employment termination is on account of retirement or occurs
after the Executive attains age 65. The provisions of section 4, prohibiting
payment of severance in specified cases, do not apply to or operate to prevent
payment of special compensation to which the Executive is entitled under this
section 19 after employment termination.

The special compensation payable under this section 19(g) will be paid to the
Executive five days after the Executive’s employment termination, but if when
the Executive’s employment terminates the Executive is a specified employee, as
defined in section 409A of the Internal Revenue Code of 1986, and if the special
compensation payable under this section 19(g) would be considered nonqualified
deferred compensation under section 409A, and finally if an exemption from the
six-month delay requirement of section 409A(a)(2)(B)(i) is not available, rather
than being payable five days after employment termination the special
compensation payable under this section 19(g) will be paid to the Executive in a
single lump sum without interest on the first day of the seventh month after the
month in which the Executive’s employment terminates.

(h) Section 19 is void after a Change in Control. Section 19 of this Agreement
is null and void after a Change in Control occurs.

 

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IN WITNESS WHEREOF, the parties have executed this Severance Agreement as of the
date first written above.

 

EXECUTIVE     CORTLAND BANCORP

 

    By:  

 

Timothy Carney       James M. Gasior       Its:   President and Chief Executive
Officer

 

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