The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of the Auburn National Bancorporation, Inc. (the "Company") and its wholly-owned subsidiary, AuburnBank (the "Bank"). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements for the quarter ended March 31, 2009 and 2008, respectively.

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," "desired," "indicate," "would," "believe," "contemplate," "expect," "seek," "estimate," "evaluate," "continue," "plan," "point to," "project," "predict," "could," "intend," "target," "potential," and 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, business and market conditions; domestic and foreign;

• government monetary and fiscal policies;

• legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, and their application by governmental authorities;

• changes in accounting policies, rules and practices;

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

• credit risks of borrowers;

• changes in the prices, values, sales volumes and liquidity of residential and commercial real estate, as well as securities;

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

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

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

• changes in the availability and cost of credit and capital in the financial markets;

• 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 events that may affect general economic conditions and economic confidence; and

• other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our annual report on Form 10-K for the year ended December 31, 2008 and subsequent quarterly and current reports. See Part II, Item 1A, "RISK FACTORS."

All written or oral forward-looking statements that are made by or 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.

Business

Auburn National Bancorporation, Inc. (the "Company") is a one-bank holding company established in 1984, and incorporated under the laws of the State of Delaware. AuburnBank (the "Bank"), the Company's principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its business in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches in Auburn, Opelika, Hurtsboro and Notasulga, Alabama. In-store branches are located in the Auburn and Opelika Kroger stores, as well as Wal-Mart SuperCenter stores in Auburn, Opelika and Phenix City, Alabama. Mortgage loan offices are located in Phenix City, Valley, and Mountain Brook, Alabama.

Summary of Results of Operations



                                                   Three Months Ended March 31
     (In thousands, except per share amounts)       2009                2008

     Net interest income (a)                    $       4,884       $       4,642
     Less: tax-equivalent adjustment                      359                 321

     Net interest income (GAAP)                         4,525               4,321
     Noninterest income (loss)                            (89 )             1,373

     Total revenue                                      4,436               5,694
     Provision for loan losses                            550                  60
     Noninterest expense                                3,553               3,149
     Income tax expense                                    87                 634

     Net earnings                                         246               1,851

Basic and diluted earnings per share $ 0.07 $ 0.50

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company's net earnings were approximately $246 thousand, or $0.07 per share, for the first quarter of 2009, compared to $1.9 million, or $0.50 per share, for the first quarter of 2008.

Excluding the effects of non-operating items such as securities gains and other-than-temporary impairment charges, first quarter 2009 operating net earnings were approximately $1.8 million, or $0.51 per share, compared to first quarter 2008 operating net earnings of approximately $1.8 million, or $0.50 per share.

Net interest income (tax-equivalent) was approximately $4.9 million for the first quarter of 2009, an increase of 5% from the first quarter of 2008 reflecting balance sheet growth. Average loans were up to $372.7 million in the first quarter of 2009, an increase of $42.9 million, or 13%, from the first quarter of 2008. Average deposits were up to $580.9 million in the first quarter of 2009, an increase of 14% from the first quarter of 2008.

Although the Company's annualized net charge-off ratio increased to 0.45% in the first quarter of 2009 from 0.11% in the first quarter of 2008, the Company's credit quality continues to compare favorably to industry peers. Nonperforming assets declined on a linked-quarter basis. Nonperforming assets were 1.24% of total loans and foreclosed properties at March 31, 2009, compared to 1.29% at December 31, 2008. Approximately $4.3 million of the $4.7 million in nonperforming assets at March 31, 2009 is related to one purchased loan participation. Excluding the effects of this loan participation, nonperforming assets were only 0.09% of total

loans and foreclosed properties. The provision for loan losses increased to $550 thousand in the first quarter of 2009 compared with $60 thousand in the first quarter of 2008. The increase in provision for loan losses reflects the credit risk associated with loan portfolio growth and an increase in net charge-offs.

Operating noninterest income (which excludes non-operating items mentioned below) was approximately $2.0 million in the first quarter of 2009, an increase of $0.7 million or 53% from the first quarter of 2008. This increase is largely due to an increase in mortgage lending income. Mortgage lending income was approximately $1.3 million in the first quarter of 2009, an increase of approximately $0.9 million from the first quarter of 2008.

Total noninterest income (loss) was a loss of $89 thousand in the first quarter of 2009, compared to approximately $1.4 million from the first quarter of 2008. Non-operating noninterest income in the first quarter of 2009 included a $2.1 million net loss on securities. The net loss on securities was attributable to a non-cash other-than-temporary impairment charge of $3.0 million, offset by a $0.9 million gross gain on the sale of securities.

Noninterest expense was approximately $3.6 million in the first quarter of 2009, an increase of approximately $0.4 million, or 13%, from the first quarter of 2008. The increase was primarily related to increases in salaries and benefits expense and other noninterest expense.

In the first quarter of 2009, the Company paid cash dividends of $693 thousand, or $ 0.19 per share. The Company's balance sheet remains strong and well capitalized under regulatory guidelines with a Tier 1 risk-based capital ratio of 13.76% and a Tier 1 leverage ratio of 8.10% at March 31, 2009.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting principles and general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses and fair value measurements, were critical to the determination of our financial position and results of operations. 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 judgments. These estimates and judgments involve significant uncertainties, and are susceptible to change. If different conditions exist or occur - depending upon the magnitude of the changes; then our actual financial condition and financial results could differ significantly. For a more detailed discussion on these critical accounting policies, see "CRITICAL ACCOUNTING POLICIES" on pages 30-31 of the Company's annual report on Form 10-K for the year ended December 31, 2008.

