10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003 Commission File No. 0-26486

Auburn National Bancorporation, Inc.

(Exact name of registrant as specified in its charter)

Delaware	63-0885779
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 N. Gay Street

Auburn, Alabama 36830

(334) 821-9200

(Address and telephone number of principal executive offices)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Name of each exchange on which registered
None	None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, Par Value, $.01 Per Share

(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Check whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of common stock held by non-affiliates of registrant computed by reference to the price at which the common stock was last sold as of June 30, 2003 was $40,306,376.

As of March 15, 2004, there were issued and outstanding 3,885,187 shares of the registrant’s $.01 par value common stock.

Documents Incorporated by Reference

Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on May 11, 2004 are incorporated by reference into Part III.

PART I

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements made herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to the protections of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may”, “will”, “anticipate”, “assume”, “should”, “indicate”, “would”, “believe”, “contemplate”, “expect”, “seek”, “estimate”, “continue”, “plan”, “point to”, “project”, “predict”, “could”, “intend”, “target”, “potential”, other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

• future economic and business conditions;

• government monetary and fiscal policies;

• the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

• the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services;

• the failure of assumptions underlying the establishment of reserves for possible loan losses and other estimates;

• the risks of mergers and acquisitions, including, without limitation, the related costs, including integrating operations as part of these transactions and the failure to achieve expected gains, revenue growth and/or expense savings from such transactions;

• changes in laws and regulations, including tax, banking and securities laws and regulations;

• changes in accounting policies, rules and practices;

• changes in technology or products may be more difficult or costly, or less effective than anticipated;

• the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence; and

• other factors and risks described in any of our subsequent reports that we make with the Securities and Exchange Commission (“the Commission”) under the Exchange Act.

All written or oral forward-looking statements that are attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

ITEM 1. BUSINESS

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered with the Board

2

of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn, Alabama (the “Bank”). The Company and its predecessor have controlled the Bank since 1984. As a bank holding company, the Company may diversify into a broader range of financial services and other business activities than currently are permitted to the Bank under applicable law. The holding company structure also provides greater financial and operating flexibility than is presently permitted to the Bank.

The Bank has operated continuously since 1907 and conducts its business in East Alabama, including Lee County and surrounding areas. In April 1995, in order to gain flexibility and reduce certain regulatory burdens, the Bank converted from a national bank to an Alabama state bank that is a member of the Federal Reserve System (the “Charter Conversion”). Upon consummation of the Charter Conversion, the Bank’s primary regulator changed from the Office of the Comptroller of the Currency to the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama Superintendent”). The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB-Atlanta”) since 1991.

General

The Company’s business is conducted primarily through the Bank. Although it has no immediate plans to conduct any other business, the Company may engage directly or indirectly in a number of activities which the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Company’s principal executive offices are located at 100 N. Gay Street, Auburn, Alabama 36830, and its telephone number at such address is (334) 821-9200. The Company maintains an internet website at www.auburnbank.com. The Company is not incorporating the information on that website into this report, and the website and the information appearing on the website are not included in, and are not part of, this report.

Services

The Bank offers checking, savings, transaction deposit accounts and certificates of deposit, and is an active residential mortgage lender in its primary service area (“PSA”). The Bank also offers commercial, financial, agricultural, real estate construction and consumer loan products and other financial services. The Bank is one of the largest providers of automated teller services in East Alabama, operating ATM machines in 14 locations. The Bank offers VISA Checkcards, which are debit cards with the VISA logo that work like checks but can be used anywhere VISA is accepted, including ATMs. The Bank’s VISA Checkcards can be used internationally through the Cirrus^® network. The Bank offers online banking and bill payment services through its Internet website, www.auburnbank.com.

Competition

The banking business in Alabama, including Lee County, is highly competitive with respect to loans, deposits, and other financial services, and the area is dominated by a number of regional and national banks and bank holding companies which have substantially greater resources, and numerous offices and affiliates operating over wide geographic areas. The Bank competes for deposits, loans and other business with these banks, as well as with credit unions, mortgage companies, insurance companies, and other local and nonlocal financial institutions, including institutions offering services through the mail, by telephone and over the Internet. As more and different kinds of businesses enter the market for financial services, competition from nonbank financial institutions may be expected to intensify further.

Among the advantages that larger financial institutions have over the Bank are their ability to finance extensive advertising campaigns and to allocate and diversify their assets among loans and securities of the highest yield and in

3

locations with the greatest demand. Many of the major commercial banks operating in the Bank’s service area, or their affiliates, offer services which are not presently offered directly by the Bank and may also have substantially higher lending limits than the Bank.

Community banks also have experienced significant competition for deposits from mutual funds, insurance companies, and other investment companies, and money center banks’ offerings of high-yield investments and deposits. Certain of these competitors are not subject to the same regulatory restrictions as the Bank.

Selected Economic Data

The Bank’s PSA includes the cities of Auburn and Opelika, Alabama and nearby surrounding areas in East Alabama, primarily in Lee County. Lee County’s population is approximately 120,000. Approximately 71% of the land in Lee County is devoted to agriculture, of which approximately 91% is comprised of forests. An estimated 10% is urban or developed. Timber and timber products, greenhouses and horticulture, beef cattle, and cotton are the major agricultural products. Principal manufactured products in the Company’s PSA include magnetic recording tapes, tires, textiles, small gasoline engines, and hardware. The largest employers in the area are Auburn University, East Alabama Medical Center, Wal-Mart Distribution Center, Uniroyal-Goodrich, West Point Stevens, and Briggs & Stratton.

Loans and Loan Concentrations

The Bank makes loans for commercial, financial, and agricultural purposes, as well as for real estate mortgage, real estate construction, and consumer purposes. While there are certain risks unique to each type of lending, management believes that there is more risk associated with commercial, real estate construction, agricultural, and consumer lending than with real estate mortgage loans. To help manage these risks, the Bank has established underwriting standards used in evaluating each extension of credit on an individual basis, which are substantially similar for each type of loan. These standards include a review of the economic conditions affecting the borrower, the borrower’s financial strength and capacity to repay the debt, the underlying collateral, and the borrower’s past credit performance. These standards are used to determine the creditworthiness of the borrower at the time a loan is made and are monitored periodically throughout the life of the loan.

The Bank has loans outstanding to borrowers in all industries within its PSA. Any adverse economic or other conditions affecting these industries would also likely have an adverse effect on the local workforce, other local businesses, and individuals in the community that have entered into loans with the Bank. However, management believes that due to the diversified mix of industries located within the Bank’s PSA, adverse changes in one industry may not necessarily affect other area industries to the same degree or within the same time frame. Management realizes that the Bank’s PSA is also subject to both local and national economic fluctuations.

Employees

At December 31, 2003, the Bank had 133 full-time equivalent employees, including 27 officers.

Statistical Information

Certain statistical information (as required by Guide 3) is included in response to Item 7 of this Annual Report on Form 10-K. Certain statistical information is also included in response to Item 6, Item 7A and Item 8 of this Annual Report on Form 10-K.

SUPERVISION AND REGULATION

Bank holding companies and banks are extensively regulated under federal and state law. This discussion is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not

4

intended to be an exhaustive description of the status or regulations applicable to the Company’s and the Bank’s business. Supervision, regulation, and examination of the Company and the Bank and their respective subsidiaries by the bank regulatory agencies are intended primarily for the protection of depositors rather than holders of Company capital stock. Any change in applicable law or regulation may have a material effect on the Company’s business.

Bank Holding Company Regulation

The Company, as a bank holding company, is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the BHC Act. Bank holding companies are generally limited to the business of banking, managing, or controlling banks, and other activities that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company is required to file with the Federal Reserve periodic reports and such other information as the Federal Reserve may request. The Federal Reserve examines the Company, and may examine its subsidiaries. The State of Alabama does not regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiary. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve has determined by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Gramm-Leach-Bliley Act (“GLB Act”) was enacted in November 1999. The GLB Act revised the statutory restrictions separating banking activities from certain other financial activities. Under the GLB Act, bank holding companies that are “well-capitalized” and “well-managed”, as defined in Federal Reserve Regulation Y, and whose subsidiary banks have and maintain satisfactory or better ratings under the Community Reinvestment Act of 1977, as amended (the “CRA”), and meet certain other conditions can elect to become “financial holding companies.” Financial holding companies and their subsidiaries are permitted to acquire or engage in previously impermissible activities such as insurance underwriting, securities underwriting, travel agency activities, broad insurance agency activities, merchant banking, and other activities that the Federal Reserve determines to be financial in nature or complementary thereto. In addition, under the merchant banking authority added by the GLB Act and Federal Reserve regulations, financial holding companies are authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the terms of its investment, does not manage the company on a day-to-day basis, and the investee company does not cross-market with any of the financial holding company’s controlled depository institutions. Financial holding companies continue to be subject to the overall oversight and supervision of the Federal Reserve, but the GLB Act applies the concept of functional regulation to the activities conducted by subsidiaries. For example, insurance activities would be subject to supervision and regulation by state insurance authorities. While the Company has not elected to become a financial holding company, in order to exercise the broader activity powers provided by the GLB Act, it may elect to do so in the future. The GLB Act also includes consumer privacy provisions, and the Federal Reserve and the other federal bank regulatory agencies have adopted extensive privacy rules.

The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company. The Company and the Bank are subject to Section 23A of the Federal Reserve Act and Federal Reserve Regulation W thereunder. Section 23A defines “covered transactions”, which include extensions of credit, and limits a bank’s covered transactions with any affiliate to 10% of such bank’s capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on

5

terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the bank’s affiliates. Finally, Section 23A requires that all of a bank’s extensions of credit to its affiliates be appropriately secured by acceptable collateral, generally United States government or agency securities. The Company and the Bank also are subject to Section 23B of the Federal Reserve Act, which generally requires covered and other transactions among affiliates to be on terms and under circumstances, including credit standards, that are substantially the same as or at least as favorable to the bank or its subsidiary as those prevailing at the time for similar transactions with unaffiliated companies.

Federal Reserve policy requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries in situations where additional investments in a troubled bank may not otherwise be warranted. In addition, where a bank holding company has more than one bank or thrift subsidiary, each of the bank holding company’s subsidiary depository institutions are responsible for any losses to the Federal Deposit Insurance Corporation (“FDIC”) as a result of an affiliated depository institution’s failure. As a result, a bank holding company may be required to loan money to its subsidiary in the form of capital notes or other instruments which qualify as capital under regulatory rules. However, any loans from the holding company to such subsidiary banks likely will be unsecured and subordinated to such bank’s depositors and perhaps to other creditors of the bank.

Bank and Bank Subsidiary Regulation

The Bank is subject to supervision, regulation and examination by the Federal Reserve and the Alabama Superintendent of Banks, which monitor all areas of the operations of the Bank, including reserves, loans, mortgages, issuances of securities, payment of dividends, establishment of branches, capital adequacy, and compliance with laws. The Bank is a member of the FDIC and, as such, its deposits are insured by the FDIC to the maximum extent provided by law. See “FDIC Insurance Assessments”.

Alabama law permits statewide branching by banks. The powers granted to Alabama-chartered banks by state law include certain provisions designed to provide such banks with competitive equality to the powers of national banks regulated by the Office of the Comptroller of the Currency.

The Federal Reserve adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) updated rating system which assigns each financial institution a confidential composite “CAMELS” rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations including Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. For most institutions, the FFIEC has indicated that market risk primarily reflects exposures to changes in interest rates. When regulators evaluate this component, consideration is expected to be given to: management’s ability to identify, measure, monitor, and control market risk; the institution’s size; the nature and complexity of its activities and its risk profile, and the adequacy of its capital and earnings in relation to its level of market risk exposure. Market risk is rated based upon, but not limited to, an assessment of the sensitivity of the financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates, commodity prices, or equity prices; management’s ability to identify, measure, monitor and control exposure to market risk; and the nature and complexity of interest rate risk exposure arising from nontrading positions.

The GLB Act requires banks and their affiliated companies to adopt and disclose privacy policies, including policies regarding the sharing of personal information they obtain from customers with third parties. The GLB Act also permits bank subsidiaries to engage in “financial activities” similar to those permitted to financial holding companies.

Community Reinvestment Act

The Company and the Bank are subject to the provisions of the Community Reinvestment Act of 1977, as amended (the “CRA”), and the federal banking agencies’ regulations thereunder. Under the CRA, all banks and

6

thrifts have a continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires a depository institution’s primary federal regulator, in connection with its examination of the institution, to assess the institution’s record of assessing and meeting the credit needs of the community served by that institution, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the institution’s record is made available to the public. Further, such assessment is required of any institution which has applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage for a newly-chartered institution; (iii) establish a new branch office that accepts deposits; (iv) relocate an office; or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the records of each subsidiary depository institution of the applicant bank holding company, and such records may be the basis for denying the application. A less than satisfactory CRA rating will slow, if not preclude expansion of banking activities. The Bank currently has a CRA rating of satisfactory.

Current CRA regulations rate institutions based on their actual performance in meeting community credit needs. CRA performance is evaluated by the Federal Reserve, the Bank’s primary federal regulator, using a lending test, an investment test, and a service test. The Federal Reserve also will consider: (i) demographic data about the community; (ii) the institution’s capacity and constraints; (iii) the institution’s product offerings and business strategy; and (iv) data on the prior performance of the institution and similarly-situated lenders. As a result of the GLB Act, CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLB Act may be commenced by a bank holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” CRA rating in its latest CRA examination. The federal bank regulators recently proposed revisions to their CRA regulations that would, among other things, require that evidence of discriminatory, illegal or abusive lending practices be considered in the CRA evaluation.

The Bank is also subject to, among other things, the provisions of the Equal Credit Opportunity Act (the “ECOA”) and the Fair Housing Act (the “FHA”), both of which prohibit discrimination based on race or color, religion, national origin, sex, and familial status in any aspect of a consumer or commercial credit or residential real estate transaction. In April 1994, the Department of Housing and Urban Development, the Department of Justice (the “DoJ”), and the federal banking agencies issued an Interagency Policy Statement on Discrimination in Lending to provide guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. The DoJ has also increased its efforts to prosecute what it regards as violations of the ECOA and FHA.

Payment of Dividends

The Company is a legal entity separate and distinct from the Bank. The prior approval of the Federal Reserve and/or the Alabama Superintendent is required if the total of all dividends declared by a state member bank (such as the Bank) in any calendar year will exceed the sum of such bank’s net profits for the year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits any state member bank from paying dividends that would be greater than such bank’s undivided profits after deducting statutory bad debt reserves in excess of such bank’s allowance for loan losses. During 2003, the Bank paid cash dividends of $1,870,000 to the Company.

In addition, the Company and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal and state regulatory authorities are authorized to determine, under certain circumstances relating to the financial condition of a state member bank or a bank holding company, that the

7

payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The Federal Reserve and the Alabama Superintendent have indicated that paying dividends that deplete a state member bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. The Federal Reserve and the Alabama Superintendent also have indicated that depository institutions should generally pay dividends only out of current operating earnings.

Capital

The Federal Reserve has risk-based capital guidelines for bank holding companies and state member banks, respectively. These guidelines require a minimum ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must consist of common equity, retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit intangibles (“Tier 1 capital”). The remainder may consist of non–qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt and intermediate term preferred stock, up to 45% of pretax unrealized holding gains on available for sale equity securities with readily determinable market values that are prudently valued, and a limited amount of general loan loss allowance (“Tier 2 capital” and, together with Tier 1 capital, “Total Capital”).

In addition, the federal regulatory agencies have established minimum leverage ratio guidelines for bank holding companies and state member banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to 3%, plus an additional cushion of 1.0% – 2.0% if the institution has less than the highest regulatory rating. The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Higher capital may be required in individual cases and depending upon a bank holding company’s risk profile. All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks including the volume and severity of their problem loans. Lastly, the Federal Reserve’s guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised the Company or the Bank of any specific minimum leverage ratio or tangible Tier 1 leverage ratio applicable to them.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal banking agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

All of the federal banking agencies have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the Total Capital ratio, Tier 1 capital ratio, and the leverage ratio. Under the regulations, a state member bank will be (i) well capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater, a Tier 1 leverage ratio of 5% or greater and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure, (ii) adequately capitalized if it has a Total Capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater, and a leverage ratio of 4% or greater (3% in certain circumstances), (iii) undercapitalized if it has a Total Capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% (3% in certain circumstances), (iv) significantly undercapitalized if it has a Total Capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% and a leverage ratio of less than 3% or (v) critically undercapitalized if its tangible equity is equal to or less than 2% of average quarterly tangible assets.

8

As of December 31, 2003, the consolidated capital ratios of the Company and the Bank were as follows:

	Regulatory Minimum		Company		Bank
Tier 1 risk-based capital ratio	4.0	%	15.27	%	13.97	%
Total risk-based capital ratio	8.0	%	16.53	%	15.22	%
Tier 1 leverage ratio	3.0-5.0	%	8.85	%	8.07	%

FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan for approval. For a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of 5% of the depository institution’s total assets at the time it became undercapitalized and the amount necessary to bring the institution into compliance with applicable capital standards. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. If the controlling holding company fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the federal Bankruptcy Code, the claim would be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. Because the Company and the Bank exceed applicable capital requirements, the respective managements of the Company and the Bank do not believe that the provisions of FDICIA have had or will have any material impact on the Company and the Bank or their respective operations.

FDICIA

FDICIA directs that each federal banking regulatory agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth composition, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares, and such other standards as the federal regulatory agencies deem appropriate.

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent monitor compliance with laws and regulations. Violations of laws and regulations, or other unsafe and unsound practices, may result in these agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and others participating in the affairs of a bank or bank holding company.

Fiscal and Monetary Policy

Banking is a business which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings. Thus, the earnings and growth of the Company and the Bank are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in United

9

States government securities, the discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits. The nature and timing of any changes in such policies and their effect on the Company and the Bank cannot be predicted.

FDIC Insurance Assessments

The Bank is subject to FDIC deposit insurance assessments. The Bank’s deposits are insured by the FDIC’s Bank Insurance Fund (“BIF”), and it has no deposits insured by the Savings Association Insurance Fund (“SAIF”). In 1996, the FDIC began applying a risk-based premium schedule which decreased the assessment rates for BIF depository institutions. Under this schedule, the annual premiums range from zero to $.27 for every $100 of deposits. The Deposit Insurance Funds Act of 1996 authorized The Financing Corporation (“FICO”) to levy assessments on BIF-assessable deposits. Since 1999, the FICO assessment rates have been the same for BIF and SAIF-assessable deposits. The FICO assessments are set quarterly, and for 2003 ranged from 1.68 basis points in the first quarter to 1.52 in the fourth quarter. In 2002, the FICO assessments ranged from 1.82 basis points in the first quarter to 1.70 basis points in the fourth quarter. The FICO assessment rate for the first quarter of 2004 is 1.54 basis points.

Each financial institution is assigned to one of three capital groups – well capitalized, adequately capitalized or undercapitalized – and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution’s primary federal and, if applicable, state regulators, and other information relevant to the institution’s financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution will, therefore, depend in part upon the risk assessment classification so assigned to the institution by the FDIC. During the three years ended December 31, 2003, the Bank paid no BIF deposit insurance premiums, and paid approximately $182,000, $174,000 and $60,000 in FICO assessments during 2003, 2002 and 2001, respectively.

Legislative and Regulatory Changes

The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001, imposes new “know your customer” requirements that obligate financial institutions to take actions to verify the identity of the account holders in connection with the opening of an account at any U.S. financial institution. Banking regulators are required to consider a financial institution’s compliance with the act’s money laundering provisions in making decisions regarding approval of acquisitions and mergers, and the regulatory authorities may impose sanctions for violations of this act. The federal bank regulatory agencies also have increased their scrutiny and enforcement of the currency transaction reporting practices under the Bank Secrecy Act.

The State of Alabama has been considering tax reform for several years and the Alabama legislature currently is considering legislation that may increase the Company’s state taxes. Other bills being considered by the Alabama legislature may adversely affect the Bank’s ability to attract and retain state deposits.

Various legislative and regulatory proposals regarding changes in banking, and the regulation of banks, thrifts and other financial institutions and bank and bank holding company powers, as well as the taxation of these entities, are being considered by the executive branch of the Federal government, Congress and various state governments. The FDIC has proposed a restructuring of the federal deposit insurance system, to better measure and price deposit insurance, to merge BIF and SAIF and increase FDIC insurance coverage. Other proposals pending in Congress would, among other things, allow banks to pay interest on checking accounts, allow the Federal Reserve to pay interest on reserves and permit de novo interstate branching. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. It cannot be predicted whether any of these proposals will be adopted, and, if adopted, how these proposals will affect the Company and the Bank. Various federal oversight authorities are also reviewing the capital adequacy and riskiness of government sponsored enterprises such as Fannie Mae and Freddie Mac. Changes from such review could affect the cost and availability of Fannie Mae and Freddie Mac Services. Recently, the Alabama Superintendent of Banks proposed regulations that, if adopted, would impose substantial audit committee, audit and corporate governance requirements upon Alabama-chartered banks.

10

ITEM 2. DESCRIPTION OF PROPERTY

The Bank conducts its business from its main office and seven branches. The Bank also has a mortgage loan office in Phenix City, Alabama. The main office is located in downtown Auburn, Alabama, in a 16,150 square foot building that is owned by the Bank. The original building was constructed in 1964, and an addition was completed in 1981. Portions of the building have been renovated within the last five years in order to accommodate growth and changes in the Bank’s operational structure and to adapt to technological changes. The main office building is surrounded on two sides by paved areas that provide parking for 84 vehicles, including four handicapped spaces. The main office offers the full line of the Bank’s services and has 2 ATMs, including one walk-up ATM and one drive-through ATM. The Bank owns a drive-in facility located directly across the street from its main office. This drive-in facility was constructed in 1979 and has five drive-through lanes and a walk-up window.

The Bank’s Kroger branch was opened in September 1987 and is located in the Kroger supermarket in the Corner Village Shopping Center in Auburn, Alabama for approximately 500 square feet of space. In April 2003, the Bank entered into a new lease agreement for another five years. This branch offers the full line of the Bank’s services including an ATM, with the exception of loans and safe deposit boxes.

The Opelika branch is located in Opelika, Alabama, in a 4,000 square foot building. This branch is owned by the Bank and was built in 1991. This branch offers the full line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking for approximately 36 vehicles, including two handicapped spaces.

The Bank’s Phenix City branch was opened in August 1998 in the Wal-Mart shopping center in Phenix City, Alabama, about 30 miles south of Auburn, Alabama for approximately 600 square feet of space in the Wal-Mart. In September 2003, the Bank entered into a new lease agreement for another five years with an option to extend for an additional five years. This branch offers the full line of the Bank’s deposit and other services including an ATM, except loans and safe deposit boxes.

The Bank’s Hurtsboro branch was opened in June 1999. This branch is located in Hurtsboro, Alabama, about 40 miles south of Auburn, Alabama, in a 1,000 square foot building. This branch was built in 1999 and is owned by the Bank. This branch offers the full line of the Bank’s services including safe deposit boxes, drive-through window and an ATM. This branch offers parking for approximately 8 vehicles, including a handicapped ramp.

The Bank’s Auburn Wal-Mart Supercenter branch was opened in September 2000 inside the Wal-Mart shopping center on the south side of Auburn, Alabama. The Bank has a five-year lease agreement with an option to extend for approximately 695 square feet of space in the Wal-Mart. This branch offers the full line of the Bank’s deposit and other services, including an ATM, except loans and safe deposit boxes.

The Bank’s Notasulga branch was opened in August 2001. This branch is located in Notasulga, Alabama, about 12 miles southwest of Auburn, Alabama in a 1,400 square foot building. This branch was built in 2001 and is owned by the Bank. This branch offers the full line of the Bank’s services including safe deposit boxes and a drive-through window. This branch offers parking for approximately 11 vehicles, including a handicapped ramp.

In July 2002, the Bank opened a mortgage loan office in Phenix City. The mortgage office is located in downtown Phenix City, about 30 miles south of Auburn, Alabama for approximately 700 square feet of space. In July 2003, the Bank entered into a new lease agreement for one year with an option to extend for another year. This office only offers mortgage loan services.

Also in July 2002, the Bank’s Opelika Wal-Mart Supercenter branch was opened inside the Wal-Mart shopping center in Opelika, Alabama. The bank has a five-year lease agreement with an option to extend for approximately 700 square feet of space in the Wal-Mart. This branch offers the full line of the Bank’s deposits and other services including an ATM, except loans and safe deposit boxes.

11

The Bank’s Winn Dixie branch lease expired and the branch was closed in April 2002. This branch was consolidated with the Auburn Wal-Mart Supercenter branch. This branch was opened in April 1997 and was located inside the Winn Dixie supermarket in the Tiger Crossing Shopping Center on the south side of Auburn, Alabama.

In addition, the Bank leases from the Company approximately 8,300 square feet of space in the AuburnBank Center (the “Center”), which is located next to the main office. This building, which has approximately 18,000 square feet of space, is also leased to outside third parties. Leases between the Bank and the Company are based on the same terms and conditions as leases to outside third parties leasing space in the same building. The Bank’s data processing activities, as well as other operations, are located in this leased space. The parking lot provides parking for approximately 120 vehicles, including handicapped parking.

Directly behind the Center is an older home that is also owned by the Company. This building is rented as housing to university students. The rear portion of this property is used as a parking area for approximately 20 vehicles of Bank employees.

The Bank also owns a two-story building located directly behind the main office. The first floor of this building is leased to unaffiliated third parties. The Bank uses the second floor for storage.

The Company owns a commercial office building (the “Hudson Building”) located across the street from the main office in downtown Auburn. The Hudson Building has two floors and a basement which contain approximately 14,395 square feet of leasable space. Approximately 60% of this building is rented by unaffiliated third-party tenants. The Bank occupies approximately 3,100 square feet, which includes a portion of the basement level used for storage and office space used to house certain bank functions. The Bank pays rent to the Company based on current market rates for such space.

In 1994, the Bank acquired a parcel of commercial real estate located in Auburn on U.S. Highway 29. This property, which was acquired in satisfaction of debt previously contracted, was formerly used by a floor covering business and contained approximately 6,045 square feet of office, showroom, and warehouse space. The Bank subsequently removed an underground storage tank (“UST”) containing petroleum products from the site. In 1995, the property was sold to a third party and the purchaser was indemnified of any environmental liability associated with the UST. Also in 1995, the Alabama Department of Environmental Management (“ADEM”) requested that the Bank submit a Secondary Investigation Plan (“Secondary Investigation”) as a result of underground soil and water contamination of petroleum-based hydrocarbon products. The Secondary Investigation was completed and submitted to ADEM by Roy F. Weston, Inc. (“Weston”), an independent consultant hired by the Bank. The Secondary Investigation indicated low concentrations of soil contamination on site and elevated concentrations of gasoline constituents both on-site and off-site. The Secondary Investigation indicated a low risk to human receptors, and Weston recommended to ADEM initiation of a quarterly ground water monitoring program for one year, at which time the program would be reassessed. In response to ADEM’s Letter of Requirement dated January 18, 1996, Weston prepared and submitted, on behalf of the Bank, a Monitoring Only Corrective Action Plan on February 20, 1996. In 1999, Weston installed a passive waste removal system to remove petroleum-based hydrocarbon products from the groundwater test well. Quarterly groundwater monitoring will continue in 2004 as required by ADEM. Samples from the eight existing monitoring wells will be collected and analyzed by Weston. The monitoring data will be submitted by Weston to ADEM as required. It is estimated that the cost for monitoring and providing reporting data to ADEM for 2004 will be approximately $9,000 (unless the site is released by ADEM during the year). The extent and cost of any further testing and remediation, if any, cannot be predicted at this time.

12

ITEM 3. LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank from time to time are involved in legal proceedings. The Company and Bank management believe there are no pending or threatened legal proceedings which upon resolution are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations.

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 ended December 31, 2003.

13

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s Common Stock is listed on the Nasdaq SmallCap Market, under the symbol “AUBN”. As of March 15, 2004, there were approximately 3,885,187 shares of the Company’s Common Stock issued and outstanding, which were held by approximately 450 shareholders of record. The following table sets forth, for the indicated periods, the high and low closing sale prices for the Company’s Common Stock as reported on the Nasdaq SmallCap Market, and the cash dividends paid to shareholders during the indicated periods.

	Closing Price Per Share (1)				Cash Dividends Declared
	High		Low
2003
First Quarter	$	14.30	$	12.91	$	0.12
Second Quarter		16.00		12.90		0.12
Third Quarter		18.95		15.06		0.12
Fourth Quarter		21.50		17.72		0.12
2002
First Quarter	$	13.00	$	11.48	$	0.11
Second Quarter		17.00		12.11		0.11
Third Quarter		14.75		13.00		0.11
Fourth Quarter		14.50		12.21		0.11

(1) The price information represents actual transactions.

In November 2003, the Company’s Board of Directors authorized the Company to repurchase up to an aggregate of $2.0 million of its outstanding shares of common stock in the open market, in negotiated transactions, block purchases, private transactions and otherwise, from time to time, through November 2004. The Company is not required to acquire any specific number of shares and may terminate its share repurchase program at any time. The Company is funding the repurchase of its common stock using a portion of the proceeds from its note payable to trust. Through December 31, 2003, the Company had purchased 3,000 shares of its common stock pursuant to this program for an aggregate purchase price of $61,562 (including broker fees) and at an average price per share of $20.42.

The Company has paid cash dividends on its capital stock since 1985. Prior to this time, the Bank paid cash dividends since its organization in 1907, except during the Depression years of 1932 and 1933. Holders of Common Stock are entitled to receive such dividends as may be declared by the Company’s Board of Directors. The amount and frequency of cash dividends will be determined in the judgment of the Company’s Board of Directors based upon a number of factors, including the Company’s earnings, financial condition, capital requirements, and other relevant factors. Company management currently intends to continue its present dividend policies.

The amount of dividends payable by the Bank is limited by law and regulation. The need to maintain adequate capital in the Bank also limits dividends that may be paid to the Company. Although Federal Reserve policy could restrict future dividends on Common Stock, such policy places no current restrictions on such dividends. See “SUPERVISION AND REGULATION — DIVIDENDS” and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CAPITAL RESOURCES.”

14

Recent Sales of Unregistered Securities

During the last three years, the Company has not sold any of its securities without registering them under the Securities Act, except on November 4, 2003:

(1) the Company organized a Delaware statutory business trust (the “Trust”) called “Auburn National Bancorporation Capital Trust I,” which is governed by an Amended and Restated Trust Agreement between the Company, Wilmington Trust Company, as trustee (the “Trustee”), and three of the Company’s employees who are the administrators of the Trust;

(2) the Company issued and sold to the Trust approximately $7.217 million in aggregate principal amount of its unsecured junior subordinated debentures, which were issued under a Junior Subordinated Indenture (note payable to trust) between the Company and the Trustee;

(3) the Trust:

(a) issued and sold $7.0 million of preferred capital securities with a liquidation amount of $50,000 per security to outside investors, and

(b) issued and sold $217,000 of its common securities to the Company, making the Company the only holder of the Trust’s common securities, and

(c) used the proceeds from these sales to purchase the junior subordinated debentures from the Company. The Company, in turn, used the proceeds from the sale of the junior subordinated debentures to fund the repurchase of up to $2 million of its common stock and to provide $5 million of capital to the Bank;

(4) the Company, under a Guarantee Agreement between the Company and the Trustee, fully and unconditionally guaranteed the payments of all amounts due on the preferred capital securities, except that the Company’s guarantee is limited to the extent the Trust actually has funds available for payment of distributions and does not apply where the Trust does not have sufficient funds to make payments on the preferred capital securities; and

(5) the Company paid a commission of $157,500 to The Bankers Bank and BankersBanc Capital Corporation, jointly, for their services as placement agents.

Both the junior subordinated debentures that the Company issued and the preferred capital securities that the Trust issued bear interest at a floating rate equal to the prime rate of interest as announced in the Money Rates section of The Wall Street Journal plus 12.5 basis points, payable quarterly on each of the last days of March, June, September and December, with a maturity of December 31, 2033. When the Company makes principal and interest payments to the Trust, as the holder of the junior subordinated debentures, the Trust, in turn, makes payments of principal and interest to holders of the preferred capital securities. The Company relied upon the exemption from registration under the Securities Act provided by Rule 506 of Regulation D thereunder.

Securities Authorized for Issuance Under Equity Compensation Plans

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	5,900	$	12.59	443,000
Equity compensation plans not approved by security holders	—		—	—
Total	5,900	$	12.59	443,000

15

ITEM 6. SELECTED FINANCIAL DATA

	For the Year Ended December 31,
	2003			2002			2001			2000			1999
	(Dollars in thousands, except per share data)
Earnings
Net Interest Income	$	13,518		$	14,570		$	13,845		$	12,584		$	12,128
Provision for Loan Losses		675			1,680			3,555			2,622			2,506
Net Earnings		5,419			5,055			4,578			3,014			2,922
Per Share:
Net Earnings – diluted		1.39			1.30			1.17			0.77			0.74
Cash Dividends		0.48			0.44			0.40			0.40			0.32
Book Value		10.38			10.16			9.20			8.10			7.25
Shares Issued		3,957,135			3,957,135			3,957,135			3,957,135			3,957,135
Weighted Average Shares Outstanding		3,894,969			3,894,649			3,908,084			3,924,573			3,924,573
Financial Condition
Total Assets	$	590,115		$	505,027		$	473,010		$	404,689		$	377,518
Loans		257,092			260,360			271,834			262,529			260,606
Investment Securities		285,319			190,918			151,474			111,730			77,867
Total Deposits		434,042			395,191			369,668			315,641			294,722
Long Term Debt		105,589			53,436			53,581			48,721			46,861
Shareholders’ Equity		40,408			39,582			35,834			31,805			28,442
Selected Ratios
Return on Average Total Assets		1.05	%		1.04	%		1.07	%		0.77	%		0.85	%
Return on Average Total Equity		13.47	%		13.66	%		13.40	%		10.30	%		9.86	%
Average Stockholders’ Equity to Average Assets		7.78	%		7.65	%		7.97	%		7.47	%		8.62	%
Allowance for Loan Losses As a % Of Loans		1.68	%		1.96	%		1.96	%		1.38	%		1.45	%
Loans To Total Deposits		59.23	%		65.88	%		73.53	%		83.17	%		88.42	%

16

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is designed to provide a better understanding of various factors related to the Company’s results of operations and financial condition. Such discussion and analysis should be read in conjunction with “BUSINESS” and “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.”

The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the three years ended December 31, 2003, 2002 and 2001. This discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere herein.

Overview

The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the bank holding company controlling the Bank. The Company’s business is conducted primarily through the Bank.

Like most financial institutions, the Company’s profitability depends largely upon the Bank’s net interest income, which is the difference between the interest received on earning assets, such as loans and investment securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. The Company’s results of operations are also affected by the Bank’s provision for loan losses; non-interest expenses, such as salaries, employee benefits, and occupancy expenses; and non-interest income, such as mortgage loan fees and service charges on deposit accounts.

Economic conditions, competition and federal monetary and fiscal policies also affect financial institutions. For example, 2003 was characterized by steady low interest rates intended to stabilize the economy and stimulate industrial economic growth. The Bank closed over $155 million in residential mortgage activity during 2003. Approximately 7.1% of the Bank’s 2003 gross revenue was a product of its traditional residential mortgage origination business. Management anticipates a significant decline in mortgage production volumes and revenues during 2004 due to anticipated higher interest rates. Lending activities are also influenced by regional and local economic factors, such as housing supply and demand, competition among lenders, customer preferences and levels of personal income and savings in the Company’s PSA.

Our balanced growth continued during 2003, with increases in assets, deposits, shareholders’ equity, earnings per share and returns on average assets and equity. The following chart shows our growth in these areas from December 31, 2001 to December 31, 2003:

	December 31, 2003			% Change		December 31, 2002			% Change		December 31, 2001
	(Dollars in thousands, except per share data)
Net Earnings	$	5,419		7.2	%	$	5,055		10.4	%	$	4,578
Net Earnings Per Share - diluted		1.39		6.9	%		1.30		11.1	%		1.17
Total Assets		590,115		16.8	%		505,027		6.8	%		473,010
Investment Securities		285,319		49.4	%		190,918		26.0	%		151,474
Deposits		434,042		9.8	%		395,191		6.9	%		369,668
Shareholders’ Equity		40,408		2.1	%		39,582		10.5	%		35,834
Return on Average Total Assets		1.05	%	1.0	%		1.04	%	–2.8	%		1.07	%
Return on Average Total Equity		13.47	%	–1.4	%		13.66	%	1.9	%		13.40	%

17

Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States and to general practices within the banking industry. The allowance for loan losses is an accounting policy applied by the Company which is deemed critical. Critical accounting policies are defined as policies which are important to the portrayal of the Company’s financial condition and results of operations, and that require management’s most difficult, subjective or complex judgements. The Company’s financial results could differ significantly if different judgements or estimates are applied in the application of this policy. See “ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS.”

Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain a level management considers adequate to absorb anticipated loan losses. When management believes the collection of the principal of a loan is unlikely, a loan is charged off against the allowance for loan losses. Subsequent recoveries of principal are added back to the allowance for loan losses. Management’s evaluation of the adequacy of the allowance for loan losses is based on a formal analysis which assesses the risks within the loan portfolio. In assessing the adequacy of the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as the Bank’s loan loss experience, the amount of past due and nonperforming loans, specific known risk, the status and amount of nonperforming assets, underlying collateral values securing loans, current and anticipated economic conditions and other factors which affect the allowance for loan losses. In 2003, the credit administration area reviewed approximately 22.9% of the total loan portfolio. In addition, the Bank has engaged an outside loan review consultant, on a semi-annual basis, to perform an independent review of the quality of the loan portfolio. In 2003, the outside loan review consultant reviewed approximately 28.2% of the total loan portfolio. The current economic conditions have slowed loan growth in 2003. The Company is closely monitoring certain portions of its loan portfolio that management believes to be of higher risk under the current economic situation.

Management believes the allowance for loan losses is adequate at December 31, 2003. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on economic changes and other changes that can effect the various borrowers. Certain economic and interest rate factors could have a material impact on the determination of the allowance for loan losses. The Bank’s allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, the Federal Reserve and the Alabama Superintendent may require a bank to make additional provisions to its allowance for loan losses where, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differ materially from those of management. See “SUPERVISION AND REGULATION.”

Management, considering current information and events regarding a borrowers’ ability to repay its obligations, considers a loan to be impaired when the ultimate collectibility of all amounts due, according to the contractual terms of the loan agreement, is in doubt. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. If the loan is collateral-dependent, the fair value of the collateral is used to determine the amount of the impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Cash receipts on accruing impaired loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans which are not accruing interest are applied first to principal and then to interest income.

Commercial real estate mortgage loans were $122,397,000 which represented 47.6% of the total loans at December 31, 2003. The largest 10 commercial real estate mortgage relationships approximated $37.5 million or 14.6% of the total loans outstanding at December 31, 2003. There are no significant concentrations of industries or loan types within the commercial real estate loan portfolio. The Bank’s commercial real estate loans are secured by real estate located principally in Lee County, Alabama. Accordingly, the ultimate collectibility of a substantial

18

portion of the Bank’s loan portfolio is susceptible to changes in market conditions in this area. A rapidly rising interest rate environment could have a material impact on certain borrowers’ ability to pay. The Company currently anticipates that interest rates will slightly increase in 2004. In the event of a deeper recession or a significant increase in interest rates, the Bank’s credit costs and losses could increase significantly. See “QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.”

Financial Condition

Total assets at December 31, 2003 and 2002 were $590,115,000 and $505,027,000, respectively, reflecting growth of $85,088,000 (16.8%). The Company’s growth during 2003 resulted primarily from the growth in investment securities available for sale and FHLB borrowings mainly due to the additional Bank capital as a result of the proceeds from the note payable to trust given to the Bank in form of a dividend. This increase is offset by a slight decrease in loans. In addition, deposits grew $38,851,000 (9.8%) from $395,191,000 at December 31, 2002 to $434,042,000 at December 31, 2003.

Investment Securities

Investment securities held to maturity were $1,238,000 and $7,928,000 at December 31, 2003 and 2002, respectively. This decrease of $6,690,000 (84.4%) in 2003 resulted from scheduled paydowns, maturities and calls of principal amounts. The investment securities available for sale portfolio was $284,081,000 and $182,990,000 at December 31, 2003 and 2002, respectively. This increase of $101,091,000 (55.2%) reflects purchases of $83,739,000 in U.S. agency securities, $176,366,000 in mortgage-backed securities, $18,172,000 in collateralized mortgage obligations (“CMOs”), $2,722,000 in corporate securities and $24,347,000 in state and political subdivision securities. This increase is offset by $116,629,000 of scheduled paydowns, maturities and calls of principal amounts. In addition, $17,253,000 of U.S. agency securities, $28,020,000 of CMOs, and $37,170,000 of mortgage-backed securities were sold in 2003. In November 2003, the Company formed a wholly-owned subsidiary, Auburn National Bancorporation Capital Trust I. This unconsolidated subsidiary issued approximately $7 million in preferred trust securities. The Company obtained these proceeds through a note payable to trust. Approximately $5 million of proceeds were given to the Bank in the form in dividend. This additional capital allowed the Bank to borrow additional funds from the FHLB. These funds were used to buy approximately $70 million in investment securities available for sale as part of a leverage transaction.

The composition of the Company’s total investment securities portfolio reflects the Company’s investment strategy to provide acceptable levels of interest income from portfolio yields while maintaining an appropriate level of liquidity to assist with controlling the Company’s interest rate position. In recent years, the Company has invested primarily in taxable securities due to its inability to fully realize the benefits of the preferential treatment afforded tax-exempt securities under the tax laws. Because of their liquidity, credit quality and yield characteristics, the majority of the purchases of taxable securities have been in investment grade mortgage-backed securities (“MBS”) and CMOs. The yields, values, and durations of such MBS and CMOs generally vary with interest rates, prepayment levels, and general economic conditions, and as a result, the values of such instruments may be more volatile and unpredictable than other instruments with similar maturities. Such MBS and CMOs also may have longer stated maturities than other securities, which may result in further price volatility.

19

The following table indicates the amortized cost of the portfolio of investment securities held to maturity at the end of the last three years:

	Amortized Cost December 31,
	2003		2002	2001
	(In thousands)
Investment Securities Held to Maturity:
U.S. government agencies	$	—	5,000	7,290
State and political subdivisions		370	564	615
Mortgage-backed securities		868	1,491	3,344
Collateralized mortgage obligations		—	873	4,915
Total investment securities held to maturity	$	1,238	7,928	16,164

The following table indicates the fair value of the portfolio of investment securities available for sale at the end of the last three years:

	Fair Value December 31,
	2003		2002	2001
	(In thousands)
Investment Securities Available for Sale:
U.S. government agencies	$	62,667	39,567	25,276
State and political subdivisions		28,076	3,686	3,393
Mortgage-backed securities		171,219	73,296	50,381
Collateralized mortgage obligations		16,084	63,124	52,523
Asset backed securities		—	—	1,299
Corporate securities		5,277	2,500	—
Equity securities		758	817	2,438
Total investment securities available for sale	$	284,081	182,990	135,310

At December 31, 2003, the Bank owned CMOs with a total amortized cost of $16,140,000. All of the CMOs are rated AAA and Aaa. The CMOs are all backed by federal agency guaranteed mortgages.

The MBS portfolio’s total amortized cost of $173,187,000 at December 31, 2003, is a mixture of fixed rate mortgages, adjustable rate mortgages (“ARMs”), and securities with balloon payments. At the time of purchase, the Bank considers various prepayment speeds and makes the purchase based on the ability to accept the yield and average life based on both increasing and decreasing prepayment speeds.

20

The following tables present the maturities and weighted average yields of investment securities at December 31, 2003:

	Maturities of Held-to-Maturity Investment Securities Amortized Cost
	Less than one year		After one through five years	After five through ten years	After ten years
	(In thousands)
State and political subdivisions	$	—	—	—	370
Mortgage-backed securities		4	595	9	260
Total investment securities held to maturity	$	4	595	9	630

	Weighted Average Yields of Held-to-Maturity Investment Securities
	Less than one year		After one through five years		After five through ten years		After ten years
State and political subdivisions	—	%	—	%	—	%	4.35	%
Mortgage-backed securities	5.99	%	7.06	%	6.43	%	5.68	%

	Maturities of Available for Sale Investment Securities Amortized Cost
	Immediate		Within one year	After one through five years	After five through ten years	After ten years
U.S. government agencies	$	—	2,000	16,359	33,048	11,459
State and political subdivisions		—	230	685	2,205	24,773
Mortgage-backed securities		—	51	3,812	73,879	94,577
Collateralized mortgage obligations		—	—	1,210	3,188	11,742
Corporate securities		—	—	—	2,500	2,721
Equity securities		1,023	—	—	—	—
Total investment securities available for sale	$	1,023	2,281	22,066	114,820	145,272

21

	Weighted Average Yields of Available for Sale Investment Securities
	Within one year		After one through five years		After five through ten years		After ten years
U.S. government agencies	3.71	%	3.09	%	3.45	%	3.73	%
State and political subdivisions	6.89	%	4.94	%	5.09	%	6.10	%
Mortgage-backed securities	6.59	%	3.57	%	3.47	%	4.56	%
Collateralized mortgage obligations	—	%	3.15	%	3.88	%	4.08	%
Corporate securities	—	%	—	%	6.75	%	4.24	%

The Company has one investment which has been in an unrealized loss position greater than one year. The Company owns 52,396 shares of Concord EFS stock. The Company has not written down this stock to its fair value because of management’s belief that this impairment is temporary. On December 31, 2003, the stock had a market value of $265,000 below historical cost. The Company believes the decrease is due to the past uncertainties from the proposed merger of Concord and First Data. Concord and First Data have agreed to settle the antitrust lawsuit filed by the U.S. Department of Justice and the merger closed in February 2004. Based on a review of analysts’ expectations, the Company’s management believes that Concord is well positioned with healthy market shares in the grocery, trucking and benefits payment sectors with a large book of recurring revenues. The Company expects that the merger should strengthen First Data’s merchant processing payment processing, electronic payments and debit card businesses. The value of First Data stock that the Company received in the merger will depend on the successful integration of Concord’s operations, of which they both have extensive experience, and solid financial performance in each quarter. Steadily improving economic conditions should positively impact First Data’s 2004 operations. Even though Concord is an economically sensitive stock, analysts believe Concord has positioned itself in areas that offer resistance to an economic slowdown. Third-party investment analysts have noted that Concord continues to improve its competitive position and operating profits and that processing electronic transactions is a complex business in which economies of scale make a big difference. Although the Company cannot predict stock prices and there is obviously variability in stock prices, management does not believe that the present decline in the Concord value is “other than temporary”. The Company will continue to monitor First Data and the performance of its common stock to determine whether or not an impairment that is not other than temporary has occurred.

Loans

Total loans were $257,092,000 at December 31, 2003, a decrease of $3,268,000 (1.3%), over total loans of $260,360,000 at December 31, 2002. The primary decrease during 2003 occurred in the residential real estate mortgage loans. In addition, the above was offset by an increase in residential held for sale loans. The residential real estate mortgage loan component of the loan portfolio decreased $4,117,000 (8.9%) to $41,988,000 at December 31, 2003, from the 2002 balance of $46,105,000 and represented 16.3% of the total loan portfolio at December 31, 2003, as compared to 17.7% at December 31, 2002.

These above decreases are offset by an increase in the residential held for sale loans. The residential held for sale loans increased $6,424,000 (106.8%) to $12,440,000 at December 31, 2003 compared to $6,016,000 at December 31, 2002. The increase was due primarily to increased demand of new and refinanced residential loans due to record low interest rates in 2003. Residential held for sale loans represented 4.8% and 2.3% of the total loans at December 31, 2003 and 2002, respectively.

In addition to originating mortgage loans for its own portfolio, the Company also originates residential mortgage loans which are sold in the secondary market. In addition to selling real estate mortgage loans to the Federal National Mortgage Association (“FNMA”) with the Bank retaining the servicing, the Bank has arranged with

22

one mortgage servicing company to originate and sell, without recourse, residential first mortgage real estate loans, with servicing released. During 2003, the Bank sold mortgage loans totaling approximately $81,310,000 to FNMA, with the Bank retaining the servicing, and sold mortgage loans totaling approximately $27,346,000 to the mortgage servicing company with servicing released. At December 31, 2003, the Bank was servicing loans totaling approximately $139,685,000. The Bank collects monthly servicing fees of 0.25% to 0.375% annually of the outstanding balances of loans serviced for FNMA. See “– EFFECTS OF INFLATION AND CHANGING PRICES.”

The following table presents the composition of the loan portfolio by major categories at the end of the last five years:

	2003			2002		2001		2000		1999
	(In thousands)
Commercial, financial and agricultural	$	54,999		56,490		63,158		71,636		77,236
Leases – commercial		6,630		7,128		8,113		—		—
Real estate – construction:
Commercial		2,099		1,392		3,562		9,883		16,591
Residential		4,866		4,768		7,932		4,973		5,653
Real estate – mortgage:
Commercial		122,397		124,490		112,075		89,465		75,285
Residential		41,988		46,105		51,806		60,128		58,350
Real estate – held for sale		12,440		6,016		9,531		7,534		7,636
Consumer installment		11,673		13,971		15,657		18,910		19,855
Total loans	$	257,092		260,360		271,834		262,529		260,606
Less: Allowance for loan losses		(4,312	)	(5,104	)	(5,340	)	(3,634	)	(3,774	)
Loans, net	$	252,780		255,256		266,494		258,895		256,832

The following table presents maturities by major loan classifications and the sensitivity of loans to changes in interest rates within each maturity category at December 31, 2003:

	Maturities of Loan Portfolio
	Within one year		After one through five years	After five years	Total
	(In thousands)
Commercial, financial and agricultural	$	25,606	28,452	941	54,999
Leases - commercial		44	5,815	771	6,630
Real estate – construction		6,548	417	—	6,965
Real estate – mortgage		22,518	84,871	56,996	164,385
Real estate – held for sale		—	—	12,440	12,440
Consumer installment		3,367	7,675	631	11,673
Total loans	$	58,083	127,230	71,779	257,092
Variable-rate loans	$	31,505	46,523	48,053	126,081
Fixed-rate loans		26,578	80,707	23,726	131,011
Total loans	$	58,083	127,230	71,779	257,092

23

Allowance for Loan Losses and Risk Elements

Interest on loans is normally accrued from the date an advance is made. The performance of loans is evaluated primarily on the basis of a review of each customer relationship over a period of time and the judgment of lending officers as to the ability of borrowers to meet the repayment terms of loans. If there is reasonable doubt as to the repayment of a loan in accordance with the agreed terms, the loan may be placed on a nonaccrual basis pending the sale of any collateral or a determination as to whether sources of repayment exist. This action may be taken even though the financial condition of the borrower or the collateral may be sufficient ultimately to reduce or satisfy the obligation. Generally, when a loan is placed on a nonaccrual basis, all payments are applied to reduce principal to the extent necessary to eliminate doubt as to the repayment of the loan. Thereafter, any interest income on a nonaccrual loan is recognized only on a cash basis.

The Company’s policy generally is to place a loan on nonaccrual status when it is contractually past due 90 days or more as to payment of principal or interest. A loan may be placed on nonaccrual status at an earlier date when concerns exist as to the ultimate collection of principal or interest. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed and charged against current earnings. Loans that are contractually past due 90 days or more which are well secured and are in the process of collection generally are not placed on nonaccrual status.

Lending officers are responsible for the ongoing review and administration of loans assigned to them. As such, they make the initial identification of loans which present some difficulty in collection or where circumstances indicate that the possibility of loss exists. The responsibilities of the lending officers include the collection effort on a delinquent loan. To strengthen internal controls in the collection of delinquencies, senior management and the Directors’ Loan Committee are informed of the status of delinquent and “watch” or problem loans on a monthly basis. Senior management reviews the allowance for loan losses and makes recommendations to the Directors’ Loan Committee as to loan charge-offs on a monthly basis.

The allowance for loan losses represents management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain a level considered adequate to absorb anticipated loan losses. In assessing the adequacy of the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as the Bank’s loan loss experience, the amount of past due and nonperforming loans, specific known risks, the status and amount of nonperforming assets, underlying collateral values securing loans, current and anticipated economic conditions and other factors which affect the allowance for loan losses. An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan losses is prepared by the Bank’s Credit Administration area and presented to the Directors’ Loan Committee on a monthly basis. In addition, the Bank has engaged outside loan review consultants, on a semi-annual basis, to perform an independent review of the quality of the loan portfolio.

The Bank’s allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, the Federal Reserve and the Alabama Superintendent may require a bank to make additional provisions to its allowance for loan losses where, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differ materially from those of management. See “SUPERVISION AND REGULATION.”

While it is the Bank’s policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.

24

The following table summarizes the levels of the allowance for loan losses at the end of the last five years and activity in the allowance during such years:

	Allowance for Loan Loss Activity for Year ended December 31,
	2003			2002		2001		2000		1999
	(Dollars in thousands)
Balance at beginning of period	$	5,104		5,340		3,634		3,775		2,808
Provision for loan losses		675		1,680		3,555		2,622		2,506
Charge-offs:
Commercial, financial, and agricultural		416		1,210		1,268		943		1,018
Real estate		1,036		851		512		1,113		277
Consumer		125		212		190		1,059		336
Total charge-offs		1,577		2,273		1,970		3,115		1,631
Recoveries:
Commercial, financial and agricultural		52		181		40		250		5
Real estate		8		67		11		11		1
Consumer		51		109		70		91		86
Total recoveries		111		357		121		352		92
Net charge-offs		1,466		1,916		1,849		2,763		1,539
Balance at end of period	$	4,313		5,104		5,340		3,634		3,775
Ratio of allowance for loan losses to loans outstanding		1.68	%	1.96	%	1.96	%	1.38	%	1.45	%
Ratio of allowance for loan losses to nonaccrual loans, renegotiated loans, and other nonperforming assets		253.11	%	163.90	%	47.52	%	41.93	%	57.34	%
Ratio of net charge-offs to average loans outstanding		0.57	%	0.71	%	0.70	%	1.06	%	0.63	%

The allowance for loan losses was $4,313,000 (1.68% of total outstanding loans) at December 31, 2003, compared to $5,104,000 (1.96% of total outstanding loans) at December 31, 2002. This decrease in the allowance is due to reduced loan growth and improved performance in the loan portfolio as of December 31, 2003 compared to the same period last year.

The Bank has been engaged in enhanced reviews of its loan approval and credit grading processes. The Bank has sought to better price its loans consistent with its costs of funds and its assessment of potential credit risk. This has had the effect of slowing the Bank’s loan growth.

During 2003, the Company had loan charge-offs totaling $1,577,000 and recoveries of $111,000, as compared to $2,273,000 in charge-offs and recoveries of $357,000 in the prior year. Charge-offs decreased in 2003 due to improved loan performance.

Management believes that the $4,313,000 allowance for loan losses at December 31, 2003 (1.68% of total outstanding loans), is adequate to absorb known risks in the portfolio at such date. However, no assurance can be given that adverse economic circumstances, generally, including current economic events, or other events, including additional loan review or examination findings or changes in borrowers’ financial conditions, will not result in increased losses in the Bank’s loan portfolio or in additional provisions to the allowance for loan losses. The Bank does not currently allocate its allowance for loan losses among its various classifications of loans. The increase in the

25

ratio of the allowance for loan losses to nonperforming assets between year-end 2003 and year-end 2002 was primarily due to the reduction in nonaccrual loans and other real estate owned. The increase in the ratio of the allowance for loan losses to nonperforming assets between year-end 2002 and year-end 2001 was primarily due to the reduction in nonaccrual loans, other real estate owned and accruing loans 90 days more past due.

While management recognizes that there is more risk traditionally associated with commercial and consumer lending as compared to real estate mortgage lending, the Bank currently has a tiered approach to determine the adequacy of its allowance for loan losses. This methodology focuses on the determination of the specific and general loss allowances for certain loans classified as problem credits and uses a five-year historical loss factor to determine the loss allocation for the remainder of the loan portfolio as opposed to allocations based on major loan categories. Level I includes specific allowances that have been reserved for impaired loans where management has identified specific losses. Level II allowances are set aside to cover general losses associated with problem loans which possess more than a normal degree of credit risk, but where no specific losses have been identified. These loans have been criticized or classified by the Bank’s regulators, external loan review personnel engaged by the Bank, or internally by management. The five-year historical loss factors, subject to certain minimum percentages considering regulatory guidelines, are applied to the Level II problem loans in determining the allocation. Level III is the allowance for the balance of the loan portfolio. The loans in this tier consist of all loans that are not classified as Level I or Level II problem credits, and less risk-free loans. Risk-free loans are defined as loans fully secured by cash or cash equivalents, readily marketable collateral, and portions of the portfolio that are partially covered by a U.S. Government or government agency guaranty. Adjustments are then made for local economic conditions. The allocation for Level III is determined by applying the historical loss factor, derived from prior years’ actual experience, to the adjusted outstanding balance for this classification. At December 31, 2003, the allowance for loan losses was allocated to approximately $365 thousand for impaired loans (Level 1), approximately $2.561 million for criticized and classified loans (Level II) and approximately $1.387 million for the general reserve (Level III).

At December 31, 2003, the Company had approximately $471,000 of impaired loans, which included 4 loans to 2 borrowers with a total valuation allowance of approximately $309,000. At December 31, 2002, the Company had approximately $5,281,000 of impaired loans, which included 5 loans to 3 borrowers with a total valuation allowance of approximately $861,000.

Nonperforming Assets

Nonperforming assets consist of loans on nonaccrual status, loans that have been renegotiated at terms more favorable to the borrower than those for similar credits, real estate and other assets acquired in partial or full satisfaction of loan obligations and accruing loans that are past due 90 days or more.

Nonperforming assets were $1,704,000, $3,114,000, and $12,706,000 at December 31, 2003, 2002, and 2001, respectively. These levels represent a decrease of $1,410,000 (45.3%) for the year ended December 31, 2003, and a decrease of $9,592,000 (75.5%) for the year ended December 31, 2002. The decrease in 2003 was mainly due to a decrease in nonaccrual loans and other real estate owned. The decrease in 2002 was mainly due to a decrease in nonaccrual loans, other real estate owned and accruing loans 90 days or more past due.

26

An analysis of the components of nonperforming assets at the end of the last five years is presented in the following table:

	Nonperforming Assets December 31,
	2003			2002		2001		2000		1999
	(Dollars in thousands)
Nonaccrual loans	$	1,704		2,532		10,211		7,793		6,075
Renegotiated loans		—		—		—		—		—
Other nonperforming assets (primarily other real estate)		—		582		1,026		874		509
Accruing loans 90 days or more past due		—		—		1,469		28		269
Total nonperforming assets	$	1,704		3,114		12,706		8,695		6,853
Nonaccrual loans and renegotiated loans as a percentage of total loans		0.66	%	0.97	%	3.76	%	2.97	%	2.33	%
Nonaccrual loans, renegotiated loans and other nonperforming assets as a percentage of total loans		0.66	%	1.20	%	4.13	%	3.30	%	2.53	%
Total nonperforming assets as a percentage of total loans		0.66	%	1.20	%	4.67	%	3.31	%	2.63	%

If nonaccrual loans had performed in accordance with their original contractual terms, interest income would have increased approximately $180,000, $462,000, and $528,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company did not recognize any interest income on nonaccrual loans for the years ended December 31, 2003, 2002 and 2001.

Other Potential Problem Loans

Potential problem loans consist of those loans where management has serious doubts as to the borrower’s ability to comply with the present loan repayment terms. At December 31, 2003, the Company had identified 78 loans totaling approximately $8,876,000, or 3.5% of total loans, which were considered potential problem loans. At December 31, 2002, the Company had identified 98 loans totaling approximately $11,574,000, or 4.4% of total loans, which were considered potential problem loans. Such loans have been considered in the determination of the Level II allowance previously discussed.

Deposits

Total deposits increased $38,851,000 (9.8%) to $434,042,000 at December 31, 2003, as compared to $395,191,000 at December 31, 2002. Noninterest-bearing deposits were $60,507,000 and $53,119,000 while total interest-bearing deposits were $373,535,000 and $342,072,000 at December 31, 2003 and 2002, respectively. This trend is the result of management’s decision to maintain a competitive position in its deposit rate structure coupled with the Bank’s marketing efforts to attract local deposits and fund its loan growth. At December 31, 2003, as a percentage of total deposits, noninterest-bearing accounts comprised approximately 13.9%, while MMDAs, NOWs and regular savings made up approximately 42.5%, certificates of deposit under $100,000 comprised approximately 19.7%, and certificates of deposit and other time deposits of $100,000 or more comprised 23.9%. At December 31, 2002, as a percentage of total deposits, noninterest-bearing accounts comprised approximately 13.5%, while MMDAs, NOWs and regular savings made up approximately 39.5%, certificates of deposit under $100,000 comprised approximately 22.7%, and certificates of deposit and other time deposits of $100,000 or more comprised 24.3%.

27

The composition of total deposits for the last three years is presented in the following table:

	December 31,
	2003				2002			2001
	Amount		% Change from prior year end		Amount	% Change from prior year end		Amount	% Change from prior year end
	(Dollars in thousands)
Demand deposits	$	60,507	13.91	%	53,119	10.09	%	48,251	12.15	%
Interest bearing deposits:
NOWs		87,353	26.69	%	68,950	15.48	%	59,705	61.83	%
MMDAs		78,881	9.27	%	72,189	1.68	%	70,999	13.61	%
Savings		18,026	20.71	%	14,933	8.98	%	13,703	17.45	%
Certificates of deposit under $100,000		85,401	-4.95	%	89,848	1.97	%	88,114	8.19	%
Certificates of deposit and other time deposits of $100,000 and over		103,874	8.03	%	96,152	8.16	%	88,896	10.96	%
Total interest bearing deposits		373,535	9.20	%	342,072	6.43	%	321,417	17.90	%
Total deposits	$	434,042	9.83	%	395,191	6.90	%	369,668	17.12	%

28

The average balances outstanding and the average rates paid for certain categories of deposits at the end of the last three years are disclosed in the “Consolidated Average Balances, Interest Income/Expense and Yields/Rates” table immediately following:

AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY

Consolidated Average Balances, Interest Income/Expense and Yields/Rates

Taxable Equivalent Basis

	Twelve Months Ended December 31,
	2003							2002						2001
	Average Balance			Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate		Average Balance		Interest	Yield/ Rate
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income (1)	$	256,431			16,299	6.36	%	268,878			18,460	6.87	%	264,948		21,418	8.08	%
Investment securities:
Taxable		214,109			8,225	3.84	%	164,159			8,872	5.40	%	119,288		7,735	6.48	%
Tax-exempt (2)		7,093			476	6.71	%	3,685			261	7.08	%	1,950		139	7.13	%
Total investment securities		221,202			8,701	3.93	%	167,844			9,133	5.44	%	121,238		7,874	6.49	%
Federal funds sold		8,130			92	1.13	%	13,243			214	1.62	%	15,857		530	3.34	%
Interest-earning deposits with other banks		797			10	1.25	%	1,510			34	2.25	%	2,395		107	4.47	%
Total interest-earning assets		486,560			25,102	5.16	%	451,475			27,841	6.17	%	404,438		29,929	7.40	%
Allowance for loan losses		(4,918	)					(5,368	)					(4,441	)
Cash and due from banks		12,838						14,719						11,918
Premises and equipment		3,077						3,256						3,241
Rental property, net		1,475						1,564						1,568
Other assets		17,796						18,183						11,599
Total assets	$	516,828						483,829						428,323
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand	$	75,307			959	1.27	%	64,074			1,114	1.74	%	45,104		1,165	2.58	%
Savings and money market		91,738			1,456	1.59	%	90,305			1,884	2.09	%	77,286		2,658	3.44	%
Certificates of deposits less than $100,000		87,621			3,057	3.49	%	88,673			3,782	4.27	%	84,988		5,106	6.01	%
Certificates of deposits and other time deposits of $100,000 or more		97,615			3,076	3.15	%	93,176			3,393	3.64	%	85,362		4,182	4.90	%
Total interest-bearing deposits		352,281			8,548	2.43	%	336,228			10,173	3.03	%	292,740		13,111	4.48	%
Federal funds purchased and securities sold under agreements to repurchase		4,279			48	1.12	%	3,295			53	1.61	%	3,233		117	3.62	%
Other borrowed funds		59,201			2,826	4.77	%	53,513			2,955	5.52	%	50,428		2,809	5.57	%
Total interest-bearing liabilities		415,761			11,422	2.75	%	393,036			13,181	3.35	%	346,401		16,037	4.63	%
Noninterest-bearing deposits		55,005						48,426						42,328
Accrued expenses and other liabilities		5,843						5,352						5,439
Stockholders’ equity		40,219						37,015						34,155
Total liabilities and stockholders’ equity	$	516,828						483,829						428,323
Net interest income				$	13,680					$	14,660					13,892
Net yield on total interest-earning assets						2.81	%					3.25	%				3.43	%

(1) Loans on nonaccrual status have been included in the computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%.

29

The following table presents the maturities of certificates of deposit and other time deposits of $100,000 or more:

	Maturities of Time Deposits over $100,000 December 31, 2003
	(Dollars in thousands)
Three months or less	$	15,736
After three within six months		17,974
After six within twelve months		25,621
After twelve months		44,543
Total	$	103,874
Weighted Average rate on time deposits of $100,000 or more at period end		3.47	%

Schedule of Short-term Borrowings (1)

The following table shows the maximum amount of short-term borrowings and the average and year-end amount of borrowings, as well as interest rates.

Year ended December 31	Maximum Outstanding at any Month-end		Average Balance		Interest Rate During Year		Ending Balance		Weighted Average Interest Rate at Year-end
	(Dollars in thousands)
2003	$	8,493	$	3,192	1.02	%	$	6,654	0.89	%
2002		11,989		3,265	1.60	%		11,989	1.19	%
2001		10,136		3,178	3.40	%		10,136	1.75	%

(1) Consists of securities sold under agreements to repurchase.

Other Borrowed Funds and Contractual Obligations

Other borrowed funds consist of Federal Home Loan Bank advances and notes payable. The following table outlines the Company’s other borrowed funds and contractual obligations as of December 31, 2003:

	Total		Payments Due by Period
			Less than one year		One to five years		After five years
			(In thousands)
Long-term debt:
FHLB advances	$	98,242	$	10,018	$	35,073	$	53,151
Notes payable		130		130		—		—
Total	$	98,372	$	10,148	$	35,073	$	53,151

The Company has operating leases for certain bank premises and equipment primarily including computer equipment and copiers. In 2003, the Company paid $158,000 and $307,000 in premises and equipment leases, respectively.

Note Payable to Trust

In November 2003, the Company formed a wholly owned Delaware statutory trust, Auburn National Bancorporation Capital Trust I. This unconsolidated subsidiary issued approximately $7 million in preferred trust securities. The Company obtained these proceeds through a note payable to trust (junior subordinated debentures). Approximately $5 million of proceeds were given to the Bank in the form of a dividend. This additional capital allowed the Bank to borrow additional funds from the FHLB. These funds along with some brokered CDs were used to buy additional investment securities available for sale as part of a leverage transaction. The remaining $2 million were used for the stock repurchase program. As of December 31, 2003, $7,217,000 of the note payable to trust was classified as Tier 1 Capital for regulatory purposes. For regulatory purposes, the trust preferred securities represent a minority investment in a consolidated subsidiary, which is currently included in Tier 1 Capital so long as it does not exceed 25% of total Tier 1

30

capital. Under Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46) and Revised Amendment to FIN 46 (FIN 46R), however, the trust subsidiary must be deconsolidated for accounting purposes. As a result, the Federal Reserve Board is reconsidering its treatment of trust preferred securities as Tier 1 capital and could determine that trust preferred securities will no longer be classified as Tier 1 Capital, or that a smaller percentage of Tier 1 Capital may be composed of trust preferred securities. Although management cannot predict the ultimate resolution of this issue, management believes the Company and Bank’s capital ratios will remain at an adequate level to allow the Company and Bank to continue to be “well capitalized “ under applicable banking regulations.

Off-Balance Sheet Commitments

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments involve elements of credit risk in excess of the amounts recognized in the consolidated financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The financial instruments whose contract amounts represent credit risk as of December 31, 2003 are as follows:

Commitments to extend credit	$	38,699,000
Standby letters of credit		4,748,000

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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. All guarantees expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary.

Capital Resources

The Company’s consolidated stockholders’ equity was $40,408,000 and $39,582,000 at December 31, 2003 and 2002, respectively, an increase of $826,000 (2.1%). The increase in stockholders’ equity for 2003 is mainly due to an increase in net earnings offset by cash dividends for 2003 and the decrease in the fair value of investment securities available for sale. The increase in stockholders’ equity for 2002 is mainly due to an increase in net earnings offset by cash dividends for 2002. The Company has funded its capital growth primarily through retained earnings since its 1995 common stock offering.

During 2003, cash dividends of $1,870,000 or $0.48 per share, were declared on the Common Stock as compared to $1,714,000 or $0.44 per share, in 2002. The Company plans to continue a dividend payout policy that provides cash returns to its investors and allows the Company to maintain adequate capital to support future growth and capital adequacy; however, the Company is dependent on dividends from the Bank as discussed subsequently. Management believes that a strong capital position is important to the continued profitability of the Company and provides a foundation for future growth as well as promoting depositor and investor confidence in the institution. See “SUPERVISION AND REGULATION.”

31

Certain financial ratios for the Company for the last three years are presented in the following table:

	Equity and Asset Ratios December 31,
	2003		2002		2001
Return on average assets	1.05	%	1.04	%	1.07	%
Return on average equity	13.47	%	13.66	%	13.40	%
Dividend payout ratio	34.53	%	33.85	%	34.19	%
Average equity to average asset ratio	7.78	%	7.65	%	7.97	%

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and the Alabama Superintendent. Failure to meet minimum capital requirements can initiate certain mandatory actions, and possibly additional discretionary 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes, as of December 31, 2003, that the Bank meets all capital adequacy requirements to which it is subject. See “SUPERVISION AND REGULATION.”

The following table sets forth the Bank’s actual capital levels and the related required capital levels at December 31, 2003:

	Actual Capital Amount		Actual Ratio		Required Capital Amount		Required Ratio
	(Dollars in thousands)
Tier 1 risk-based capital	$	43,857	13.97	%	$	12,556	³ 4	%
Leverage ratio		43,857	8.07	%		23,499	3-5	%
Total risk-based capital		47,785	15.22	%		25,112	³ 8	%

Liquidity

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand, and maturing liabilities. Without proper management, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.

At the Bank, asset liquidity is provided primarily through cash, the repayment and maturity of investment securities, and the sale and repayment of loans.

Sources of liability liquidity include customer deposits, federal funds purchased and investment securities sold under agreements to repurchase. Although deposit growth historically has been a primary source of liquidity, such balances may be influenced by changes in the banking industry, interest rates available on other investments, general economic conditions, competition and other factors. The Bank has participated in the FHLB-Atlanta’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and are taken out with varying maturities. This line is collateralized by a blanket lien against the Bank’s one to four family residential mortgage loans and investment securities. At December 31, 2003, the Bank had $98,242,000 in advances from FHLB-Atlanta.

Overall, net cash provided from financing activities increased $58,225,000 (228.15%) to $83,746,000 during 2003 from the previous year’s total of $25,521,000. Net cash provided by operating activities decreased $2,957,000 (27.2%) to $7,906,000 from net cash provided of $10,863,000 for the year ended December 31, 2002. Cash used in investing activities during 2003 approximated $100,111,000.

32

The Company depends mainly on dividends, management fees and lease payments from the Bank for its liquidity. The Company only receives cash dividends from the Bank if the cash flow from other sources is not sufficient to maintain a positive cash flow, also giving consideration to regulatory restrictions. Accordingly, the Bank paid the Company $1,870,000, $1,712,000, and $1,850,000 in cash dividends for 2003, 2002, and 2001 respectively. The Company provides services to the Bank for which it is paid a management fee comparable to the fee an unaffiliated vendor would receive. In addition, the Bank leases premises and equipment from the Company for its operations. Leases between the Bank and the Company are based on the same terms and conditions as leases to unaffiliated parties leasing space in the same building. The Bank paid the Company $44,000 and $27,000 in management fees for the years ended December 31, 2003 and 2002, respectively. The Bank also paid $188,000 and $204,000 in lease payments for the years ended December 31, 2003 and 2002, respectively. These funds were used to pay operating expenses and fund dividends to the Company’s shareholders. In addition, the Bank makes transfers to the Company, under its Tax Sharing Agreement, for payment of consolidated tax obligations. The Tax Sharing Agreement calls for the allocation of the consolidated tax liability or benefit between the Company and each subsidiary based on their individual tax positions as if each entity filed a separate tax return.

The Bank has reduced its loan to deposit ratio to 59.23% at December 31, 2003 from 65.88% at December 31, 2002. The Bank has been monitoring its liquidity, and has sought to better price its loans consistent with its costs of funds and the Bank’s assessment of potential credit risk. This process has slowed and is expected to continue to slow the Bank’s loan growth and related loan revenues.

Interest Rate Sensitivity Management

An integral part of the funds management of the Company and the Bank is to maintain a reasonably balanced position between interest rate sensitive assets and liabilities. The Bank’s Asset/Liability Management Committee (“ALCO”) is charged with the responsibility of managing, to the degree prudently possible, its exposure to “interest rate risk,” while attempting to provide earnings enhancement opportunities. The dollar difference between rate sensitive assets and liabilities for a given period of time is referred to as the rate sensitive gap (“GAP”). A GAP ratio is calculated by dividing rate sensitive assets by rate sensitive liabilities. Due to the nature of the Bank’s balance sheet structure and the market approach to pricing of liabilities, management and the Board of Directors recognize that achieving a perfectly matched GAP position in any given time frame would be extremely rare. ALCO has determined that an acceptable level of interest rate risk would be for net interest income to fluctuate no more than 5.0% given a change in selected interest rates of up or down 200 basis points over any 12-month period. Using an increase of 200 basis points and a decrease of 200 basis points, at December 31, 2003, the Bank’s net interest income would decrease approximately 1.90% in a rising rate environment and would slightly decrease in a falling rate environment. Interest rate scenario models are prepared using software created and licensed by The Bankers Bank.

For purposes of measuring interest rate sensitivity, Company management provides growth assumptions to incorporate over the 12-month period. Although demand and savings accounts are subject to immediate withdrawal, all passbook savings and regular NOW accounts are reflected in the model as repricing based on The Bankers Bank model standards. For repricing GAP, these accounts are repricing immediately.

Certificates of deposit are spread according to their contractual maturity. Investment securities and loans reflect either the contractual maturity, call date, repricing date, or in the case of mortgage-related products, a market prepayment assumption.

33

	Interest Sensitivity Analysis
December 31, 2003	Immediate		One to Three Months		Four to Twelve Months		One to Five Years		Over Five Years and Non-rate Sensitive	Total
	(In thousands)
Earning Assets:
Loans	$	—	102,238		17,861		54,922		82,071	257,092
Taxable investment securities		—	19,349		48,618		129,059		60,401	257,427
Tax-exempt investment securities		—	373		517		2,870		24,132	27,892
Federal funds sold		14,067	—		—		—		—	14,067
Interest earning deposits with other banks		266	—		—		—		—	266
Total earning assets		14,333	121,960		66,996		186,851		166,604	556,744
Interest bearing liabilities:
NOW		—	87,353		—		—		—	87,353
Savings and money market		—	96,907		—		—		—	96,907
Certificates of deposit less than $100,000		—	23,594		34,272		27,535		—	85,401
Certificates of deposit and other time deposits of $100,000 or more		—	24,965		40,612		33,297		5,000	103,874
Federal funds purchased and securities sold under agreements to repurchase		6,654	—		—		—		—	6,654
FHLB and other borrowings		—	18,047		50,079		25,096		5,150	98,372
Total interest bearing liabilities		6,654	250,866		124,963		85,928		10,150	478,561
Interest sensitivity gap		7,679	(128,906	)	(57,967	)	100,923		156,454	78,183
Cumulative interest sensitivity gap	$	7,679	(121,227	)	(179,194	)	(78,271	)	78,183

The interest sensitive assets at December 31, 2003, that reprise or mature within 12 months were $203,289,000 while the interest sensitive liabilities that reprice or mature within the same time frame were $382,483,000. At December 31, 2003, the 12 month cumulative GAP position, was a negative $179,194,000 resulting in a GAP ratio of interest sensitive assets to interest sensitive liabilities of 0.53. This negative GAP indicates that the Company has more interest-bearing liabilities than interest-earning assets that reprice within the GAP period.

The Bank enters into interest rate protection contracts to help manage its interest rate exposure. These contracts include interest rate swaps, caps and floors. Interest rate swap transactions involve the exchange of fixed and floating rate interest payment obligations based on the underlying notional principal amounts. Interest rate caps and floors are purchased by the Bank for a non-refundable fixed amount. The Bank receives interest based on the underlying notional principal amount if the specified index rises above the cap rate or falls below the floor strike rate. Notional principal amounts are used to express the volume of these transactions, but because they are never exchanged, the amounts subject to credit risk are much smaller. Risks associated with interest rate contracts include interest rate risk and creditworthiness of the counterparty. These risks are considered in the Bank’s overall asset liability management program. The Bank utilizes periodic financial statements issued by the counterparty to analyze the creditworthiness of the counterparty prior to entering into a contract and to monitor changes in the financial condition of the counterparty throughout the term of the contract. Current contracts are issued by a securities broker-dealer and were entered into with the purpose of managing the Bank’s interest rate exposure. Although none of the interest rate protection agreements are traded on any organized exchange, an active secondary market is available to the Company for such contracts.

The Bank’s Asset Liability Management Policy states that establishing limits on interest rate swaps, caps, and floors can be somewhat confusing or misleading since the notional amount by which these instruments are expressed is never exchanged between counterparties and therefore is not “at risk.” Furthermore, since they represent tools used by ALCO to manage imbalances in the Bank’s balance sheet in a prudent and cost effective manner, the appropriate volume of swaps for the Bank is not static; it changes with elements such as the economic environment, the capital position, and the ability to efficiently replicate hedging actions in the cash markets. The Bank endeavors to limit outstanding notional value of cash

34

contracts executed for purposes of managing net interest income to 25% of total assets as reported in the most recent quarterly call report. Notional value of cash contracts executed with one counterparty are limited to 10% of total assets as reported in the Bank’s most recent quarterly call report.

On January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement 133), which resulted in a $142,000 net of tax cumulative effect of a change in accounting principle adjustment to the Company’s consolidated financial statements upon adoption. As of December 31, 2003, the Company had the following derivative instrument:

	Notional Amount		Carrying Value		Estimated Fair Value		Weighted Average Rate (1)				Weighted Average Remaining Life (Years)
							Received		Paid
	(Dollars in thousands)
Swaps:
Fair value hedge: receive fixed:
Less than one year	$	5,000	$	64	$	64	5.68	%	1.20	%	0.29

(1) The weighted average rates received/paid are shown only for swaps for which net interest amounts were receivable or payable at the end of each period. Interest rates on variable rate derivative products held by the Bank are derived from the 3 month LIBOR rate.

At December 31, 2003, the $5.0 million interest rate swap was used as a fair value hedge to convert the interest rate on a like amount of certificates of deposit with similar terms from fixed to variable rates. The fair value of this derivative financial instrument is based on dealer quotes and third party financial models. See “RESULTS OF OPERATIONS – NET INTEREST INCOME.”

Three other interest rate swap contracts which had been used as fair value hedges of variable rate certificates of deposits with the total notional value of $20.0 million were terminated during 2001. There was no significant gain or loss resulting from these terminations. In February 2000, the Bank entered into an interest rate swap with respect to $10.0 million in variable rate loans. This agreement allows the Bank to receive fixed-interest payments at 9.80% per annum and to pay a variable rate equal to prime. The purpose of this contract was to reduce interest rate exposure to variable rate assets in a low-interest rate environment. During 2001, the Bank recorded a gain of $199,000 due to the change in fair value of this interest rate swap. This contract, which was not specifically designated as a hedging instrument, was terminated in 2001 for an additional gain of $34,000.

Effects of Inflation and Changing Prices

Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects financial institutions’ cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and stockholders’ equity. Mortgage originations and refinancings tend to slow as interest rates increase, and such increases likely will reduce the Company’s volume of such activities and the income from the sale of residential mortgage loans in the secondary market.

Pending Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be

35

required to apply FIN 46R to all entities subject to this Interpretation no later than the end of the first reporting period that end after December 15, 2004. This interpretation must be applied to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003.

For any variable interest entities (Vies) that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and no controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and no controlling interest of the VIE.

The Company has applied FIN 46R in accounting for Auburn National Bancorporation Capital Trust I (“Trust”), established in November, 2003. Accordingly, in the accompanying balance sheet, we have included, in other assets, our investment in the Trust of $217,000 and also included, in subordinated debt, the balance owed the Trust of $7,217,000. Except as related to the Trust, the application of this Interpretation is not expected to have a material effect on the Company’s consolidated financial statements.

In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 includes loans acquired in purchase business combinations, but does not apply to loans originated by the entity. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004 although earlier adoption is encouraged. The adoption of this new statement of position is not expected to have a material impact on the consolidated balance sheets or statements of earnings of the Company.

Results of Operations

Net Earnings

Net earnings increased $364,000 (7.2%) to $5,419,000 during 2003 from $5,055,000 for the year ended December 31, 2002. Basic income per share was $1.39 and $1.30 for 2003 and 2002, respectively, an increase of 6.9%. Comparatively, net earnings during 2002 increased $477,000 (10.4%) to $5,055,000 from the 2001 total of $4,578,000, while basic income per share increased of $0.13 per share for 2002 from a 2001 per share total of $1.17.

The increase in net earnings for 2003 is attributable to an increase in noninterest income and a decrease in provision for loan losses offset by a decrease in net interest income and an increase in noninterest expense. The increase in net earnings for 2002 is attributable to higher net interest income and lower provision for loan losses offset by a decrease in noninterest income and an increase in noninterest expense.

Net Interest Income

Net interest income is the difference between the interest the Company earns on its loans, investment securities and other earning assets and the interest cost of its deposits, borrowed funds and other interest-bearing liabilities. This is the primary component of the Company’s earnings. Net interest income was $13,518,000 for the year ended December 31, 2003. This decrease of $1,052,000 (7.2%) over 2002 is due to a decrease in the net yield on total interest earning assets of 44 basis points to 2.81% offset by an increase in average interest earning assets during 2003.

Net interest income was $14,570,000 for the year ended December 31, 2002. This increase of $725,000 (5.2%) over 2001 is due to the increase in average interest earning assets during 2002 offset by a decrease in the net yield on total interest earning assets of 18 basis points to 3.25%.

The Company uses interest rate protection contracts, primarily interest rate swaps, caps and floors, to protect the yields on earning assets and the rates paid on interest-bearing liabilities. Such contracts act as hedges against unfavorable rate changes. The income and expense associated with interest rate swaps, caps and floors are ultimately reflected as adjustments

36

to the net interest income or expense of the underlying assets or liabilities. The effect of such interest rate protection contracts resulted in a net increase in net interest income of $220,000, $188,000 and $219,000 for 2003, 2002, and 2001, respectively. It is the intention of the Company to continue to utilize interest rate protection contracts to manage exposure to certain future changes in interest rate environments. However, there can be no assurance that such transactions will positively affect earnings. See “— INTEREST RATE SENSITIVITY MANAGEMENT”, the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table appearing elsewhere herein and the “RATE/VOLUME VARIANCE ANALYSIS” tables immediately following.

Rate/Volume Variance Analysis

Taxable-Equivalent Basis (1)(2)	Change Due to
Years Ended December 31, 2003 Compared to 2002	Net Change			Rate		Volume		Rate/ Volume
	(In thousands)
Earning Assets:
Loans	$	(2,161	)	(1,369	)	(855	)	63
Investment securities:
Taxable		(647	)	(2,566	)	2,700		(781	)
Tax-exempt		215		(14	)	242		(13	)
Total investment securities		(432	)	(2,580	)	2,942		(794	)
Federal funds sold		(122	)	(64	)	(83	)	25
Interest earning deposits with other banks		(24	)	(15	)	(16	)	7
Total earning assets	$	(2,739	)	(4,028	)	1,988		(699	)
Interest bearing liabilities:
Deposits:
Demand	$	(155	)	(298	)	195		(52	)
Savings and money market		(428	)	(451	)	30		(7	)
Certificates of deposit less than $100,000		(725	)	(688	)	(45	)	8
Certificates of deposit and other time deposits of $100,000 or more		(317	)	(457	)	162		(22	)
Total interest bearing deposits		(1,625	)	(1,894	)	342		(73	)
Federal funds purchased and securities sold under agreements to repurchase		(5	)	(16	)	16		(5	)
Other borrowed funds		(129	)	(400	)	314		(43	)
Total interest bearing liabilities	$	(1,759	)	(2,310	)	672		(121	)

(1) For analytical purposes, income for tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate).

(2) The change in interest due to rate is calculated by multiplying the previous volume by the rate change and the change in interest due to volume is calculated by multiplying the change in volume by the previous rate. Changes attributable to both changes in rate and volume are calculated by multiplying the change in volume by the change in rate.

37

Rate/Volume Variance Analysis

Taxable-Equivalent Basis (1)(2)	Change Due to
Years Ended December 31, 2002 Compared to 2001	Net Change			Rate		Volume		Rate/ Volume
	(In thousands)
Earning Assets:
Loans	$	(2,958	)	(3,228	)	318		(48	)
Investment securities:
Taxable		1,137		(1,288	)	2,910		(485	)
Tax-exempt		122		(1	)	124		(1	)
Total investment securities		1,259		(1,289	)	3,034		(486	)
Federal funds sold		(316	)	(274	)	(87	)	45
Interest earning deposits with other banks		(73	)	(53	)	(40	)	20
Total earning assets	$	(2,088	)	(4,844	)	3,225		(469	)
Interest bearing liabilities:
Deposits:
Demand	$	(51	)	(381	)	490		(160	)
Savings and money market		(774	)	(1,046	)	448		(176	)
Certificates of deposit less than $100,000		(1,324	)	(1,481	)	221		(64	)
Certificates of deposit and other time deposits of $100,000 or more		(789	)	(1,074	)	383		(98	)
Total interest bearing deposits		(2,938	)	(3,982	)	1,542		(498	)
Federal funds purchased and securities sold under agreements to repurchase		(64	)	(65	)	2		(1	)
Other borrowed funds		146		(24	)	171		(1	)
Total interest bearing liabilities	$	(2,856	)	(4,071	)	1,715		(500	)

(1) For analytical purposes, income for tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate).

(2) The change in interest due to rate is calculated by multiplying the previous volume by the rate change and the change in interest due to volume is calculated by multiplying the change in volume by the previous rate. Changes attributable to both changes in rate and volume are calculated by multiplying the change in volume by the change in rate.

Interest Income

Interest income is a function of the volume of interest-earning assets and their related yields. Interest income was $24,940,000, $27,752,000, and $29,883,000 for the years ended December 31, 2003, 2002, and 2001, respectively. The decrease in interest income resulted primarily from decreases in loan yields and the amount of loans outstanding. Average interest-earning assets increased $35,085,000 (7.8%) during 2003, compared to $47,037,000 (11.6%) during 2002, while the fully taxable equivalent yields on average earning assets decreased 101 basis points in 2003 after decreasing 123 basis points in 2002. The combination of these factors resulted in decreases in interest income of $2,812,000 (10.1%) for 2003 and $2,131,000 (7.1%) during 2002. See “—CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” and THE “RATE/VOLUME VARIANCE ANALYSIS” tables.

Loans are the main component of the Bank’s earning assets. Interest and fees on loans were $16,299,000, $18,460,000, and $21,418,000 for the years ended December 31, 2003, 2002, and 2001, respectively. These levels reflected a decrease of $2,161,000 (11.7%) during 2003, and a decrease of $2,958,000 (13.8%) during 2002. The decrease in 2003 is due to a decrease in the fully taxable equivalent yield on loans and a decrease in the average volume outstanding on loans. The decrease in 2002 is due to a decrease in the fully taxable equivalent yield on loans offset by an increase in the average

38

volume outstanding on loans. The level of average balances has decreased to $256,431,000 in 2003 from $268,878,000 in 2002 and $264,948,000 for 2001. The fully taxable equivalent yield on loans decreased 51 basis points to 6.36% in 2003, and decreased 121 basis points to 6.87% in 2002 from the 2001 average yield of 8.08%.

Interest income on investment securities decreased $505,000 (5.6%) to $8,539,000 in 2003, following an increase of $1,217,000 (15.5%) to $9,044,000 in 2002 from $7,827,000 in 2000. The 2003 decrease was due to a $53,358,000 increase in average volume outstanding offset by a decrease in yield of 151 basis points compared to 2002 levels. The 2002 increase was due to a $46,606,000 increase in average volume outstanding offset by a decrease in yield of 105 basis points compared to 2001 levels. The fully taxable equivalent yields on investment securities were 3.93% in 2003, 5.44% in 2002, and 6.49% in 2001. See “FINANCIAL CONDITION—INVESTMENT SECURITIES.”

Interest Expense

Total interest expense was $11,422,000, $13,181,000 and $16,038,000 for the years ended December 31, 2003, 2002, and 2001 respectively, representing decreases of $1,759,000 (13.3%) during 2003 and $2,857,000 (17.8%) during 2002. Total average balances outstanding of interest-bearing liabilities have continued an upward trend over the last three years to $415,761,000 in 2003 from $393,036,000 in 2002 and $346,401,000 in 2001. The rates paid on these liabilities decreased 60 basis points in 2003 to 2.75% after decreasing 128 basis points to 3.35% during 2002 from 4.63% in 2001.

Interest on deposits, the primary component of total interest expense, decreased $1,625,000 to $8,548,000 (16.0%) during 2003 from $10,173,000 in 2002, which in turn represents a $2,938,000 (22.4%) decrease from the 2001 level of $13,111,000. The average balance outstanding of interest-bearing deposits has increased steadily to the 2003 level of $352,281,000 as compared to $336,228,000 in 2002 and $292,740,000 in 2001. The average rates paid on interest-bearing deposits were 2.43%, 3.03%, and 4.48% for 2003, 2002, and 2001, respectively.

Interest expense on borrowed funds was $2,826,000 in 2003, $2,955,000 in 2002, and $2,809,000 in 2001. These levels represent a decrease of $129,000 (4.4%) during 2003, and an increase of $146,000 (5.2%) during 2002. The 2003 decrease is due to the refinancing of $10 million in FHLB advances to a lower interest rate in April 2003. The 2002 increase is due to a full year of interest expense in 2002 for a $5 million advance drawn in August 2001.

Provision for Loan Losses

During 2003, the Company made a total provision for loan losses of $675,000 based on management’s reviews and assessments of the risks in the loan portfolio, the amount of the loan portfolio and historical loan loss trends, and an evaluation of certain significant problem loans. During 2002 and 2001, the Company made total provisions for loan losses of $1,680,000 and $3,555,000, respectively. The decrease in 2003 is due to reduced loan growth and improved performance in the loan portfolio. The decrease in 2002 is due to reduced loan growth and less deterioration in certain loans than in the same period last year. See “FINANCIAL CONDITION — ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS.”

Noninterest Income

Noninterest income increased $1,381,000 (25.6%) to $6,773,000 for the year ended December 31, 2003, from the 2002 total of $5,392,000, which in turn represented a decrease of $559,000 (9.4%) from the total of $5,951,000 for 2001.

Service charges on deposit accounts increased $99,000 (7.1%) during 2003 to $1,497,000 and decreased $76,000 (5.2%) in 2002 to $1,398,000 from $1,474,000 in 2001. The increase in 2003 is due to an overall increase in service charges offset slightly by a decrease in the number of insufficient funds and overdraft charges. The decrease in 2002 is due to a decrease in insufficient funds and overdraft charges due to a decrease in the number of items.

Net gains from investment securities increased $502,000 (101.8%) to $995,000 for the year ended December 31, 2003, from the 2002 total of $493,000. The increase is primarily due to the gains in the second quarter of 2003 on the sale of specific available for sale securities.

Other noninterest income increased $780,000 (22.3%) to $4,281,000 in 2003 from $3,501,000 in 2002. Comparatively, the 2002 total represented an increase of $550,000 (18.6%) from $2,951,000 in 2001. The increase in 2003 was primarily

39

due to an increase of $421,000 in MasterCard/VISA discounts and fees due to an increase in transaction volume and fees and an increase of $319,000 in gains on the sale of mortgage loans. The increase in 2002 was primarily due to an increase of $317,000 in MasterCard/VISA discounts and fees mainly due to Auburn University’s acceptance of MasterCard/VISA for tuition, an increase of $400,000 in the cash surrender value of life insurance, and an increase of $142,000 in the gain on the sale of mortgage loans. See “ITEM 1 – BUSINESS—SERVICES.”

Noninterest Expense

Total noninterest expense was $11,914,000 for 2003, $11,143,000 for 2002, and $9,923,000 for 2001 reflecting an increase of $771,000 (6.9%) for 2003, and an increase of $1,220,000 (12.3%) for 2002.

Salaries and benefits increased $109,000 (2.3%) to $4,751,000 for the year ended December 31, 2003, and increased $409,000 (9.7%) to $4,642,000 for the year ended December 31, 2002, from the 2001 total of $4,233,000. At December 31, 2003, the Company had 133 full-time equivalent employees, an increase of 10 over the level at December 31, 2002. At December 31, 2002, the Company had 123 full-time equivalent employees, an increase of 3 over the level at December 31, 2001. The increases for 2003 and 2002 were primarily due to new hires, merit raises and the cost of benefits associated with such increases.

Net occupancy expense was $1,251,000, $1,229,000, and $1,095,000 for 2003, 2002 and 2001, respectively, representing an increase of $22,000 (1.8%) in 2003 and $134,000 (12.2%) in 2002 over the previous year’s levels. The 2003 increase is mainly due to a slight increase in computer hardware maintenance offset by a decrease in computer lease payments. The 2002 increase is mainly due to an increase in computer lease payments.

Other noninterest expense was $5,912,000 for 2003, $5,272,000 for 2002, and $4,595,000 for 2001. These levels represent an increase of $640,000 (12.1%) in 2003 and an increase of $677,000 (14.7%) in 2002 over the respective previous years. This 2003 increase is mainly due to the early prepayment penalty of $715,000 to refinance the $10 million in FHLB advances and increases of $299,000 in the MasterCard/VISA transaction volume mentioned above from the same period of 2002. The increase in MasterCard/VISA expenses resulted from the increase in fees the Company paid to its merchant processor in connection with an increase in MasterCard/VISA transactions. The 2002 increase is mainly due to increases of $360,000 in the expenses associated with Auburn University’s acceptance of MasterCard/VISA for tuition mentioned above, $68,000 in marketing expenses, $72,000 in network communications, $59,000 in expenses to maintain other real estate owned as well as losses on the sale of other real estate owned and an increase of $114,000 in the FDIC assessment. See “SUPERVISION AND REGULATION-FDIC INSURANCE ASSESSMENTS.”

Income Taxes

The Company’s income tax expense was $2,283,000, $2,085,000, and $1,881,000 in 2003, 2002, and 2001, respectively. These levels represent an effective tax rate on pre-tax earnings of 29.6% for 2003, 29.2% for 2002, and 29.8% for 2001. The effective tax rate has decreased due to benefits of tax credits related to a low income housing investment and bank owned life insurance. Details of the tax provision for income taxes are included in Note 11, “Income Tax Expense” in the Notes to the Consolidated Financial Statements included elsewhere herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk, with respect to the Company, is the risk of loss arising from adverse changes in interest rates and prices. The risk of loss can result in either lower fair market values or reduced net interest income. Although the Company manages other risk, such as credit and liquidity, management considers interest rate risk to be the more significant market risk and could potentially have the largest material effect on the Company’s financial condition. Further, the Company believes the potential reduction of net interest income may be more significant than the effect of reduced fair market values. The Company does not maintain a trading portfolio, therefore it is not exposed to risk from trading activities. Nor does it deal in international instruments, therefore the Company is not exposed to foreign currency risk.

40

The Company’s interest rate risk management is the responsibility of the Asset/Liability Management Committee (ALCO). ALCO has established policies and limits to monitor, measure and coordinate the Company’s sources, uses and pricing of funds.

The Company manages the relationship of interest sensitive assets to interest sensitive liabilities and the resulting effect on net interest income. The Company utilizes a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on both a rise and fall in interest rates of 200 basis points over a twelve month period. The model is based on actual repricing dates of interest sensitive assets and interest sensitive liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rates of certain assets. The assumptions are based on nationally published prepayment speeds on given assets when interest rates increase or decrease by 200 basis points or more.

Interest rate risk represents the sensitivity of earnings to changes in interest rates. As interest rates change, the interest income and expense associated with the Company’s interest sensitive assets and liabilities also change, thereby impacting net interest income, the primary component of the Company’s earnings. ALCO utilizes the results of the simulation model and the static GAP report to quantify the estimated exposure of net interest income to a sustained change in interest rates.

The Company makes use of interest rate contracts to protect its net interest income against changes in interest rates. At year-end, the Company had an interest rate swap agreement with a notional value of $5.0 million. This contract was negotiated to protect the Company’s balance sheet against a fall or rise in interest rates. The effect of this instrument is considered in the simulation models.

Currently the Company’s income exposure to changes in interest rates is relatively low. The Company measures this exposure based on a gradual increase or decrease in interest rates of 200 basis points. Given this scenario, the Company had, at year-end, a slight exposure to rising rates and falling rates.

The following chart reflects the Company’s sensitivity to changes in interest rates as of December 31, 2003. Numbers are based on the December balance sheet and assumes paydowns and maturities of both assets and liabilities are reinvested based on growth assumptions provided by the Company. The same growth and interest rate assumptions are used in the base, up 200 basis points, and down 200 basis points scenarios.

INTEREST RATE RISK

Income Sensitivity Summary:

Interest Rate Scenario (000)

(Dollars in thousands)

	-200 BP		Base	+200 BP
Year 1 Net Interest Income	15,191		15,176	14,885
$ Change Net Interest Income	(15	)	—	(291	)
% Change Net Interest Income	(0.10	)%	—	(1.95	)%

Policy Limit 5% for +/- 200 Basis Points (BP) over 12 months.

The preceding sensitivity analysis is a modeling analysis, which changes quarterly and consists of hypothetical estimates based upon numerous assumptions, including the interest rate levels, shape of the yield curve, prepayments on loans and securities, rates on loans and deposits, reinvestments of paydowns and maturities of loans, investments and deposits, and others. While assumptions are developed based on the current economic and market conditions, management cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. See “INTEREST SENSITIVITY ANALYSIS” table.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Financial Statements and Supplementary Data contained within this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Director of Financial Operations (DFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and DFO, concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the CEO and DFO, as appropriate, to allow timely decisions regarding disclosure. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the end of the period covered by this report.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Information required by this item is set forth under the headings “Proposal One: Election of Directors—Information about Nominees for Directors,” “Additional Information Concerning the Company’s Board of Directors and Committees,” “Executive Officers—General” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the definitive proxy statement for the Company’s Annual Meeting to be held on May 11, 2004, and is incorporated herein by reference.

The Board of Directors has adopted a Code of Conduct and Ethics applicable to the Company’s directors, officers and employees, including the Company’s principal executive officer, principal financial officer, and principal accounting officer, controller and other senior financial officers. Upon request, the Company will provide a copy of its Code of Conduct and Ethics, without charge, to any person. Written requests for a copy of the Company’s Code of Conduct may be sent to Auburn National Bancorporation, Inc., 100 N. Gay Street, Auburn, Alabama 36830, and Attention: Marla Kickliter, Assistant Vice President of Compliance and Internal Audit. Requests may also be made via telephone by contacting Marla Kickliter, Assistant Vice President of Compliance and Internal Audit, or Laura Carrington, Vice President of Human Resources, at (334) 821-9200.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is set forth under the headings “Additional Information Concerning the Company’s Board of Directors and Committees—Board Compensation,” “Executive Officers,” “Compensation Committee Report” and “Performance Graph” in the definitive proxy statement for the Company’s Annual Meeting to be held on May 11, 2004, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is set forth under the headings “Proposal One: Election of Directors—Information about Nominees for Directors” and “Principal Shareholders” in the definitive proxy statement for the Company’s Annual Meeting to be held on May 11, 2004, and is incorporated herein by reference.

42

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is set forth under the heading “Certain Transactions and Business Relationships” in the definitive proxy statement for the Company’s Annual Meeting to be held on May 11, 2004, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is set forth under the heading “Independent Auditors” in the definitive proxy statement for the Company’s Annual Meeting to be held on May 11, 2004, and is incorporated herein by reference.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) List of all Financial Statements

The following consolidated financial statements and report of independent certified public accountants of the Company are included in this Annual Report on Form 10-K:

Independent Auditors’ Report

Consolidated Balance Sheets as of December 31, 2003 and 2002

Consolidated Statement of Earnings for the years ended December 31, 2003, 2002, and 2001

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2003, 2002, and 2001

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001

Notes to the Consolidated Financial Statements

(b) Reports on Form 8-K

October 16, 2003 – Third Quarter 2003 Earnings Press Release

(c) Exhibits

3.1. Certificate of Incorporation of Auburn National Bancorporation, Inc. (incorporated by reference from Registrant’s Form 10-Q dated June 20, 2002 (File No. 000-26486)).

3.2. Bylaws of Auburn National Bancorporation, Inc.

10. Material Contracts

10.1. Auburn National Bancorporation, Inc. 1994 Long-Term Incentive Plan (incorporated by reference from Registrant’s Registration Statement on Form SB-2 (File No. 33-86180)).

10.2. Lease and Equipment Purchase Agreement, dated September 15, 1987 (incorporated by reference from Registrant’s Registration Statement on Form SB-2 (File No. 33-86180)).

21.1 Subsidiaries of Registrant

43

23.1 Consent of Accountants

31.1 Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).

31.2 Certification signed by the Director of Financial Operations pursuant to SEC Rule 13a-14(a).

32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.

32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 by C. Wayne Alderman, Director of Financial Operations.

(d) Financial Statement Schedules

44

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(With Independent Auditors’ Report Thereon)

45

Independent Auditors’ Report

The Board of Directors

Auburn National Bancorporation, Inc.:

We have audited the accompanying consolidated balance sheets of Auburn National Bancorporation, Inc. and subsidiary (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three–year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Auburn National Bancorporation, Inc. and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three–year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments in 2001.

/s/ KPMG LLP

Birmingham, Alabama

March 15, 2004

46

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2003 and 2002

	2003			2002
Assets
Cash and due from banks (note 2)	$	12,270,957		16,964,285
Federal funds sold		14,067,000		17,832,000
Cash and cash equivalents		26,337,957		34,796,285
Interest-earning deposits with other banks		265,729		598,420
Investment securities held to maturity (fair value of $1,276,720 and $8,079,503 for December 31, 2003 and 2002, respectively) (note 3)		1,237,764		7,928,456
Investment securities available for sale (note 3)		284,081,123		182,989,794
Loans (notes 4)		257,092,056		260,359,870
Less allowance for loan losses		(4,312,554	)	(5,104,165	)
Loans, net		252,779,502		255,255,705
Premises and equipment, net (note 5)		2,876,052		3,154,942
Rental property, net		1,427,285		1,532,535
Other assets (note 3)		21,109,501		18,770,815
Total assets	$	590,114,913		505,026,952
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	60,507,145		53,119,379
Interest-bearing (note 6)		373,534,995		342,071,985
Total deposits		434,042,140		395,191,364
Securities sold under agreements to repurchase (note 7)		6,654,332		11,989,334
Other borrowed funds (note 8)		98,372,188		53,436,483
Note payable to trust (note 9)		7,217,000		—
Accrued expenses and other liabilities		3,421,369		4,827,347
Total liabilities		549,707,029		465,444,528
Stockholders’ equity (notes 15 and 16):
Preferred stock of $0.01 par value. Authorized 200,000 shares; issued shares – none		—		—
Common stock of $0.01 par value. Authorized 8,500,000 shares; issued 3,957,135 shares		39,571		39,571
Additional paid-in capital		3,712,246		3,708,443
Retained earnings		38,092,829		34,543,870
Accumulated other comprehensive (loss)/income		(828,816	)	1,842,099
Less treasury stock, at cost – 64,947 shares and 62,317 shares for December 31, 2003 and 2002, respectively		(607,946	)	(551,559	)
Total stockholders’ equity		40,407,884		39,582,424
Commitments and contingencies (note 13)
Total liabilities and stockholders’ equity	$	590,114,913		505,026,952

See accompanying notes to consolidated financial statements.

47

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Consolidated Statements of Earnings

Years ended December 31, 2003, 2002, and 2001

	2003		2002	2001
Interest and dividend income:
Loans, including fees	$	16,299,018	18,459,669	21,418,386
Investment securities:
Taxable		8,224,739	8,872,169	7,734,690
Tax-exempt		313,880	172,171	92,168
Federal funds sold		92,498	213,999	529,936
Interest-earning deposits with other banks		10,002	33,848	107,361
Total interest and dividend income		24,940,137	27,751,856	29,882,541
Interest expense:
Deposits (note 6)		8,547,949	10,173,324	13,111,375
Securities sold under agreements to repurchase and federal funds purchased (note 7)		47,901	53,192	117,199
Other borrowings (note 8)		2,825,987	2,954,947	2,809,166
Total interest expense		11,421,837	13,181,463	6,037,740
Net interest income		13,518,300	14,570,393	3,844,801
Provision for loan losses (note 4)		675,000	1,680,000	3,555,000
Net interest income after provision for loan losses		12,843,300	12,890,393	10,289,801
Noninterest income:
Service charges on deposit accounts		1,496,680	1,398,490	1,473,525
Investment securities gains, net (note 3)		994,699	492,776	1,526,196
Other (note 17)		4,281,260	3,501,038	2,950,786
Total noninterest income		6,772,639	5,392,304	5,950,507
Noninterest expense:
Salaries and benefits (note 12)		4,751,166	4,642,133	4,232,896
Net occupancy expense		1,251,128	1,229,416	1,095,313
Other (note 17)		5,911,690	5,271,840	4,594,655
Total noninterest expense		11,913,984	11,143,389	9,922,864
Earnings before income taxes		7,701,955	7,139,308	6,317,444
Income tax expense (note 11)		2,283,435	2,084,653	1,880,899
Earnings before cumulative effect of a change in accounting principle		5,418,520	5,054,655	4,436,545
Cumulative effect of a change in accounting principle, net of tax (note 1)		—	—	141,677
Net earnings	$	5,418,520	5,054,655	4,578,222
Earnings per share before change in accounting principle – basic	$	1.39	1.30	1.14
Cumulative effect of change in accounting principle		—	—	0.03
Earnings per share – basic		1.39	1.30	1.17
Earnings per share before change in accounting principle – diluted		1.39	1.30	1.14
Cumulative effect of change in accounting principle		—	—	0.03
Earnings per share – diluted		1.39	1.30	1.17
Weighted average shares outstanding – basic		3,894,969	3,894,649	3,908,084
Weighted average shares outstanding – diluted		3,895,728	3,894,925	3,908,084

See accompanying notes to consolidated financial statements.

48

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Years ended December 31, 2003, 2002, and 2001

	Comprehensive income			Common stock			Additional paid-in capital	Retained earnings		Accumulated other comprehensive income (loss)		Treasury stock		Total
				Shares	Amount
Balances at December 31, 2000				3,957,135		39,571	3,707,472	28,187,466		85,147		(214,599	)	31,805,057
Comprehensive income:
Net earnings	$	4,578,222		—		—	—	4,578,222		—		—		4,578,222
Other comprehensive income due to unrealized gain on investment securities available for sale, net (note 10)		1,351,733		—		—	—	—		1,351,733		—		1,351,733
Total comprehensive income	$	5,929,955
Cash dividends paid ($0.40 per share)				—		—	—	(1,562,819	)	—		—		(1,562,819	)
Purchase of treasury stock (29,955 shares)				—		—	—	—		—		(338,260	)	(338,260	)
Balances at December 31, 2001				3,957,135		39,571	3,707,472	31,202,869		1,436,880		(552,859	)	35,833,933
Comprehensive income:
Net earnings	$	5,054,655		—		—	—	5,054,655		—		—		5,054,655
Other comprehensive income due to unrealized gain on investment securities available for sale, net (note 10)		405,219		—		—	—	—		405,219		—		405,219
Total comprehensive income	$	5,459,874
Cash dividends paid ($0.44 per share)				—		—	—	(1,713,654	)	—		—		(1,713,654	)
Sale of treasury stock (200 shares)				—		—	971	—		—		1,300		2,271
Balances at December 31, 2002				3,957,135		39,571	3,708,443	34,543,870		1,842,099		(551,559	)	39,582,424
Comprehensive income:
Net earnings	$	5,418,520		—		—	—	5,418,520		—		—		5,418,520
Other comprehensive loss due to unrealized loss on investment securities available for sale, net (note 10)		(2,670,915	)	—		—	—	—		(2,670,915	)	—		(2,670,915	)
Total comprehensive income	$	2,747,605
Cash dividends paid ($0.48 per share)				—		—	—	(1,869,561	)	—		—		(1,869,561	)
Purchase of treasury stock (3,000 shares)				—		—	—	—		—		(61,262	)	(61,262	)
Sale of treasury stock (750 shares)				—		—	3,803	—		—		4,875		8,678
Balances at December 31, 2003				3,957,135	$	39,571	3,712,246	38,092,829		(828,816	)	(607,946	)	40,407,884

See accompanying notes to consolidated financial statements.

49

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002, and 2001

	2003			2002		2001
Cash flows from operating activities:
Net earnings	$	5,418,520		5,054,655		4,578,222
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Cumulative effect of accounting change for derivative instruments and hedging activities		—		—		(141,677	)
Depreciation and amortization		557,146		490,749		463,842
Net amortization (accretion) of investment security discounts/premiums		1,711,893		603,075		(136,417	)
Provision for loan losses		675,000		1,680,000		3,555,000
Deferred tax expense		427,704		313,362		484,998
Loans originated for resale		(107,507,779	)	(66,842,809	)	(45,376,207	)
Proceeds from sale of loans originated for resale		108,656,026		70,358,000		43,378,889
Loss on sale of premises and equipment		34,693		44,522		12,153
(Gain) loss on sale and calls of investment securities		(994,699	)	(492,776	)	22,144
Gain on exchange of privately-held stock investment		—		—		(1,548,340	)
Loss on sale of other real estate		70,694		73,350		33,283
Gain on change in fair value of derivatives		—		—		(272,000	)
(Increase) decrease in interest receivable		(273,677	)	132,080		650,608
Increase in other assets		(346,683	)	(1,003,800	)	(8,996,900	)
(Decrease) increase in interest payable		(74,947	)	(491,587	)	504,533
(Decrease) increase in accrued expenses and other liabilities		(448,037	)	943,907		(991,268	)
Net cash provided by (used in) operating activities		7,905,854		10,862,728		(3,779,137	)
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale		82,443,026		16,892,073		46,532,577
Proceeds from maturities/calls/paydowns of investment securities available for sale		116,628,669		62,340,614		26,355,701
Purchases of investment securities available for sale		(305,345,720	)	(126,415,939	)	(119,593,961	)
Proceeds from maturities/calls/paydowns of investment securities held to maturity		6,704,668		8,304,280		10,938,449
Proceeds from termination of interest rate swap		—		—		490,083
Net decrease (increase) in loans		801,520		4,850,211		(9,723,445	)
Purchases of premises and equipment		(140,658	)	(386,030	)	(456,220	)
Proceeds from sale of premises and equipment and other real estate		711,094		1,585,380		381,388
Additions to rental property		(5,806	)	(82,255	)	(75,857	)
Net decrease (increase) in interest-earning deposits with other banks		332,691		255,341		(407,617	)
Investment in FHLB stock		(2,240,000	)	—		(245,600	)
Net cash used in investing activities		(100,110,516	)	(32,656,325	)	(45,804,502	)

(141,677)  

(141,677)  

4,578,222   

50

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002, and 2001

	2003			2002		2001
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	$	7,387,766		4,868,707		5,226,285
Net increase in interest-bearing deposits		31,463,010		20,655,143		48,800,035
Net (decrease) increase in securities sold under agreements to repurchase		(5,335,002	)	1,853,456		5,747,317
Borrowings from FHLB		55,000,000		—		10,000,000
Repayments to FHLB		(10,043,250	)	(118,251	)	(5,118,249	)
Repayments of other borrowed funds		(21,045	)	(26,507	)	(21,050	)
Proceeds from the note payable to Trust		7,217,000		—		—
Purchase of treasury stock		(61,262	)	—		(338,260	)
Sale of treasury stock		8,678		2,271		—
Dividends paid		(1,869,561	)	(1,713,654	)	(1,562,819	)
Net cash provided by financing activities		83,746,334		25,521,165		62,733,259
Net (decrease) increase in cash and cash equivalents		(8,458,328	)	3,727,568		13,149,620
Cash and cash equivalents at beginning of year		34,796,285		31,068,717		17,919,097
Cash and cash equivalents at end of year	$	26,337,957		34,796,285		31,068,717
Supplemental information on cash payments:
Interest paid	$	11,496,784		13,854,400		15,533,207
Income taxes paid		1,918,796		2,189,835		1,578,399
Supplemental information on noncash transactions:
Real estate acquired through foreclosure		185,236		1,192,893		1,011,003
Loans to facilitate the sale of other real estate		333,800		—		444,625

See accompanying notes to consolidated financial statements.

51

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(1) Summary of Significant Accounting Policies

Auburn National Bancorporation, Inc. (the Company) provides a full range of banking services to individual and corporate customers in Lee County, Alabama and surrounding counties through its subsidiary, AuburnBank (the Bank). The Company and the Bank are subject to competition from other financial institutions. The Company and the Bank are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The Company does not have any segments other than banking that are considered material.

The accounting policies followed by the Company and its subsidiary and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practice within the banking industry. Certain principles which significantly affect the determination of financial position, results of operations and cash flows are summarized below.

(a) Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near–term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties that serve as collateral.

Management believes that the allowance for losses on loans is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for losses on loans. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The Bank’s real estate loans are secured by real estate located principally in Lee County, Alabama and surrounding areas. In addition, the foreclosed real estate owned by the Bank is located in this same area. Accordingly, the ultimate collectibility of a substantial portion of the Bank’s loan portfolio and the recovery of real estate owned are susceptible to changes in market conditions in this area.

(b) Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary, AuburnBank.

52 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(c) Cash Equivalents

Cash equivalents include amounts due from banks and federal funds sold. Federal funds are generally sold for one–day periods.

(d) Investment Securities

The Company accounts for investment securities under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities whereby investment securities are classified in one of three portfolios: (i) trading account securities, (ii) held to maturity securities, and (iii) securities available for sale. Trading account securities are stated at fair value. The Company does not have trading account securities. Investment securities held to maturity are those for which the Company has both the intent and ability to hold until maturity and are stated at cost adjusted for amortization of premiums and accretion of discounts. Investment securities available for sale are stated at fair value with any unrealized gains and losses reported as a separate component of stockholders’ equity, net of taxes, until realized.

Accretion of discounts and amortization of premiums are calculated on the straight–line method over the anticipated life of the security, taking into consideration prepayment assumptions. Gains and losses from the sale of investment securities are computed under the specific identification method.

A decline in the fair value below cost of any available for sale or held to maturity security that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security.

(e) Loans

Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity are recorded at principal amounts outstanding, net of unearned income and allowance for loan losses. Interest on loans is credited to income on the simple interest method.

It is the policy of the Company to discontinue the accrual of interest when principal or interest payments become more than ninety days delinquent. When a loan is placed on a nonaccrual basis, any interest previously accrued but not collected is reversed against current income unless the collateral for the loan is sufficient to cover the accrued interest. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are recorded on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

The Company accounts for impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures. Under the provisions of SFAS No. 114 and SFAS No. 118, management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is also considered impaired if its terms are modified in a troubled debt restructuring

53 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

and the restructuring agreement specifies an interest rate below the rate that the Company is willing to accept for a new loan with comparable risk. When a loan is considered impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the note’s effective interest rate, unless the loan is collateral–dependent, for which the fair value of the collateral is used to determine the amount of impairment. Impairment losses are included in the allowance for loan losses through the provision for loan losses. Impaired loans are charged to the allowance when such loans are deemed to be uncollectible. Subsequent recoveries are added to the allowance.

When a loan is considered impaired, cash receipts are applied under the contractual terms of the loan agreement, first to principal and then to interest income. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has not been recognized. Any further cash receipts are recorded as recoveries of any amount previously charged off.

The Company originates mortgage loans to be held for sale only for loans that have been pre–approved by the investor. The Company bears minimal interest rate risk on these loans. Such loans are stated at the lower of cost or aggregate fair value.

(f) Allowance for Loan Losses

The amount of provision for loan losses charged to earnings is based on actual loss experience, periodic specific reviews of significant and nonperforming loan relationships, and management’s evaluation of the loan portfolio under current economic conditions. Such provisions, adjusted for loan charge–offs and recoveries, comprise the allowance for loan losses. Provision amounts are largely determined based on loan classifications determined through credit quality reviews using estimated loss factors based on historical loss experience. Such loss factors are adjusted periodically based on changes in loss experience.

Loans are charged against the allowance when management determines such loans to be uncollectible. Subsequent recoveries are credited to the allowance.

(g) Premises and Equipment

Land is stated at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally on a straight–line method for buildings, furniture, fixtures, and equipment over the estimated useful lives of the assets, which range from three to 39 years.

(h) Rental Property

Rental property consists of land; buildings; and furniture, fixtures, and equipment which are rented by the Company to the Bank and the general public. Rental property is stated at cost less accumulated depreciation. Depreciation is computed principally on a straight–line method for buildings, furniture, fixtures, and equipment over the shorter of estimated useful lives of the assets or the lease period.

54 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(i) Other Real Estate

Real estate acquired through foreclosure or in lieu of foreclosure is carried at the lower of cost or fair value, as determined by independent appraisals, adjusted for estimated selling costs. Any write–down at the time of foreclosure is charged to the allowance for loan losses. Subsequent declines in fair value below acquisition cost and gains or losses on the sale of these properties are credited or charged to earnings.

(j) Derivative Financial Instruments and Hedging Activities

As part of its overall interest rate risk management activities, the Company utilizes derivative instruments (i) to modify the repricing characteristics of assets and liabilities and (ii) to hedge the fair value risk of fixed–rate liabilities. The primary instruments utilized by the Company are interest rate swaps and interest rate floor and cap arrangements. The fair value of these derivative financial instruments is based on dealer quotes or third–party financial models and are recorded as assets or liabilities and are recognized on the balance sheet at their fair value.

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as subsequently amended by SFAS No. 137 and SFAS No. 138, which establishes the accounting and reporting standards for derivatives and hedging activities. Under SFAS No. 133 the accounting for changes in fair value of a derivative instrument depends on whether it has been designated as a hedge of the fair value of a recognized asset or liability (fair value hedge), or a hedge of the variability of a floating rate asset or liability (cash flow hedge), or a foreign–currency fair value or cash flow hedge.

Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge along with the gain or loss on the hedged asset or liability that are attributable to the risk being hedged is recognized in earnings in the period of change. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is recorded initially as a component of accumulated other comprehensive income, and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss would be recognized in earnings in each period. The adoption of SFAS No. 133 resulted in a $141,677 cumulative effect adjustment for the change in accounting principle, net of tax.

The net settlement on the Company’s fair value hedges is recorded in earnings on an accrual basis. The Company has no cash flow hedges at December 31, 2003 or 2002.

(k) Income Taxes

Income taxes are accounted for under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

55 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The Company files its federal income tax returns on a consolidated basis.

(l) Earnings per Share

Basic earnings per share are computed on the weighted average number of shares outstanding in accordance with SFAS No. 128, Earnings Per Share. The Company reserved 450,000 shares of common stock in May 1994 for issuance under stock option plans. During 2003, the Company granted 4,000 options with an exercise price of $13.39 which was equal to the closing market price on the date of grant. During 2002, the Company granted 3,000 options with an exercise price of $11.35 which was equal to the closing market price on the date of grant. No options were granted in years previous to 2002.

A reconciliation of the numerator and denominator of the basic EPS computation to the diluted EPS computation for the three years ended December 31 is as follows:

	2003		2002	2001
Basic:
Net income	$	5,418,520	5,054,655	4,578,222
Average common shares outstanding		3,894,969	3,894,649	3,908,084
Earnings per share	$	1.39	1.30	1.17
Diluted:
Net income	$	5,418,520	5,054,655	4,578,222
Average common shares outstanding		3,894,969	3,894,649	3,908,084
Dilutive effect of options issued		759	276	—
Average diluted shares outstanding		3,895,728	3,894,925	3,908,084
Earnings per share	$	1.39	1.30	1.17

The Company had no options that were issued and not included in the calculation of diluted earnings per share for the years ended December 31, 2003, 2002 and 2001.

(m) Stock–based compensation

The Company applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for employee stock compensation plans and, accordingly, does not recognize compensation cost for stock options granted when the option price is greater than or equal to the underlying stock price. This accounting method is referred to as

56 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

the intrinsic value method. The Company provides the pro–forma disclosures of SFAS No. 123, Accounting for Stock–Based Compensation, as amended by SFAS No. 148, using the fair value method of accounting for stock–based compensation.

The Company granted 4,000 options on January 1, 2003 with an exercise price of $13.39 which was equal to the closing market price on the date of grant. At December 31, 2002, each option had a fair value of $3.51. These options vested on the date of grant and expire on December 31, 2006. During 2003, 200 options were exercised. At December 31, 2003, 3600 options were outstanding with a remaining contractual life of three years.

The Company granted 3,000 options on January 1, 2002 with an exercise price of $11.35 which was equal to the closing market price on the date of grant. Each option had a fair value of $5.17 and $5.47 at December 31, 2003 and 2002, respectively. These options vested on the date of grant and expire on December 31, 2005. During 2003 and 2002, 500 and 200 options were exercised, respectively. At December 31, 2003, 2300 options were outstanding with a remaining contractual life of two years.

The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock–based employee compensation:

	2003		2002	2001
	(In thousands, except per share data)
Net earnings – as reported	$	5,418,520	5,054,655	4,578,222
Deduct:
Total stock–based employee compensation expense determined under fair value based method for all awards, net of related tax effects		17,740	9,846	—
Net earnings – pro forma	$	5,400,780	5,044,809	4,578,222
Earnings per share – as reported
Basic	$	1.39	1.30	1.17
Diluted		1.39	1.30	1.17
Earnings per share – pro forma
Basic	$	1.39	1.30	1.17
Diluted		1.39	1.30	1.17

57 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The fair value of the option grant is estimated on the date of grant using the Black–Scholes option–pricing model with the following assumptions:

	2003		2002
Expected stock price volatility	53.93	%	71.78	%
Risk free interest rate	2.52	%	1.90	%
Expected life of options	3 years		3 years
Dividend yield	3.01	%	3.29	%

(n) Recent Accounting Pronouncements

In December 2003, the FASB issued SFAS 132 (revised 2003), which revises employers’ disclosures about pension plans and other postretirement benefits. It does not change the measurement or recognition of those plans required by SFAS 87, Employers’ Accounting for Pensions, SFAS 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in SFAS 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original SFAS 132 about the assets, obligations, cash flows, investment strategy, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement is effective for financial statements ending after December 15, 2003. The effect of this Statement is reflected in the disclosures noted in Note 12 herein.

In May 2003, the FASB issued SFAS 150, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instrument that is a liability under this Statement is an obligation that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares. SFAS 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. In addition to its requirements for the classification and measurement of financial instruments in its scope, SFAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company currently does not have any of these types of financial instruments and therefore the effect of this Statement on the Consolidated Financial Statements was not material.

58 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

In January 2003, the FASB issued FIN 46, which clarifies the application of Accounting Research Bulletin (“ARB”) 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation were effective for all financial statements issued after January 31, 2003. The consolidation requirements applied to all variable interest entities created after January 31, 2003. This Interpretation was amended in October 2003 by FASB Staff Position (“FSP”) 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This FSP deferred the effective date for applying the provisions of FIN 46 for interests held by public companies in variable interest entities or potential variable interest entities created before February 1, 2003. As amended, public companies were to apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remained in existence as of the end of annual or interim periods ending after December 15, 2003. In December 2003, FIN 46R was issued, which again deferred the effective date for interests held by public companies in special-purpose entities for periods ending after December 15, 2003, and for all other types of entities for periods ending after March 15, 2004. The Company adopted FIN 46 as of July 1, 2003 and the effect of this Interpretation on the Consolidated Financial Statements was not material.

(o) Reclassifications

Certain 2002 and 2001 amounts have been reclassified to conform to the 2003 presentation.

(2) Cash and Due from Banks

The Bank is required to maintain certain average cash reserve balances in accordance with Federal Reserve Board requirements. The amounts of those required balances as of December 31, 2003 and 2002 were approximately $0 and $7,810,000, respectively.

59 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(3) Investment Securities

The amortized cost and fair value of investment securities at December 31, 2003, were as follows:

	Amortized cost		Gross unrealized gains	Gross unrealized losses	Fair value
Investment securities held to maturity:
State and political subdivisions		370,000	—	—	370,000
Collateralized mortgage obligations		—	—	—	—
Mortgage-backed securities		867,764	38,956	—	906,720
	$	1,237,764	38,956	—	1,276,720
Investment securities available for sale:
U.S. government agencies, excluding mortgage-backed securities	$	62,866,562	205,551	405,486	62,666,627
State and political subdivisions		27,892,370	277,557	93,787	28,076,140
Corporate securities		5,221,236	65,308	9,014	5,277,530
Collateralized mortgage obligations		16,139,661	23,986	79,746	16,083,901
Mortgage-backed securities		172,319,223	359,500	1,459,968	171,218,755
Equity securities		1,023,432	—	265,262	758,170
	$	285,462,484	931,902	2,313,263	284,081,123

The Company has one investment which has been in an unrealized loss position greater than one year. The Company has not written down this stock to its fair value because of management’s belief that this impairment is temporary. The Company owns 52,396 shares of Concord EFS stock. On December 31, 2003, the stock had a market value of $265,000 below historical cost. The Company believes the decrease is due to the past uncertainties from the proposed merger of Concord and First Data. Concord and First Data have agreed to settle the antitrust lawsuit filed by the U.S. Department of Justice and the merger closed in February 2004. Based on the Company’s review of analysts’ expectations, Concord is well positioned with healthy market shares in the grocery, trucking and benefits payment sectors with a large book of recurring revenues. The Company agrees the merger should strengthen First Data’s merchant processing payment processing, electronic payments and debit card businesses. The 2004 stock price will depend on the successful integration of Concord’s operations, of which they both have extensive experience, and solid financial performance in each quarter. Steadily improving economic conditions should positively impact First Data’s 2004 operations. Even though Concord is an economically sensitive stock, analysts believe Concord has positioned itself in areas that offer resistance to an economic slowdown. Analysts note that Concord continues to improve its competitive position and operating profits and processing electronic transactions is a complex business in which economies of scale make a big difference. Although the Company cannot predict stock prices and there is obviously variability in stock prices, management does not believe that the present decline in the Concord value is “other than temporary”. The Company will continue to monitor First Data’s performance to determine whether or not an impairment that is not other than temporary has occurred.

60 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The amortized cost and fair value of investment securities at December 31, 2002 were as follows:

	Amortized cost		Gross unrealized gains	Gross unrealized losses	Fair value
Investment securities held to maturity:
U.S. government agencies, excluding mortgage-backed securities	$	5,000,000	62,500	—	5,062,500
State and political subdivisions		564,000	—	—	564,000
Collateralized mortgage obligations		873,018	28,745	—	901,763
Mortgage-backed securities		1,491,438	59,822	20	1,551,240
	$	7,928,456	151,067	20	8,079,503
Investment securities available for sale:
U.S. government agencies, excluding mortgage-backed securities	$	38,726,325	840,684	—	39,567,009
State and political subdivisions		3,548,207	138,002	—	3,686,209
Corporate securities		2,500,000	—	—	2,500,000
Collateralized mortgage obligations		62,545,021	630,594	51,560	63,124,055
Mortgage-backed securities		71,576,644	1,719,030	7	73,295,667
Equity securities		1,023,433	—	206,579	816,854
	$	179,919,630	3,328,310	258,146	182,989,794

61 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The amortized cost and fair value of investment securities at December 31, 2003, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.

	Amortized cost		Fair value
Investment securities held to maturity:
Due after ten years	$	370,000	370,000
Mortgage-backed securities		867,764	906,720
Total	$	1,237,764	1,276,720
Investment securities available for sale:
Due within one year	$	2,230,221	2,249,185
Due after one year through five years		17,044,219	17,060,231
Due after five years through ten years		35,253,152	35,259,833
Due after ten years		36,231,340	36,173,518
Subtotal		90,758,932	90,742,767
Corporate securities		5,221,236	5,277,530
Mortgage-backed securities		172,319,223	171,218,755
Collateralized mortgage obligations		16,139,661	16,083,901
Equity securities		1,023,432	758,170
Total	$	285,462,484	284,081,123

Proceeds from the sale of investment securities available for sale during the years ended December 31, 2003, 2002, and 2001 were $82,443,026, $16,892,073, and $46,532,577, respectively. Gross gains of $1,125,798, $492,776, and $4,114 were realized on the sales for the years ended December 31, 2003, 2002, and 2001, respectively. Gross losses of $131,099, $32,571 and $21,282 were realized on the sales for the years ended December 31, 2003, 2002 and 2001, respectively.

During 2001, the Company exchanged its ownership interest in a privately held entity for common shares of a publicly traded entity as part of the sale of the privately held entity and recognized a gain of $1,548,340. Upon the exchange of ownership interest, the Company reclassified this investment from other assets to available for sale securities.

The Company recognized a loss of $4,976 during 2001, as a result of calls of held to maturity securities. There were no sales of investment securities held to maturity during the years ended December 31, 2003, 2002 and 2001.

Investment securities with an aggregate carrying value of $210,345,148 and $153,591,937 at December 31, 2003 and 2002, respectively, were pledged to secure public and trust deposits as required by law and for other purposes.

62 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The Company maintains a diversified investment portfolio, including held to maturity and available–for–sale securities, with limited concentration in any given region, industry, or economic characteristic.

Included in other assets is stock in the Federal Home Loan Bank (FHLB) of Atlanta. FHLB stock is carried at cost, has no contractual maturity, has no quoted fair value, and no ready market exists. The investment in the stock is required of every member of the FHLB system. The investment in the stock was $4,912,200 and $2,672,200 at December 31, 2003 and 2002, respectively.

(4) Loans

At December 31, 2003 and 2002, the composition of the loan portfolio was as follows:

	2003		2002
Commercial, financial, and agricultural	$	54,998,933	56,489,860
Leases – commercial		6,630,351	7,127,939
Real estate – construction:
Commercial		2,098,839	1,392,022
Residential		4,865,773	4,768,047
Real estate – mortgage:
Commercial		122,397,493	124,489,627
Residential		41,987,725	46,105,099
Real estate – held for sale		12,439,618	6,015,907
Consumer installment		11,673,324	13,971,369
Total loans		257,092,056	260,359,870
Less allowance for loan losses		4,312,554	5,104,165
Loans, net	$	252,779,502	255,255,705

During 2003 and 2002, certain executive officers and directors of the Company and the Bank, including companies with which they are associated, were loan customers of the Bank. Total loans outstanding to these persons at December 31, 2003 and 2002 amounted to $5,619,763 and $6,072,337, respectively. The change from 2002 to 2003 reflects payments of $3,284,196 and advances of $2,831,622. In management’s opinion, these loans were made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements, and do not represent more than normal credit risk.

63 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

A summary of the transactions in the allowance for loan losses for the years ended December 31, 2003, 2002, and 2001 is as follows:

	2003			2002		2001
Balance at beginning of year	$	5,104,165		5,339,945		3,634,442
Provision charged to earnings		675,000		1,680,000		3,555,000
Loan recoveries		110,813		357,341		121,128
Loans charged off		(1,577,424	)	(2,273,121	)	(1,970,625	)
Balance at end of year	$	4,312,554		5,104,165		5,339,945

At December 31, 2003 and 2002, the Company had $471,441 and $5,280,970, respectively, of impaired loans. Impaired loans at December 31, 2003 and 2002 in the amount of $471,441 and $5,280,970, respectively, have a related valuation allowance of $309,181 and $861,205 at December 31, 2003 and 2002, respectively.

For the years ended December 31, 2003, 2002, and 2001, the average recorded investment in impaired loans was $1,408,378, $7,394,190, and $8,635,425, respectively. The amount of interest income on impaired loans recognized during 2003, 2002, and 2001 amounted to $48,817, $135,385 and $119,854, respectively.

Nonperforming loans, consisting of loans on nonaccrual status and accruing loans past due greater than 90 days, amounted to $1,704,080 and $2,532,038 at December 31, 2003 and 2002, respectively. Nonaccrual loans were $1,704,080, $2,532,038, and $10,211,279 at December 31, 2003, 2002, and 2001, respectively. Interest that would have been recorded on nonaccrual loans had they been in accruing status was approximately $180,000, $462,000 and $528,000, in 2003, 2002, and 2001, respectively.

The Company had no real estate acquired by foreclosure at December 31, 2003. The Company had approximately $582,000 in real estate acquired by foreclosure at December 31, 2002.

The Company’s loan servicing portfolio consisted of 1,409 loans with an outstanding balance of $139,684,559; 1,188 loans with an outstanding balance of $107,671,929 and 1,018 loans with an outstanding balance of $81,845,024, as of December 31, 2003, 2002, and 2001, respectively.

64 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(5) Premises and Equipment

Premises and equipment at December 31, 2003 and 2002 are summarized as follows:

	2003		2002
Land	$	407,747	407,747
Buildings		2,970,259	2,970,259
Furniture, fixtures, and equipment		3,766,484	4,166,393
Total premises and equipment		7,144,490	7,544,399
Less accumulated depreciation		4,268,438	4,389,457
	$	2,876,052	3,154,942

(6) Interest–Bearing Deposits

At December 31, 2003 and 2002, the composition of interest–bearing deposits was as follows:

	2003		2002
NOW	$	87,352,561	68,949,676
Money market		78,881,031	72,188,963
Savings		18,026,285	14,933,248
Certificates of deposit under $100,000		85,400,560	89,848,220
Certificates of deposit and other time deposits of $100,000 and over		103,874,558	96,151,878
	$	373,534,995	342,071,985

Interest expense on certificates of deposit and other time deposits of $100,000 and over amounted to approximately $2,954,000, $3,029,000, and $3,378,000, in 2003, 2002, and 2001, respectively.

The following table presents the maturities of certificates of deposit and other time deposits of $100,000 or more at December 31, 2003.

Years ending December 31:
2003	$	59,330,685
2004		19,871,020
2005		6,243,761
2006		8,534,044
2007		4,895,048
Thereafter		5,000,000
	$	103,874,558

65 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

During 2003 and 2002, certain executive officers and directors of the Company and Bank, including companies with which they are associated, were deposit customers of the Bank. Total deposits of these persons at December 31, 2003 and 2002 amounted to $5,539,141 and $5,118,042, respectively.

(7) Securities Sold Under Agreements to Repurchase

The securities sold under agreements to repurchase at December 31, 2003 and 2002 are collateralized by obligations of the U.S. Government or its corporations and agencies, state and municipal securities, or mortgage–backed securities, which are held by independent trustees. The following summarizes pertinent data related to the securities sold under agreements to repurchase as of and for the years ended December 31, 2003, 2002, and 2001.

	2003			2002		2001
Weighted average borrowing rate at year end		0.89	%	1.19	%	1.75	%
Weighted average borrowing rate during the year		1.02	%	1.60	%	3.40	%
Average daily balance during the year	$	3,192,075		3,265,000		3,178,000
Maximum month-end balance during the year		8,492,969		11,989,000		10,136,000

(8) Other Borrowed Funds

Other borrowed funds at December 31, 2003 and 2002 consisted of the following:

	Maturity Dates	Weighted Average Interest rate		2003		2002
Federal Home Loan Bank borrowings:
Fixed rate	2003-2017	6.64	%	$	241,755	285,005
LIBOR-based floating rate	2004-2013	3.82	%		98,000,000	53,000,000
Notes payable	2003-2004	6.63	%		130,433	151,478
				$	98,372,188	53,436,483

66 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Required annual principal payments on long–term debt for years subsequent to December 31, 2003 are as follows:

	Notes Payable		FHLB Borrowings
2004	$	130,433	10,018,250
2005		—	18,250
2006		—	18,250
2007		—	18,250
2008		—	35,018,250
Thereafter		—	53,150,505
Total	$	130,433	98,241,755

On September 30, 2003, the FHLB increased the Bank’s available line to 25% from 10% of the Bank’s total assets. This resulted in an increase in the line of credit to $146,868,000 at December 31, 2003 from $50,241,000 at December 31, 2002. Additionally, on February 11, 2004, the FHLB increased the Bank’s available line to 30% of the Bank’s total assets. Interest expense on FHLB advances was $2,770,890, $2,946,247, and $2,795,007 in 2003, 2002, and 2001, respectively. The advances and line of credit are collateralized by the Bank’s investment in the stock of the FHLB, all eligible first mortgage residential loans, and investment securities with a lendable collateral value totaling $80,683,185, which are sufficient to draw the full line of credit.

(9) Note Payable to Trust

In November, 2003, the Company established Auburn National Bancorporation Capital Trust I (“Trust”), a wholly-owned statutory business trust. The Company is the sole sponsor of the trust and owns $217,000 of the Trust’s common securities. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $7,000,000 and using the proceeds from the issuance of the common and preferred securities to purchase $7,217,000 of junior subordinated debentures (“Note Payable to Trust”) issued by The Bankers Bank. The sole asset of the Trust is the Note Payable to Trust. The Company’s $217,000 investment in the Trust is included in other assets in the accompanying consolidated balance sheet and the $7,217,000 obligation of the Company is included in notes payable.

The Trust Preferred Securities bear a floating interest rate equal to the prime rate of interest set at the end of each quarter and mature on December 31, 2033. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Note Payable to Trust at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. The Company guarantees the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trust. The Company’s obligations under the Note Payable to Trust together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the Trust Preferred Securities.

67 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The Note Payable to Trust are unsecured, bear an interest rate equal to the prime rate of interest set at the end of each quarter and mature on December 31, 2033. Interest is payable quarterly. The Company may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and the Company’s ability to pay dividends on our common shares will be restricted.

Subject to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred Securities may be redeemed prior to maturity at our option on or after December 31, 2008. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trust becoming subject to federal income tax on income received on the Note Payable to Trust, (2) interest payable by the parent company on the Note Payable to Trust becoming non-deductible for federal tax purposes, (3) the requirement for the Trust to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as “Tier I capital” under the Federal Reserve capital adequacy guidelines.

The Trust Preferred Securities qualify as Tier I capital under current regulatory interpretations. However, banking regulators are currently reviewing such treatment, the outcome of which is not known. Should the banking regulators determine that treatment of trust preferred securities shall not be treated as Tier 1 capital, such determination would have an impact on the Company, however the Company’s capital structure, at the present time and based on our current growth projections, is such that utilization of the Trust Preferred Securities as Tier II capital is more critical to the Company. To our knowledge, there has been no discussion by banking regulators to disqualify trust preferred securities as Tier II capital.

68 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(10) Comprehensive Income (Loss)

The following table sets forth the amounts of other comprehensive income (loss) included in stockholders’ equity along with the related tax effect for the years ended December 31, 2003, 2002, and 2001.

	Pretax amount			Tax (expense) benefit		Net of tax amount
2003:
Net unrealized holding loss on investment securities available for sale arising during the year	$	(3,456,827	)	1,382,731		(2,074,096	)
Reclassification adjustment for net gains realized in net income		994,699		(397,880	)	596,819
Other comprehensive loss	$	(4,451,526	)	1,780,611		(2,670,915	)
2002:
Net unrealized holding gains on investment securities available for sale arising during the year	$	1,168,140		(467,255	)	700,885
Reclassification adjustment for net gains realized in net income		492,776		(197,110	)	295,666
Other comprehensive income	$	675,364		(270,145	)	405,219
2001:
Net unrealized holding gains on investment securities available for sale arising during the year	$	2,235,718		(894,283	)	1,341,435
Reclassification adjustment for net losses realized in net income		(17,168	)	6,870		(10,298	)
Other comprehensive income	$	2,252,886		(901,153	)	1,351,733

(11) Income Tax Expense

Total income tax expense for the years ended December 31, 2003, 2002, and 2001 was allocated as follows:

	2003			2002	2001
Income from continuing operations	$	2,283,435		2,084,653	1,880,899
Cumulative effect of change in accounting principle		—		—	93,323
Stockholders’ equity, for accumulated other comprehensive (loss)/income		(1,780,611	)	270,145	901,153

69 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

For the years ended December 31, 2003, 2002, and 2001 the components of income tax expense from continuing operations were as follows:

	2003		2002		2001
Current income tax expense (benefit):
Federal	$	1,794,625	1,771,291		1,422,534
State		61,106	—		(26,633	)
Total		1,855,731	1,771,291		1,395,901
Deferred income tax expense (benefit):
Federal		347,100	364,702		417,716
State		80,604	(51,340	)	67,282
Total		427,704	313,362		484,998
	$	2,283,435	2,084,653		1,880,899

Total income tax expense differed from the amount computed by applying the statutory federal income tax rate of 34% to pretax earnings as follows:

	2003			2002		2001
Income tax expense at statutory rate	$	2,618,665		2,427,365		2,147,931
Increase (decrease) resulting from:
Tax-exempt interest		(98,484	)	(58,281	)	(28,075	)
State income taxes net of Federal income tax effect		93,529		(33,884	)	26,829
Low-income housing credit		(227,823	)	(227,823	)	(229,290	)
Dividends received deduction		(8,610	)	(9,525	)	(8,187	)
Bank owned life insurance		(171,360	)	(171,818	)	(35,700	)
Other		77,518		158,619		7,391
	$	2,283,435		2,084,653		1,880,899

70 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are presented below:

	2003			2002
Deferred tax assets:
Loans, principally due to allowance for loan losses	$	620,219		829,180
Principal amortization of leases		638,613		455,026
Unrealized loss on investment securities available for sale		552,543		—
Other		81,428		128,600
Total gross deferred tax assets before valuation allowance		1,892,803		1,412,806
Valuation allowance		—		—
Total deferred tax assets		1,892,803		1,412,806
Deferred tax liabilities:
Premises and equipment, principally due to differences in depreciation		2,225,368		1,679,003
Investments, principally due to discount accretion		180,908		165,612
Basis difference in equity investment		363,257		363,257
FHLB stock dividend		16,792		16,758
Prepaid expenses		68,624		71,993
Loans, principally due to differences in deferred loan fees		69,921		70,062
Unrealized gain on investment securities available for sale		—		1,228,065
Deferred REIT income		543,024		750,614
Other		25,885		21,320
Total deferred tax liabilities		3,493,779		4,366,684
Net deferred tax liability	$	(1,600,976	)	(2,953,878	)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over the periods which the temporary differences resulting in the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

(12) Retirement Plans

The Bank has a defined contribution retirement plan that covers substantially all employees. Participants become 20% vested in their accounts after two years of service and 100% vested after six years of service. Contributions to the plan are determined by the board of directors. Company contributions to the plan amounted to $97,372, $89,353, and $87,882, in 2003, 2002, and 2001, respectively, and are included in salaries and benefits expense.

71 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(13) Guarantees, Derivatives, and Contingent Liabilities

Off–Balance–Sheet Commitments

The Company is a party to financial instruments with off–balance–sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments involve elements of credit risk in excess of the amounts recognized in the consolidated financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on–balance–sheet instruments.

The financial instruments whose contract amounts represent credit risk as of December 31, 2003 are as follows:

Commitments to extend credit	$	38,699,384
Standby letters of credit		4,747,553

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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. All guarantees expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary. The Company has recorded a liability for the estimated fair value of these standby letters of credit of approximately $47,000 at December 31, 2003 based on the fees charged for these arrangements.

Derivatives

The Bank enters into interest rate protection contracts to help manage the Bank’s interest rate exposure. These contracts can include interest rate swaps, caps, and floors. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the risk associated with the movements in interest rates. These risks are considered in the Bank’s overall asset liability

72 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

management program. Notional principal amounts often are used to express the volume of these transactions; however, the amounts potentially subject to credit risk are much smaller. At December 31, 2003 and 2002, the Company had one interest rate swap with a notional amount of $5,000,000. The Bank utilizes periodic financial statements issued by the counterparty to analyze the creditworthiness of the counterparty prior to entering into a contract and to monitor changes in the financial condition of the counterparty throughout the term of the contract.

In February 2000, the Bank entered into an interest rate swap with respect to $10,000,000 in variable rate loans. This agreement allowed the Bank to receive fixed–interest payments at 9.80% per annum and to pay a variable rate equal to prime. The purpose of this contract was to reduce interest rate exposure to variable assets in a low–interest rate environment. During 2001, the Bank recorded a gain of $238,000 due to change in fair value of this interest rate swap. This contract, which was not specifically designated as a hedging instrument, was terminated during 2001 for an additional gain of $34,000.

The following table summarizes information on the outstanding interest rate swap at December 31, 2003:

	(In thousands)						during year
	Notional amount		Carrying value		Estimated fair value		Received	Paid (1)	average remaining life (years)
Swap:
Less than one year	$	5,000	$	64	$	64	5.68	1.20	0.29

(1) The interest rate protection contract above reprices quarterly. The variable pay rate is based upon the three–month LIBOR.

Contingent Liabilities

The Company and the Bank are involved in various legal proceedings, arising in connection with their business. In the opinion of management, based upon consultation with legal counsel, the ultimate resolution of these proceedings will not have a material adverse effect upon the financial position or results of operations of the Company and Bank.

(14) Fair Value of Financial Instruments

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good–faith estimate of the fair value of financial instruments held by the Company. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

73 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

(a) Cash, Cash Equivalents, and Interest–Earning Deposits with Other Banks

Fair value equals the carrying value of such assets.

(b) Investment Securities

The fair value of investment securities is based on quoted market prices.

(c) Loans

The fair value of loans is calculated using discounted cash flows. The discount rates used to determine the present value of the loan portfolio are estimated market discount rates that reflect the credit and interest rate risk inherent in the loan portfolio. The estimated maturities are based on the Company’s historical experience with repayments adjusted to estimate the effect of current market conditions. The carrying amount of accrued interest approximates its fair value.

(d) Derivatives

Fair value of interest rate swaps is based on prices quoted by the counterparty. These values represent the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the creditworthiness of the counterparties.

(e) Deposits

As required by SFAS No. 107, the fair value of deposits with no stated maturity, such as noninterest–bearing demand deposits, NOW accounts, savings, and money market deposit accounts, is equal to the carrying value. Certificates of deposit have been valued using discounted cash flows. The discount rates used are based on estimated market rates for deposits of similar remaining maturities.

(f) Short–term Borrowings

The fair values of federal funds purchased, securities sold under agreements to repurchase, and other short–term borrowings approximate their carrying value.

(g) Long–term Borrowings

The fair value of the Company’s fixed rate long–term debt is estimated using discounted cash flows based on estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Company’s variable rate long–term debt approximates its fair value.

74 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The carrying value and estimated fair value of the Company’s financial instruments at December 31, 2003 and 2002 are as follows (in thousands):

	2003			2002
	Carrying amount		Estimated fair value	Carrying amount	Estimated fair value
Financial assets:
Cash and short-term investments	$	26,604	26,604	35,395	35,395
Investment securities		285,319	285,358	190,918	191,069
Loans, net of allowance for loan losses		252,780	254,214	255,256	261,737
Financial liabilities:
Deposits		434,042	433,110	395,191	395,617
Short-term borrowings		6,654	6,654	11,989	11,989
Long-term borrowings		105,589	107,094	53,436	59,502
Interest rate contracts:
Swaps		64	64	262	262

(15) Common Stock and Capital Requirements

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk–weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Company and Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2003, based on its most recent notification, the Bank is categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk–based, Tier I risk–based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s capital category.

75 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The actual capital amounts and ratios and the aforementioned minimums as of December 31, 2003 and 2002 are as follows (dollars in thousands):

	Actual				Minimum for capital adequacy purposes			Minimum to be well capitalized underprompt corrective action provisions
	Amount		Ratio		Amount	Ratio		Amount	Ratio
Auburn National Bancorporation, Inc.
As of December 31, 2003
Total capital (to risk-weighted assets)	$	52,279	16.53	%	25,308	8.00	%	N/A	N/A
Tier I risk-based capital (to risk-weighted assets)		48,320	15.27	%	12,654	4.00	%	N/A	N/A
Tier I leverage capital (to average assets)		48,320	8.85	%	23,596	4.00	%	N/A	N/A
As of December 31, 2002
Total capital (to risk-weighted assets)	$	41,432	13.75	%	24,114	8.00	%	N/A	N/A
Tier I risk-based capital (to risk-weighted assets)		37,648	12.49	%	12,057	4.00	%	N/A	N/A
Tier I leverage capital (to average assets)		37,648	7.62	%	20,201	4.00	%	N/A	N/A
AuburnBank
As of December 31, 2003
Total capital (to risk-weighted assets)		47,785	15.22	%	25,112	8.00	%	31,389	10.00	%
Tier I risk-based capital (to risk-weighted assets)		43,857	13.97	%	12,556	4.00	%	18,834	6.00	%
Tier I leverage capital (to average assets)		43,857	8.07	%	23,499	4.00	%	29,374	5.00	%
As of December 31, 2002
Total capital (to risk-weighted assets)		39,029	13.05	%	23,910	8.00	%	29,887	10.00	%
Tier I risk-based capital (to risk-weighted assets)		35,276	11.79	%	11,955	4.00	%	17,932	6.00	%
Tier I leverage capital (to average assets)		35,276	7.18	%	20,096	4.00	%	25,121	5.00	%

(16) Dividends from Subsidiary

Dividends paid by the Bank are a principal source of funds available to the Company for payment of dividends to its stockholders and for other needs. Applicable federal and state statutes and regulations impose restrictions on the amounts of dividends that may be declared by the subsidiary bank. State statutes restrict the Bank from declaring dividends in excess of the sum of the current year’s earnings plus the retained net earnings from the preceding two years without prior approval. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits, and other such items. Capital adequacy considerations could further limit the availability of dividends from the Bank. At December 31, 2003, the Bank could have declared additional dividends of

76 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

approximately $9,188,000 without prior approval of regulatory authorities. As a result of this limitation, approximately $32,104,000 of the Company’s investment in the Bank was restricted from transfer in the form of dividends.

(17) Supplemental Information

Components of other noninterest income exceeding 1% of revenues for any of the years in the three–year period ended December 31, 2003, include:

	2003		2002	2001
Merchant discounts and fees on Master Card and Visa sales	$	1,915,479	1,493,740	1,179,391
Gains on the sale of mortgage loans		683,989	364,841	222,721
Change in cash surrender value of Bank Owned Life Insurance		504,000	505,348	105,000

Components of other noninterest expense exceeding 1% of revenues for any of the years in the three–year period ended December 31, 2003, include:

	2003		2002	2001
Master Card and Visa processing fees	$	1,898,204	1,599,341	1,239,288
Marketing		286,060	459,268	391,139
Penalty on early withdrawl of FHLB advances		715,000	—	—

77 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(18) Parent Company Financial Information

The condensed financial information for Auburn National Bancorporation, Inc. (Parent Company Only) is presented as follows:

Parent Company Only

Condensed Balance Sheets

December 31, 2003 and 2002

	2003			2002
Assets
Cash and due from banks	$	2,182,926		187,379
Investment securities held to maturity		—		185,089
Investment securities available for sale		758,170		816,854
Investment in bank subsidiary		43,378,760		37,209,808
Premises and equipment, net		823		1,622
Rental property, net		1,427,285		1,532,535
Other assets		239,251		435,286
Total assets	$	47,987,215		40,368,573
Liabilities and Stockholders’ Equity
Other borrowed funds	$	130,432		151,478
Accrued expenses and other liabilities		231,899		634,671
Note payable to trust		7,217,000		—
Total liabilities		7,579,331		786,149
Stockholders’ equity:
Preferred stock of $0.01 par value; Authorized 200,000 shares; issued shares – none		—		—
Common stock of $0.01 par value; Authorized 8,500,000 shares; issued 3,957,135 shares		39,571		39,571
Additional paid-in capital		3,712,246		3,708,443
Retained earnings		38,092,829		34,543,870
Accumulated other comprehensive income		(828,816	)	1,842,099
Less:
Treasury stock, at cost – 64,947 shares and 62,317 shares for December 31, 2003 and 2002, respectively		(607,946	)	(551,559	)
Total stockholders’ equity		40,407,884		39,582,424
Total liabilities and stockholders’ equity	$	47,987,215		40,368,573

78 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Parent Company Only

Condensed Statements of Earnings

Years ended December 31, 2003, 2002, and 2001

	2003			2002		2001
Income:
Cash dividends from bank subsidiary	$	1,869,602		1,711,838		1,850,000
Interest on investment securities:
Taxable		—		32		276
Tax-exempt		5,801		12,011		14,275
Gain on exchange of investment securities		—		—		1,548,340
Other income		387,692		379,108		374,211
Total income		2,263,095		2,102,989		3,787,102
Expense:
Interest on borrowed funds		55,097		8,700		14,159
Net occupancy expense		1,299		10,165		9,008
Salaries and benefits		6,437		3,502		8,335
Other		396,687		395,426		421,548
Total expense		459,520		417,793		453,050
Earnings before income tax expense (benefit) and equity in undistributed earnings of subsidiary		1,803,575		1,685,196		3,334,052
Applicable income tax expense (benefit)		(27,287	)	(14,079	)	558,590
Earnings before equity in undistributed earnings of subsidiary		1,830,862		1,699,275		2,775,462
Equity in undistributed earnings of bank subsidiary		3,587,658		3,355,380		1,802,760
Net earnings	$	5,418,520		5,054,655		4,578,222

79 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Parent Company Only

Condensed Statements of Cash Flows

Years ended December 31, 2003, 2002, and 2001

	2003			2002		2001
Cash flows from operating activities:
Net earnings	$	5,418,520		5,054,655		4,578,222
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		111,855		123,123		111,429
Gain on exchange of investment securities		—		—		(1,548,340	)
Equity in undistributed earnings of subsidiary		(3,587,658	)	(3,355,380	)	(1,802,760	)
Decrease (increase) in other assets		219,510		(32,014	)	(26,108	)
(Decrease) increase in other liabilities		(402,772	)	(5,863	)	617,016
Net cash provided by operating activities		1,759,455		1,784,521		1,929,459
Cash flows from investing activities:
Proceeds from paydowns of investment securities held to maturity		—		—		5,143
Proceeds from calls of investment securities held to maturity		185,089		45,880		45,000
Subordinated note to preferred trust		7,217,000		—		—
Investment in preferred trust		(217,000	)	—		—
Cash dividend to Bank		(5,000,000	)	—		—
Additions to rental property		(5,806	)	(82,255	)	(75,857	)
Net cash provided (used in) by investing activities		2,179,283		(36,375	)	(25,714	)
Cash flows from financing activities:
Repayments of other borrowed funds		(21,046	)	(26,507	)	(21,050	)
Dividends paid		(1,869,561	)	(1,713,654	)	(1,562,819	)
Purchase of treasury stock		(61,262	)	—		(338,260	)
Sale of treasury stock		8,678		2,271		—
Net cash used in financing activities		(1,943,191	)	(1,737,890	)	(1,922,129	)
Net increase (decrease) in cash and cash equivalents		1,995,547		10,256		(18,384	)
Cash and cash equivalents at beginning of year		187,379		177,123		195,507
Cash and cash equivalents at end of year	$	2,182,926		187,379		177,123

80 (Continued)

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(19) Quarterly Financial Data (Unaudited)

The supplemental quarterly financial data for the years ended December 31, 2003 and 2002 is summarized as follows:

	Quarter ended
	March 31, 2003		June 30, 2003	September 30, 2003	December 31, 2003
Interest and dividend income	$	6,412,317	6,159,874	5,977,785	6,390,161
Interest expense		2,965,087	2,820,413	2,716,802	2,919,535
Net interest income		3,447,230	3,339,461	3,260,983	3,470,626
Provision for loan losses		225,000	175,000	125,000	150,000
Net earnings		1,342,136	1,317,384	1,318,055	1,440,945
Net earnings per share – basic and diluted		0.34	0.34	0.34	0.37
	Quarter ended
	March 31, 2002		June 30, 2002	September 30, 2002	December 31, 2002
Interest and dividend income	$	6,828,167	7,192,515	7,121,179	6,609,995
Interest expense		3,367,202	3,341,030	3,321,601	3,151,630
Net interest income		3,460,965	3,851,485	3,799,578	3,458,365
Provision for loan losses		1,005,000	275,000	350,000	50,000
Net earnings		902,874	1,210,316	1,494,251	1,447,214
Net earnings per share – basic and diluted		0.23	0.31	0.38	0.38

81

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, in the City of Auburn, State of Alabama, on the 30th day of March, 2004.

AUBURN NATIONAL BANCORPORATION, INC.
(Registrant)
By:	/S/ E. L. SPENCER, JR.
	E. L. Spencer, Jr.
	President

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.

Signature	Title	Date
/S/ E. L. SPENCER, JR. E. L. Spencer, Jr.	President, CEO and Chairman of the Board	March 30, 2004
/S/ C. WAYNE ALDERMAN C. Wayne Alderman	Director of Financial Operations	March 30, 2004
/S/ TERRY W. ANDRUS Terry W. Andrus	Director	March 30, 2004
/S/ ANNE M. MAY Anne M. May	Director	March 30, 2004
/S/ ROBERT W. DUMAS Robert W. Dumas	Director	March 30, 2004

82

AUBURN NATIONAL BANCORPORATION, INC.

EXHIBIT INDEX

Exhibit Number	Description
3.1.	Certificate of Incorporation of Auburn National Bancorporation, Inc. *
3.2.	Bylaws of Auburn National Bancorporation, Inc.
10.1.	Auburn National Bancorporation, Inc. 1994 Long-Term Incentive Plan. **
10.2.	Lease and Equipment Purchase Agreement, dated September 15, 1987. **
21.1.	Subsidiaries of Registrant
23.1.	Consent of Accountants
31.1	Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).
31.2	Certification signed by the Director of Financial Operations pursuant to SEC Rule 13a-14(a).
32.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.
32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 by C. Wayne Alderman, Director of Financial Operations.

* Incorporated by reference from Registrant’s Form 10-Q dated June 20, 2002 (File No. 000-26486).

** Incorporated by reference from Registrant’s Registration Statement on Form SB-2 (File No. 33-86180).

83

EX-3.2

Exhibit 3.2

AUBURN NATIONAL BANCORPORATION, INC.

AMENDED AND RESTATED BYLAWS

Adopted as of

February 10, 2004

AUBURN NATIONAL BANCORPORATION, INC. BY-LAWS

TABLE OF CONTENTS

		Page
ARTICLE I	OFFICES	1
Section 1.	Registered Office	1
Section 2.	Other Offices	1
ARTICLE II	MEETINGS OF SHAREHOLDERS	1
Section 1.	Location	1
Section 2.	Annual Meetings	1
Section 3.	Notice of Annual Meetings	1
Section 4.	Special Meetings	1
Section 5.	Notice of Special Meetings	2
Section 6.	Business of Special Meetings	2
Section 7.	Shareholder List	2
Section 8.	Quorum	2
Section 9.	Action by Shareholders	2
Section 10.	Voting	2
Section 11.	Proxies	3
Section 12.	Effect of Attendance at Meetings	3
Section 13.	Action Without a Shareholders’ Meeting	3
Section 14.	Form of Written Consent	3
ARTICLE III	BOARD OF DIRECTORS	4
Section 1.	General Powers; Number, Tenure and Qualifications	4
Section 2.	Classified Board	4
Section 3.	Vacancies	4
Section 4.	Time and Location of Meetings	4
Section 5.	Organizational Meetings	4
Section 6.	Special Meetings	5
Section 7.	Meetings by Conference Telephone, etc.	5
Section 8.	Quorum	5
Section 9.	Action Without a Meeting	5
Section 10.	Committees	5
Section 11.	Committee Minutes and Reports	6
Section 12.	Compensation	6
Section 13.	Transactions with Interested Persons, etc	6
Section 14.	Removal of Directors	6
Section 15.	Nominations for Director	6
Section 16.	Shareholder Proposals	7
Section 17.	Inspectors of Election	8
ARTICLE IV	NOTICES	8
Section 1.	Manner of Giving Notice	8
Section 2.	Waiver of Notice	8

i

		Page
ARTICLE V	OFFICERS	9
Section 1.	Officers, Elections, Terms	9
Section 2.	Duties of the Chairman of the Board	9
Section 3.	Duties of the President	9
Section 4.	Vice Presidents	10
Section 5.	Treasurer	10
Section 6.	Assistant Treasurer	10
Section 7.	Secretary	10
Section 8.	Assistant Secretaries	11
Section 9.	Other Officers, Employees and Agents	11
Section 10.	Compensation	11
Section 11.	Vacancies	11
Section 12.	Removal of Officers	11
Section 13.	Bonds	11
ARTICLE VI	CONTRACTS, LOANS, CHECKS, BANK ACCOUNTS, ETC.	11
Section 1.	Contracts	11
Section 2.	Borrowings and Loans	11
Section 3.	Checks, Drafts, etc	12
Section 4.	Deposits	12
ARTICLE VII	SHARES	12
Section 1.	Certificates for Shares	12
Section 2.	Appointment of Transfer Agents and Registrars	12
Section 3.	Ownership and Transfer of Shares	12
Section 4.	Restrictions on Transfer of Shares and Other Securities	13
Section 5.	Date for Determining Shareholders of Record	13
Section 6.	Lost, Stolen and Destroyed Certificates	14
Section 7.	Examination of Books by Shareholders	14
ARTICLE VIII	INDEMNIFICATION	14
Section 1.	Indemnification in Actions Other Than Those By or In the Right of the Corporation	14
Section 2.	Indemnification in Actions By or In the Right of the Corporation	15
Section 3.	Mandatory Indemnification of Expenses in Successful Defenses	15
Section 4.	Authorization for Indemnification	15
Section 5.	Right to Indemnification Upon Application; Procedure Upon Application	16
Section 6.	Expenses Payable in Advance	17
Section 7.	Insurance	17
Section 8.	Non-Exclusivity of Indemnification and Advancement of Expenses	17
Section 9.	Certain Persons Not Entitled to Indemnification	18

ii

		Page
Section 10.	Successors; Meaning of Certain Terms for Purposes of Article VIII	18
Section 11.	Severability	18
ARTICLE IX	MISCELLANEOUS	18
Section 1.	Fiscal Year	18
Section 2.	Corporate Seal	18
Section 3.	Amendments	18
Section 4.	Definitions	19

iii

AUBURN NATIONAL BANCORPORATION, INC.

AMENDED AND RESTATED BYLAWS

ARTICLE I

OFFICES

Section 1. Registered Office. Auburn National Bancshares, Inc. (the “Corporation”) shall have its registered office in the State of Delaware at The Corporation Trust Company, 1209 Orange Street, City of Wilmington, County of New Castle, 19801.

Section 2. Other Offices. The Corporation may also have offices at such other places, both within and without the States of Alabama and Delaware, as the Corporation’s Board of Directors (the “Board of Directors” or the “Board”) may from time to time determine or the business of the Corporation may require to the extent not prohibited by law.

ARTICLE II

MEETINGS OF SHAREHOLDERS

Section 1. Location. All meetings of shareholders shall be held at the Corporation’s principal office in Auburn, Alabama, or at such other place either within or without the States of Alabama or Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.

Section 2. Annual Meetings. Annual meetings of shareholders shall be held on the date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At the annual meeting, the shareholders shall elect a Board of Directors by plurality vote, and shall transact any other business as may properly come before the meeting.

Section 3. Notice of Annual Meeting. Written notice of the annual meeting stating the place, day and hour of the meeting, and the means of remote communications, if any, by which shareholders and proxyholders may be deemed to be present and to vote at such meeting, shall be given to each shareholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting.

Section 4. Special Meetings. Special meetings of shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation (as may be amended and/or restated from time to time, the “Certificate of Incorporation”), may be called by the Chairman or the President, or a majority of the Board of Directors, or upon the written request of shareholders owning not less than 25% of all shares of capital stock of the Corporation (“Shares”) issued and outstanding and entitled to vote at such meeting. Such request by the shareholders shall state specifically the purpose or purposes of the proposed meeting.

Section 5. Notice of Special Meetings. Written notice of a special meeting stating the place, date and hour of the meeting, and the means of remote communications, if any, by which shareholders and proxyholders may be deemed to be present and to vote at such meeting, and the purpose or purposes for which the meeting is called, shall be given to each shareholder entitled to vote at such meeting, not less than 10 nor more than 60 days before the date of the meeting.

Section 6. Business of Special Meetings. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice.

Section 7. Shareholder List. The officer who has charge of the Corporation’s stock ledger shall prepare and make at least 10 days before every meeting of shareholders, a complete list of shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of Shares registered in the name of each shareholder. Such list shall be available for inspection by any shareholder for any purpose germane to the meeting for a period of at least 10 days prior to the meeting (i) on a reasonably accessible electronic network, provided that, the information required to gain access to such list is included with the notice of the meeting, or (ii) during ordinary business hours at the Corporation’s principal office. The list of shareholders entitled to vote also shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall be open to the examination by any shareholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. The original stock transfer books shall be the only evidence as to the shareholders entitled to examine the shareholder list or stock transfer book, or to vote at any meeting of shareholders.

Section 8. Quorum. The holders of a majority of the Corporation’s Shares issued and outstanding and entitled to vote at any meeting of the shareholders, present in person or represented by proxy, shall constitute a quorum at such meetings for the transaction of business, except as otherwise provided by the Delaware General Corporation Law (as amended, the “DGCL”) or the Certificate of Incorporation. If, however, such quorum is not present or represented at any meeting of the shareholders, then the shareholders entitled to vote at such meeting, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the adjourned meeting shall be given to the shareholders entitled to vote at the meeting. Every meeting of the shareholders may be adjourned from time to time until its business is completed, and except as provided herein or by applicable law, no notice need be given of such adjourned meeting.

Section 9. Action by Shareholders. When a quorum is present at any meeting, the vote of the holders of a majority of the Shares having voting power present in person or represented by proxy shall decide any question brought before such meeting other than the election of directors, unless the question is one upon which by express provision of the DGCL, the Certificate of Incorporation or these Bylaws (as may be amended and/or restated from time to time, these “Bylaws”) a different vote is required, in which case, such express provision shall govern and control the decision of such question.

Section 10. Voting. Each shareholder shall at every meeting of the shareholders be entitled to one vote in person or by proxy for each Share having voting power held by such shareholder, except as may otherwise be provided in the Certificate of Incorporation or any Certificate of Designation

2

thereunder. All elections of directors shall be by written ballot; provided, however, that if authorized by the Board, such requirement shall be satisfied by a ballot submitted by electronic transmission, and, provided further, that any such electronic transmission must either set forth or be accompanied by information from which it can be determined that the electronic transmission was authorized by the shareholder or proxyholder.

Section 11. Proxies. Each shareholder entitled to vote at a meeting of shareholders, or to express consent or dissent to any corporate action in writing without a meeting, may authorize another person or persons to act for such shareholder by proxy, but no such proxy shall be voted or acted upon after three years from its date unless the proxy provides for a longer period. A shareholder may authorize another person or persons to act for such shareholder as proxy by any appropriate means, including, without limitation, those means provided by Section 212(c) of the DGCL. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission entered pursuant to Section 212(c) of the DGCL may be substituted or used in lieu of the original writing or transmission for any and all persons for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.

A duly executed proxy shall be irrevocable if it states that it is irrevocable, and if and only so long as it is coupled with an interest sufficient in law to support an irrevocable power. The proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the Shares or an interest in the Corporation, generally.

Section 12. Effect of Attendance at Meetings. Attendance by a person of a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

Section 13. Action Without a Shareholders’ Meeting. To the extent permitted by the Certificate of Incorporation and the DGCL, any action which is required to be taken or that may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed and consented to by the holders of outstanding Shares entitled to vote on such matters having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all Shares entitled to vote thereon were present and voted, provided that directors may be elected only by unanimous written consent. Any such consent shall be delivered to the Corporation at its registered office in the State of Delaware, its principal place of business, or to an officer or agent of the Corporation having custody of the minutes of the proceedings of the shareholders. Any delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. In the event that the action which is consented to is such as would have required the filing of a certificate under any other section of the DGCL, if such action had been voted on by the shareholders or members of the meeting, the certificate filed under such other section shall state, in lieu of any statement required by such other section asserting any vote of shareholders, that written consent has been given in accordance with Section 228 of the DGCL.

Section 14. Form of Written Consent. Every written consent by a shareholder or shareholders shall bear the date of signature of each shareholder who signs the consent. No written consent shall be effective with respect to the action referred to therein, unless, within 60 days of the earliest date of consent delivered as required by these Bylaws and the DGCL, written consents signed by a sufficient number of shareholders to take action are delivered to the Corporation by delivery as provided

3

in Section 13 of this Article II. A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a shareholder, proxyholder or by any person or persons authorized to act for any such person shall be deemed to be written, signed and dated as of the date of such transmission for the purpose of this section if consistent with Section 228(d) of the DGCL. In addition, any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original for any and all purposes for which the original writing may be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.

ARTICLE III

BOARD OF DIRECTORS

Section 1. General, Powers; Number, Tenure and Qualifications. The Corporation’s business, properties and affairs shall be managed by its Board of Directors. The number of directors of the Corporation shall be fixed in the manner provided for in the Corporation’s Certificate of Incorporation.

Section 2. Classification. The directors shall be divided into three Classes, designated Class I, Class II and Class III, as nearly equal in number as the then total number of directors constituting the whole Board shall permit, with the term of office of one Class expiring each year. At the 2004 Annual Meeting of Shareholderss, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding annual meeting of shareholders, commencing in 2005, successors to the class of directors whose term expires at the annual meeting shall be elected or re-elected for a three-year term. Each director shall hold office until the annual meeting for the year in which his or her term expires, and unless he or she dies, resigns or is removed, until his or her successor is elected and qualified. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible.

Section 3. Vacancies. Any vacancies on the Board, and newly created directorships, shall be filled by the affirmative vote of a majority of the remaining directors, or by a sole remaining director, even though such remaining directors constitute less than a quorum of the Board. Any director chosen to fill a vacancy shall serve a term that coincides with the remaining term of the director whose seat he is filling, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. If there are no directors in office, then any officer or shareholder of the Corporation, or an executor, administrator, trustee or guardian of a shareholder, or any other fiduciary entrusted with like responsibility for the person or estate of a shareholder, or any other person specified in Section 223(a) of the DGCL, may give notice calling a special shareholders’ meeting or apply to the Delaware Court of Chancery for a decree summarily ordering an election of directors as provided under the DGCL.

Section 4. Time and Location of Meetings. Meetings of the Board, regular or special, shall be held at such times as the Board may determine at the Corporation’s principal office unless otherwise specified in the notice thereof, in which event the meeting shall be held where specified in the notice, either within or without the States of Delaware and Alabama.

Section 5. Organizational Meetings. The first meeting of each newly-elected Board shall be held on the day and time specified by the Board. No notice of such meeting shall be necessary to the newly-elected directors in order to legally constitute the meeting; provided, that a quorum is present.

4

Section 6. Special Meetings. Special meetings of the Board may be called by the Chairman or President on 24 hours’ personal, telephonic, telegraphic or facsimile notice to each director, or on three days’ written notice to each director. A number of directors constituting a majority of the whole Board may call a special meeting; provided, that appropriate notice is given. Any notice or waiver thereof of a special meeting, whether personal, telephonic, telegraphic or written, need not include a statement of the business to be transacted at, nor the purposes of, such special meeting except as expressly required by statute, the Corporation’s Certificate of Incorporation or these Bylaws. Meetings of any committee of the Board may be called by the Chairman, the President, or by the chairman of the committee, at any time upon personal, telephonic, telegraphic or written notice to each member of such committee, and such notice need not include a statement of the business to be transacted at, nor the purposes of, such special meeting.

Section 7. Meetings by Conference Telephone, etc. Meetings of the Board, and of any committee thereof, may be held by means of a conference telephone or other communication equipment by which all persons participating in the meeting can hear each other simultaneously. Participation by such means shall constitute presence in person at any such meeting.

Section 8 Quorum. At all meetings of the Board, a majority of the directors then holding office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may otherwise specifically be provided by statute, the Certificate of Incorporation or these Bylaws. If a quorum is not present at any meeting of the Board, then the directors present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum shall be present.

Section 9. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting or vote, if a consent setting forth the action taken is signed by all of the members of the Board or committee, or assented to by electronic transmission, as the case may be, and such consent or consents, whether in the form of writings or electronic transmissions, are filed with the minutes of proceedings of the Board or of such committee. Such filings shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. Such consents shall have the same effect as a unanimous vote of the Board.

Section 10. Committees. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any committee meeting. The Corporation shall at all times have an Audit Committee, a Nominating and Corporate Governance Committee, a Compensation Committee, an Executive Committee (or differently named, but similarly functioning committees) and such other committees as the Board may establish from time to time. The members of such committees shall have such qualifications and characteristics as then required by law, by the Board and by the committee’s charter, if any. The committees may adopt written charters approved by the Board, or where authorized by the Board or required by law, such committees shall adopt and maintain their own written charters. All committee charters shall contain the provisions then required by law or regulation, including requirements of any of the Corporation’s and its subsidiaries’ primary federal regulators, securities regulators or any securities exchange or market then applicable to the Corporation. Any such committee, to the extent provided in the resolution or resolutions of the Board and to the extent permitted by the DGCL, the Certificate of Incorporation and/or these Bylaws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation during intervals between meetings of the Board, and may authorize the seal of the

5

Corporation, if any, to be affixed to all papers which may require it, except to the extent otherwise prohibited under the DGCL. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board.

Pursuant to a resolution of the whole Board, the Corporation has expressly elected to be governed by Section 141(c)(2) of the DGCL.

Section 11. Committee Minutes and Reports. Each committee shall keep and permanently maintain regular minutes of its meetings and report the same to the Board whenever required or requested.

Section 12. Compensation. The Board shall have the authority to fix the amount, nature and timing of the compensation of directors. The directors may be paid a fixed sum for attendance at each meeting of the Board and/or a stated salary or retainer. Members of committees may also be compensated for such service in any manner approved by the Board.

Section 13. Transactions with Interested Persons, etc. Insofar as not prohibited by applicable law, no contract or other transaction between the Corporation and one or more of its directors or any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors, officers or similar officials, or have a financial interest, shall be either void or voidable solely because of such relationship or interest, or solely because such director or directors are present at or participate in the meeting of the Board or a committee thereof which authorizes, approves or ratifies such contract or transaction or solely because his or their votes are counted for such purpose, if the contract or transaction is fair and reasonable to the Corporation and if either:

(a) The material facts as to such relationship or interest and as to the contract or transaction are disclosed or are known to the Board or appropriate committee which, in good faith, authorizes, approves or ratifies the contract or transaction by the affirmative vote or consent of a majority of the disinterested directors even though the disinterested directors are less than a quorum; or

(b) The material facts as to such relationship or interest and as to such contract or transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote or written consent of the shareholders; or

(c) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board or a committee thereof or by the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee that authorizes the contract or transaction.

Section 14. Removal of Directors. To the extent permitted by the Certificate of Incorporation and the provisions of the DGCL, any director or the entire Board may be removed from office, with or without cause, by the holders of a majority of the Shares then entitled to vote at an election of directors.

Section 15. Nominations for Director. Nominations for election to the Board of Directors will be made by the Board of Directors, based upon the recommendations of the Nominating and Corporate Governance Committee. Candidates for nomination may be recommended by any shareholder subject to the requirements of the certificate of incorporation, and subject further to any requirements of law or regulation, or of any securities market on which the Company’s securities are listed or traded. The Nominating and Corporate Governance Committee will evaluate the

6

qualifications of and give appropriate consideration to those candidates recommended by shareholders. Notification by a shareholder of proposed nomination shall contain, in addition to the information otherwise required by the Certification of Incorporation, law or regulation, or the rules or regulations of a securities exchange or market on which the Company’s securities are listed or traded, the following information to the extent known to the notifying shareholder: (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director at the annual meeting, (i) the name, age, business address and resident address of the proposed nominee, (ii) the principal occupation or employment of the proposed nominee, (iii) the class and number of Shares of capital stock of the Corporation that are beneficially owned by the proposed nominee, and (iv) any other information relating to the proposed nominee that is required to be disclosed in solicitations for proxies for election of directors pursuant to Schedule 14A of Regulation 14A promulgated under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and a fully completed Federal Reserve Form FR 2081 (or any successor thereto) and fingerprint card together with such information as the regulators of the Corporation and its subsidiaries may require or request; and (b) as to the shareholder giving the notice of nominees for election at the annual meeting, (i) the name and record address of the shareholder, and (ii) the class and number of Shares of the Corporation that are beneficially owned by the shareholder. The Corporation may require any proposed nominee for election at an annual or special meeting of shareholders to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare in the meeting that a nomination was not made in accordance with the requirements of the Certificate of Incorporation and this Section 14, and if he should so determine, then he shall so declare to the meeting and the defective nomination shall be disregarded.

Section 16. Shareholder Proposals.

(a) At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder in accordance with this Section 15.

(b) For business to be properly brought before an annual meeting by a shareholder, the Corporation must have received timely notice thereof in writing from such shareholder. To be timely, a shareholder’s notice must be received by the Secretary of the Corporation as of the date set forth in the Corporation’s proxy statement relating to the annual meeting for the preceding year; provided, however, that if no such date is stated, then such date shall be 120 calendar days in advance of the date (with respect to the forthcoming annual meeting) that the Corporation’s proxy statement was released to its shareholders in connection with the previous year’s annual meeting of security holders; and provided, further, that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year’s proxy statement, a proposal shall be

7

received by the Corporation no later than the close of business on the tenth day following the date on which notice of the date of the annual meeting is given to the shareholders or made public, whichever first occurs.

(c) Such notification shall contain the following information as to each matter the shareholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business; (iii) the class and number of Shares of the Corporation that are beneficially owned, as such term is defined in SEC Rule 13d-3 (“Rule 13d-3”) promulgated under the Exchange Act, by the shareholder; (iv) any substantial interest of the shareholder in such business; and (v) any other information required pursuant to the rules and regulations promulgated under the Exchange Act relating to the shareholder proposals. For purposes of clause (iv) above, a “substantial interest of the shareholder in such business” shall be deemed to occur if such interest were reportable (assuming that the shareholder’s business was in fact brought before the annual meeting) pursuant to Item 5 of Schedule 14A (Rule 14-a-101) promulgated under the Exchange Act.

(d) Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 15.

Section 17. Inspectors of Election. Prior to each meeting of shareholders, the Board of Directors or the President shall appoint one or more Inspectors of Election. Upon his appointment, each such Inspector shall take and sign an oath to faithfully execute the duties of Inspector at such meeting with strict impartiality and to the best of his ability. Such Inspectors shall determine the number of Shares outstanding, the number of Shares present at the meeting and whether a quorum is present at such meeting. The Inspectors shall receive votes and ballots and shall determine all challenges and questions as to the right to vote and shall thereafter count and tabulate all votes and ballots and determine the result. Such Inspectors shall do such further acts as are proper to conduct the elections of directors and the vote on other matters with fairness to all shareholders. The Inspectors shall make a certificate of the results of the elections of directors and the vote on other matters. No Inspector shall be a candidate for election as a director of the Corporation.

ARTICLE IV

NOTICES

Section 1. Manner of Giving Notice. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, whenever notice is required to be given to any director or shareholder, such notice requirement can be satisfied by giving written notice by mail, postage prepaid, addressed to such director or shareholder, at his address as it appears on the records of the Corporation, and such notice shall be deemed to be given at the time when the same is deposited in the United States mail. Notice to directors may also be given in person, or by telegram, facsimile, telephone, or, if consented to in advance by a director, by electronic mail (e-mail).

Section 2. Waiver of Notice. Whenever any notice is required to be given to any shareholder or director of the Corporation, a written waiver or a waiver by electronic communication may be given by the person or persons entitled to said notice, or in the case of a shareholder by his attorney

8

thereunto duly authorized, whether such waiver is given before or after the meeting, or other matter in respect of which such notice is to be given, and in such event such notice, and any action to be taken after such notice, or after the lapse of a prescribed period of time, may be taken without such notice and without the lapse of any period of time.

ARTICLE V

OFFICERS

Section 1. Officers, Election, Terms. The officers of the Corporation shall be a President, a Treasurer, and a Secretary. The Board may also elect a Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers, Assistant Secretaries and such other officers as the Board may from time to time deem proper. The Corporation’s officers shall be elected annually by the Board at its regular annual meeting to serve for a term of one year and, unless they die, resign or are removed, until their respective successors are elected and qualified. If the officers or any of them for any reason should not be elected at the regular annual meeting of the Board, they may be elected at any other time by the Board. Any person may hold two or more of the offices in the Corporation, except that the offices of President and Secretary shall not be held by the same person. The Board may, in its discretion, designate one or more of the Vice Presidents as Executive Vice Presidents or Senior Vice Presidents.

Section 2. Duties of the Chairman of the Board. The Chairman of the Board, if one is elected and serving, shall preside at all shareholders’ and Board meetings. He shall have authority to execute bonds, mortgages, and other contracts requiring a seal, under the seal of the Corporation. He shall have the power to endorse, when sold, assigned, transferred or otherwise disposed of by the Corporation, all certificates or other evidences of shares of stock, bonds, or other interests, securities and instruments issued by or on behalf of other corporations, associations, trusts or other entities, whether public or private, or by any government or any agency or authority thereof (collectively, “Securities and Rights”), and owned or held by the Corporation, and to make, execute and deliver all instruments or assignments of transfer of any Securities and Rights. He shall have general and acting supervision over the business and affairs of the Corporation, subject to the direction of the Board. He may, with the approval of the Board, or shall, at the Board’s direction, delegate any or all of such duties to the President.

Section 3. Duties of the President. The President shall be responsible to the Board and shall see that all orders and resolutions of the Board are carried into effect. He shall, under the direction of the Board, have general supervision and direction of the Corporation’s other officers, employees and agents and shall see that their duties, as assigned by the Board or the President, are properly performed. He shall designate and assign the duties of the officers under his supervision, with the approval of the Board or at their direction.

The President shall have authority to execute bonds, mortgages and other contracts and instruments requiring a seal under the seal of the Corporation. He shall have power to endorse, when sold, assigned, transferred or otherwise disposed of by the Corporation, all certificates or evidences of Securities and Rights owned or held by the Corporation and to make, execute and deliver all instruments, assignments or transfers of any Securities and Rights.

The President shall have general authority over the Corporation’s business, and if the office of Chairman of the Board is vacant, shall perform the duties and have all powers of the Chairman of the Board, and shall have such other powers and perform such other duties as the Board may from time to time prescribe.

9

Section 4. Vice Presidents. The Vice Presidents (in order of the Executive Vice President, Senior Vice President and other Vice Presidents, and within each class in order of the seniority of the respective members or as designated by resolution of the Board) shall, in the absence or disability of the Chairman and President, perform the duties, exercise the powers and have the responsibilities of such officers, and shall perform such other duties, exercise such other powers and have such responsibilities as the Board or the President may prescribe.

Section 5. Treasurer. The Treasurer shall be the Corporation’s chief financial officer and shall have charge and custody of, and shall be responsible for, all funds, securities and financial records of the Corporation; shall deposit all such funds in the name of the Corporation in such banks or other depositories as shall be selected or authorized to be selected by the Board; shall render or cause to be rendered a statement of the condition of the finances of the Corporation at all regular meetings of the Board, and a full financial report at the annual meeting of shareholders, if called upon so to do; shall receive and give receipts for moneys due and payable to the Corporation from any source whatsoever; and, in general, shall perform or cause to be performed all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board or the President.

Section 6. Assistant Treasurer. The Assistant Treasurers shall perform such duties as from time to time may be assigned to them by the President, the Treasurer or the Board. At the request of the Treasurer, or in case of his absence or inability to act, any Assistant Treasurer may act in his place.

Section 7. Secretary. The Secretary shall have such powers and perform such duties as are incident to the Office of Secretary of a Corporation, or as are assigned to him by the President or the Board of Directors, including the following:

(1) He shall keep the resolutions, forms of written consent, minutes of the meetings of the Board of Directors and of the shareholders, and other official records of the Corporation in appropriate books as permanent records of the Corporation.

(2) He shall give and serve all notices of the Corporation to shareholders and to the Board of Directors, and shall receive and record all waivers of such notices duly received therefrom.

(3) He shall be custodian of the Corporation’s records and corporate seal, and shall have the authority to affix the seal to any documents or instruments.

(4) He shall keep or cause to be kept by the Corporation’s stock transfer agent and registrar, the stock and transfer books in the manner prescribed by law, so as to show at all times the amount of capital stock, the manner and the time the same was paid in, the names of the owners thereof, alphabetically arranged, their respective places of residences, their post office addresses, the number of Shares owned by each, and the date on which each person became such owner.

(5) He shall present to the Board of Directors all communications addressed to him officially by the President or any officer or shareholder of the Corporation.

(6) He shall attend to all correspondence and perform all the duties incident to the Office of Secretary.

10

Section 8. Assistant Secretaries. The Assistant Secretaries shall perform such duties as from time to time may be assigned to them by the President, the Secretary or the Board. At the request of the Secretary, or in case of his absence or inability to act, any Assistant Secretary may act in his place.

Section 9. Other Officers, Employees and Agents. Each and every other officer, employee, and agent of the Corporation shall possess and may exercise such power and authority, and shall perform such duties, as may from time to time be assigned to him or her by the Board of Directors, the officer appointing him or her, or such officer or officers who may from time to time be designated by the Board to exercise supervisory authority; provided that, no officer appointed by another officer shall have any greater duties, powers and responsibilities than the officer who has made such appointment.

Section 10. Compensation. The salaries of the Corporation’s executive officers shall be fixed from time to time by the Corporation’s Compensation Committee or by the Board of Directors, after taking account of any recommendation of the Corporation’s Compensation Committee. The Board may, from time to time, delegate to any executive officer or to the Compensation Committee the power to fix the salaries of other officers, agents and employees. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation or a member of any committee contemplated by these Bylaws.

Section 11. Vacancies. Vacancies in any office arising from any cause may be filled by action of the Board of Directors.

Section 12. Removal of Officers. The Board of Directors may remove any officer from office at any time, with or without cause, by a majority vote of the whole Board.

Section 13. Bonds. If the Board of Directors by resolution shall so require, any officer or agent of the Corporation shall give bond to the Corporation in such amount and with such surety as the Board may deem sufficient, conditioned upon the faithful performance of their respective duties and offices.

ARTICLE VI

CONTRACTS, LOANS, CHECKS, BANK ACCOUNTS, ETC.

Section 1. Contracts. The Board may authorize any officer or officers or agent or agents to enter into, execute and deliver any contract or instrument in the name of, on behalf of and for the benefit of the Corporation. Such authority may be general or confined to specific instances and if the Board so provides may be delegated by the person so authorized. Unless so authorized by the Board or these Bylaws, no officer, employee or agent shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount.

Section 2. Borrowings and Loans. No borrowings or loans shall be contracted on behalf of the Corporation and no evidences of indebtedness or debt instruments shall be executed in the Corporation’s name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances, and may be delegated to a Corporation officer in the authorizing Board resolutions. No loans or extensions of credit shall be made by the Corporation to any director or executive officer of the Corporation where such loans would be prohibited by Section 13(k) of the Exchange Act.

11

Section 3. Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, or agent or agents, and in such manner as shall from time to time be determined by resolution of the Board.

Section 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation, or otherwise as the President or any other officer or officers authorized by the Board shall direct, in such banks, trust companies or other depositories or agencies as may be selected by the President, the Treasurer or any other officer or officers or agents or agents to whom power in that respect shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by such officer or officers or agent or agents as shall be determined by the President, the Treasurer or any other officer or officers designated by the Board.

ARTICLE VII

SHARES

Section 1. Certificates for Shares. The Board shall determine whether the Corporation’s Shares of each class and series shall be certificated or uncertificated. Notwithstanding any Board action to adopt Shares that are uncertificated, every holder of certificated Shares of such series or class, and upon request, every holder of uncertificated Shares, shall be entitled to have a certificate, in such form as the Board shall prescribe, certifying the number and class of Corporation Shares owned by him. Each such certificate shall be signed in the name of the Corporation by the Chairman or Vice Chairman of the Board, the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. The signature of any such officer, transfer agent or registrar may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate shall cease to be such officer, transfer agent or registrar before such certificate shall have been issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, corporations or entities owning the Shares represented by certificates, and the respective dates when their Shares were issued, and, in case of cancellation, the respective dates of cancellation. No certificate evidencing Shares shall be in bearer form. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and a new certificate or certificates shall not be issued in exchange for any existing certificates until such existing certificate shall have been so cancelled, except in cases otherwise provided for in this Article VII.

Section 2. Appointment of Transfer Agents and Registrars. The Corporation may, from time to time, appoint one or more transfer agents and registrars for the Corporation’s Shares and other securities, and such transfer agents and registrars shall maintain the Corporation’s transfer books and records of all holders.

Section 3. Ownership and Transfer of Shares. The person in whose name any of the Corporation’s Shares stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation, except as provided in the Certificate of Incorporation or by applicable law; provided that, whenever any transfer of Shares shall be made for collateral security and not absolutely, such fact, if known to the Corporation or to any such transfer agent, shall be so expressed

12

in the entry of transfer, if requested by both the transferor and transferee. Each transfer of any of the Corporation’s Shares shall be made only (a) on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, or with a transfer agent appointed as provided in this Article VII, upon the payment of any taxes thereon, and (b) on the surrender of the certificate or certificates for such Shares properly endorsed and in good delivery form. The Corporation may purchase, redeem, receive, take or otherwise acquire, own, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own Shares, except as otherwise provided by the Certificate of Incorporation or the DGCL.

Section 4. Restrictions on Transfer of Shares and Other Securities. A written restriction or restrictions on the transfer or registration of transfer of Shares or other securities or indebtedness of the Corporation, or on the amount of the Corporation’s Shares or other securities or indebtedness that may be owned by any “person” or “group,” each as defined in Section 13(d)(3) of the Exchange Act and the Securities and Exchange Commission’s Rules and Regulations thereunder, if placed in the transfer books and records for the Corporation’s Shares or other securities or indebtedness, or if permitted by Section 202 of the DGCL, noted conspicuously on the certificate representing such Shares or other securities or indebtedness, or contained in a notice or notices sent pursuant to Section 151(f) of the DGCL, may be enforced against the holder of the restricted Shares or other securities or indebtedness or against any successor or transferee of the holder, including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Stop transfer notices may be placed in the Corporation’s stock transfer books with respect to restricted Shares or other securities or indebtedness. Except where the Shares or other securities or indebtedness are registered under the Securities Act of 1933, (as amended, the “Securities Act”), and applicable state and foreign securities acts, or where, in the Corporation’s judgment, transfer restrictions are imposed or required thereunder or otherwise are appropriate and permitted by the Securities Act and/or the Exchange Act, all securities, and all evidences of indebtedness which are convertible into, or exchangeable for the Corporation’s Shares or other securities, shall be legended substantially as follows:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE OR OTHER JURISDICTION’S SECURITIES OR BLUE SKY LAWS. NO SUCH SECURITIES NOR ANY INTEREST THEREIN SHALL BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED OR DISPOSED OF ABSENT SUCH REGISTRATION, UNLESS, IN THE OPINION OF THE CORPORATION’S COUNSEL, SUCH REGISTRATION IS NOT REQUIRED.

This legend is non-exclusive, and is in addition to other restrictions on transfer or the registration of transfer, or the amount of securities that may be owned by any person or group that may be imposed.

Section 5. Date for Determining Shareholders of Record.

(a) In order that the Corporation may determine the shareholders entitled to receive notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect to any change, conversion or exchange of Shares or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board, then the record date shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived,

13

at the close of business on the day next preceding the day on which the meeting is held. A determination of shareholders of record entitled to receive notice of or to vote at a meeting of shareholders shall apply to any adjournment of such meeting; provided, however, that the Board may fix a new record date for the adjourned meeting.

(b) If no record date has been fixed by the Board, then the record date for determining shareholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board is required under the DGCL, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered.

Section 6. Lost, Stolen and Destroyed Certificates. Upon the Corporation’s receipt of notice from the holder of any of the Corporation’s Shares or other securities of any loss, theft or destruction of the certificate(s) therefor, the Board may, in its discretion, and after the expiration of such period of time as it may determine to be advisable, cause to be issued to such holder a new certificate or certificates or uncertificated Shares or securities in replacement Shares or other securities, upon the surrender of the mutilated certificate, or in case of loss or destruction of the certificate, upon proof satisfactory to the Board of such loss, theft or destruction, and the Board or its delegee may, in its discretion, require the owner of the lost, destroyed or mutilated certificate, or his legal representatives, to give the Corporation a bond, in such sum and with such surety or sureties as it may direct, or to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or on account of the issuance of such new certificate or uncertificated Shares or securities in replacement of the allegedly lost, stolen or destroyed certificates.

Section 7. Examination of Books by Shareholders. The Board shall, subject to any applicable statutes, have the power to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations, the Corporation’s Shares ledger, a list of its shareholders and the books and records of the Corporation, or any of them, shall be open to the inspection of the Corporation’s shareholders of record. No shareholder shall have any right to inspect the Corporation’s Shares ledger, a list of its shareholders, or its books and records, except as conferred by any applicable statute, unless and until authorized so to do by resolution of the Corporation’s Board.

ARTICLE VIII

INDEMNIFICATION

Section 1. Indemnification in Actions Other Than Those By or In the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any director of the Corporation or any officer elected by the Board of Directors (and may indemnify any other officer or any employee or agent of the Corporation) who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee, trustee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not,

14

of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

Section 2. Indemnification in Actions By or In the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any director of the Corporation or any officer elected by the Board of Directors (and may indemnify any other officer or any employee or agent of the Corporation) who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise against amounts paid in settlement of such action or suit or expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification shall be made in respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses or amounts which the Court of Chancery or such other court shall deem proper.

Section 3. Mandatory Indemnification of Expenses in Successful Defenses. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 or 2 of this Article VIII, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith without the necessity of authorization in the specific case.

Section 4. Authorization for Indemnification.

(a) Any indemnification under Sections 1 or 2 of this Article VIII (unless ordered by a court) shall be made by the Corporation only upon a determination in the specific case that indemnification of the person seeking indemnification is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 or 2 above, as the case may be. If indemnification is determined to be proper, then, in the case of proposed indemnification of any person other than a director of the Corporation or an officer elected by the Board, such indemnification shall be made by the Corporation only as authorized in the specific case. Such determination (and determinations under Sections 5 and 6 of this Article VIII) or authorization shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding; (ii) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (iii) by the shareholders; provided, however, that if a Change in Control (as defined in this Section 4) has occurred and the person seeking indemnification so requests, such determination (and determination under Sections 5 and 6 of this Article VIII) shall be made in a written opinion rendered by Independent Legal Counsel (as defined in this Section 4) chosen by the person seeking indemnification and not reasonably objected to by the Board of Directors (whose fees and expenses shall be paid by the Corporation).

(b) For purposes of this Article VIII, “Independent Legal Counsel” shall mean legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who

15

has performed services for the Corporation or the person seeking indemnification within the previous three years. For purposes of this Article VIII, “Change in Control” shall mean a change in control of the Corporation of a nature that would be required to be reported in response to Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Corporation is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any “person” (as such term is used in sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Shares representing 35% or more of the Corporation’s common stock, par value $0.01 per Share, then outstanding without the prior approval of a majority of the members of the Board of Directors in office immediately prior to such acquisition; (ii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation’s shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period) cease for any reason to constitute at least a majority of the Board of Directors.

(c) For purposes of any determination under Section 4(a) of this Section, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if such person relied on the records or books of account of the Corporation or other enterprise, or on information supplied to him by the officers of the Corporation or other enterprise, or on information or records given or reports made to the Corporation or other enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or other enterprise. The provisions of this Section 4(c) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be.

Section 5. Right to Indemnification Upon Application; Procedure Upon Application. Except as otherwise provided in the proviso to Section 2 of this Article VIII:

(a) Any indemnification under Sections 1 or 2 of this Article VIII shall be made for each director or officer elected by the Board of Directors, and if authorized, by the Board of Directors in the specific case for any other officer, employee or agent of the Corporation, no later than 45 days after receipt by the Corporation of the written request of the director, officer, employee or agent unless a determination is made within said 45-day period in accordance with Section 4 of this Article VIII that such person has not met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII.

(b) The right to indemnification under Section 1, 2 or 4 of this Article VIII or advances of expenses under Section 6 of this Article VIII shall be enforceable by the director, officer, employee or agent in any court of competent jurisdiction to the extent such person because of his position is entitled to indemnification or where indemnification has been authorized in his specific case. Following a Change in Control, the burden of proving that indemnification is not appropriate shall be on the Corporation both as to authorization, if required, and determination as to meeting the applicable standard of conduct. Neither the absence of any prior determination that indemnification is proper in the circumstances, nor a prior determination that indemnification is not proper in the circumstances, shall be a defense to the action or create a presumption that the director, officer, employee or agent has not met the applicable standard of conduct. The expenses (including attorneys’ fees and expenses) actually and reasonably incurred by the

16

director, officer, employee or agent in connection with successfully establishing his right to indemnification, in whole or in part, in any such action (or in any action or claim brought by him to recover under any insurance policy or policies referred to in Section 7 of this Article VIII) shall also be indemnified by the Corporation.

(c) If any person is entitled under any provision of this Article VIII to indemnification by the Corporation for some or a portion of expenses, judgments, fines or amounts paid in settlement incurred by him, but not for the total amount thereof, the Corporation shall indemnify such person only for the portion of such expenses, judgments, fines and amounts to which he is entitled.

Section 6. Expenses Payable in Advance. Expenses (including attorneys’ fees and expenses) actually and reasonably incurred by a director or officer in defending, investigating, preparing to defend, or being or preparing to be a witness in, a threatened or pending action, suit, proceeding or claim against him, whether civil or criminal, shall be paid by the Corporation in advance of the final disposition of such action, suit, proceeding or claim upon receipt by the Corporation of a written request therefor and a written undertaking by or on behalf of the director or officer to repay such amounts if it shall be determined in accordance with Section 5 of this Article VIII that he is not entitled to be indemnified by the Corporation; provided, however, that if he seeks to enforce his rights in a court of competent jurisdiction pursuant to Section 5(b) of this Article VIII, said undertaking to repay shall not be applicable or enforceable unless and until there is a final court determination that he is not entitled to indemnification as to which all rights of appeal have been exhausted or have expired. Such expenses incurred by other employees or agents of the Corporation may, at the discretion of the Board of Directors, be so paid on such terms and conditions, including receipt of the undertaking to repay as described above, as the Board of Directors deems appropriate.

Section 7. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, trustee or agent of another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under this Article VIII. The Corporation shall not be obligated under this Article VIII to make any payment in connection with any claim made against any person if and to the extent that such person has actually received payment therefor under any insurance policy or policies.

Section 8. Non-Exclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any provision of these Bylaws, agreement, vote of shareholders or disinterested directors or otherwise, both as to action by a director, officer, employee or agent in his official capacity and as to action in another capacity while holding such office or position. Except as otherwise provided in Section 9 of this Article VIII, but notwithstanding any other provision of this Article VIII, it is the policy of the Corporation that indemnification of and expense advances to directors and officers of the Corporation shall be made to the fullest extent permitted by law, and, accordingly, in the event of any change in law, by legislation or otherwise, permitting greater indemnification of and/or expense advances to any such person, the provisions of this Article VIII shall be construed so as to require such greater indemnification and/or expense advances. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this Article VIII but whom the Corporation has the power to indemnify under the provisions of the DGCL or otherwise. The provisions of this Article VIII shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person.

17

Section 9. Certain Persons Not Entitled to Indemnification. Notwithstanding any other provision of this Article VIII, no person shall be entitled to indemnification under this Article VIII or to advances under Section 6 of this Article VIII with respect to any action, suit, proceeding or claim brought or made by him against the Corporation, other than an action, suit, proceeding or claim seeking, or defending such person’s right to, indemnification and/or expense advances pursuant to this Article VIII or otherwise.

Section 10. Successors; Meaning of Certain Terms for Purposes of Article VIII. This Article VIII shall be binding upon and enforceable against any direct or indirect successor, by purchase, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Corporation. For purposes of this Article VIII, but subject to the provisions of any agreements relating to any merger or consolidation, references to the “Corporation” shall include any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger with the Corporation which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees so that any person who is or was a director, officer or employee of such constituent corporation, or who is or was serving at the request of such constituent corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article VIII with respect to the Corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article VIII.

Section 11. Severability. In the event that any of the provisions of this Article VIII (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the fullest extent permitted by law.

ARTICLE IX

MISCELLANEOUS

Section 1. Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors, and unless otherwise determined, shall end on December 31st of each year.

Section 2. Corporate Seal. The seal of the Corporation shall be in the form of a circle and shall bear the name of the Corporation and the word “Delaware” as impressed to the margin hereof.

Section 3. Amendments. Except as otherwise required by the Certificate of Incorporation, these Bylaws (including, without limitation, this Article IX) may be altered, amended or repealed, or new

18

Bylaws may be adopted, by the Board of Directors, with the exception of Article III, Section 2, regarding Classification of the Board, which can only be modified with the approval of a majority of shareholders qualified to vote.

Section 4. Definitions. Terms defined in the Certificate of Incorporation and not otherwise defined in these Bylaws shall have the same meanings when used in these Bylaws.

These Amended and Restated Bylaws have been duly adopted and approved by the Corporation’s Board of Directors, and are effective, as of February 10^th, 2004.

/s/    C. Wayne Alderman

Name: C. Wayne Alderman

Title: Secretary

19

EX-21.1

EXHIBIT 21.1

AUBURN NATIONAL BANCORPORATION INC AND SUBSIDIARIES

SUBSIDIARIES

DIRECT SUBSIDIARIES

AuburnBank

Auburn National Bancorporation Capital Trust I

INDIRECT SUBSIDIARIES

AUB Holdings Corp.

AUB, Inc.

Banc of Auburn, Inc.

EX-23.1

EXHIBIT 23.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

CONSENT OF ACCOUNTANTS

The Board of Directors

Auburn National Bancorporation, Inc.

We consent to the incorporation by reference in the registration statement (No. 333-03516) on Form S-3 and the registration statement (No. 333-87626) on Form S-8 of Auburn National Bancorporation, Inc. of our report dated March 15, 2004, relating to the consolidated balance sheets of Auburn National Bancorporation, Inc. and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2003, which report appears in the December 31, 2003 annual report on Form 10-K of Auburn National Bancorporation, Inc.

Our report refers to a change in the method of accounting for derivative instruments and hedging activities in 2001.

/s/    KPMG LLP

Birmingham, Alabama

March 29, 2004

EX-31.1

EXHIBIT 31.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

CERTIFICATION PURSUANT TO

RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, E.L. Spencer, Jr., certify that:

1. I have reviewed this Annual Report on Form 10-K of Auburn National Bancorporation, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2004

/s/ E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-31.2

EXHIBIT 31.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

CERTIFICATION PURSUANT TO

RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, C. Wayne Alderman, certify that:

1. I have reviewed this Annual Report on Form 10-K of Auburn National Bancorporation, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

d) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

e) disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

c) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2004

/s/ C. Wayne Alderman

Director of Financial Operations

EX-32.1

EXHIBIT 32.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2002, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 30, 2004

/s/ E.L. Spencer, Jr.

E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-32.2

EXHIBIT 32.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2002, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, C. Wayne Alderman, Director of Financial Operations of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 30, 2004

/s/ C. Wayne Alderman

C. Wayne Alderman

Director of Financial Operations