Average Balance Sheet and Interest Rates



                                                             Quarter ended March 31
                                                      2009                           2008
                                               Average      Yield/            Average      Yield/

(Dollars in thousands)                         Balance       Rate             Balance       Rate

Loans and loans held for sale                $   377,560        5.74%       $   332,741        7.01%
Securities - taxable                             272,370        4.80%           259,046        5.11%
Securities - tax-exempt                           66,065        6.48%            59,247        6.41%

Total securities                                 338,435        5.13%           318,293        5.35%
Federal funds sold                                11,256        0.22%             2,513        2.40%
Interest bearing bank deposits                       918        0.00%               758        4.78%

Total interest-earning assets                    728,169        5.37%           654,305        6.18%

Deposits:
NOW                                               86,417        0.98%            65,478        2.46%
Savings and money market                          88,960        1.24%           127,208        2.29%
Certificates of deposits less than
$100,000                                         143,143        3.23%            90,937        5.34%
Certificates of deposits and other time
deposits of $100,000 or more                     188,047        4.11%           157,737        4.43%

Total interest-bearing deposits                  506,567        2.82%           441,360        3.71%
Short-term borrowings                             12,799        0.51%            13,541        2.85%
Long-term debt                                   123,365        3.98%           116,581        4.32%

Total interest-bearing liabilities               642,731        3.00%           571,482        3.81%

Net interest income and margin               $     4,884        2.72%       $     4,642        2.85%

RESULTS OF OPERATIONS

Net Interest Income and Margin

Tax-equivalent net interest income increased 5% in the first quarter of 2009 from the first quarter of 2008 as a result of balance sheet growth. Net interest margin decreased 13 basis points to 2.72%.

The tax-equivalent yield on total interest earning assets decreased 81 basis points in the first quarter of 2009 from the first quarter of 2008, to 5.37%. This decrease was driven by a 127 basis point decrease in the yield on loans and loans held for sale to 5.74% and a 22 basis point decrease in the tax-equivalent yield on total securities to 5.13%.

The cost of total interest-bearing liabilities decreased 81 basis points in the first quarter of 2009 from the first quarter of 2008, to 3.00%. This decrease was driven by an 89 basis point decrease in the cost of total interest-bearing deposits to 2.82%, a 234 basis point decrease in the cost of short-term borrowings to 0.51% and a 34 basis point decrease in the cost of long-term debt to 3.98%. The average federal funds rate during the first quarter of 2009 was 300 basis points lower than the average for the same period in 2008.

Noninterest Income (Loss)



                                                   Quarter ended March 31
      (Dollars in thousands)                       2009                2008

      Service charges on deposit accounts    $              303    $         311
      Mortgage lending                                    1,330              470
      Bank-owned life insurance                              98              122
      Securities (losses) gains, net                    (2,123)               43
      Other                                                 303              427

      Total noninterest income (loss)        $             (89)    $       1,373

The major components of noninterest income are service charges on deposit accounts, mortgage lending income, income from bank-owned life insurance, securities gains (losses), net, and other noninterest income.

Noninterest income decreased by approximately $1.5 million in the first quarter of 2009 compared to the same period in 2008. The primary reason for the decrease was a net securities loss of $2.1 million, offset by an increase in mortgage lending income of $0.9 million. The net loss on securities was attributable to a non-cash other-than-temporary impairment charge of $3.0 million, offset by a $0.9 million gross gain on the sale of securities. Mortgage lending income typically fluctuates as mortgage interest rates change and is primarily attributable to increased volume in the origination and sale of new mortgage loans.

Noninterest Expense



                                                Quarter ended March 31
           (In thousands)                     2009                   2008

           Salaries and benefits          $        2,049          $     1,853
           Net occupancy and equipment               344                  306
           Professional fees                         161                  158
           Other                                     999                  832

           Total noninterest expense      $        3,553          $     3,149

The major components of noninterest expense are salaries and benefits, net occupancy and equipment, professional fees, and other noninterest expense.

Noninterest expense increased 13%, or $0.4 million in the first quarter of 2009 from the first quarter of 2008. The increase was primarily related to increases in salaries and benefits expense and other noninterest expense. Salaries and benefits expense increased primarily due to commissions paid to our mortgage originators as a result of increased origination volume. Other noninterest expense increased due to various factors, including an increase in FDIC insurance premiums, despite being assessed at the FDIC's lowest rate.

Income Tax Expense

The Company recognized income tax expense of $87 thousand in the first quarter of 2009, compared to income tax expense of $634 thousand in the first quarter of 2008. The decrease in income tax expense is largely due to a decrease in pre-tax earnings during the first quarter of 2009. The Company's effective tax rate for the first quarter of 2009 was 26.13%, compared to an effective tax rate of 25.51% for the first quarter of 2008. Despite an increase in tax-exempt interest income recognized as a percentage of pre-tax earnings during the first quarter of 2009, the Company's overall effective tax rate increased in the first quarter of 2009 due to the recognition of a valuation allowance related to a capital loss for income tax purposes on an investment in the common stock of Silverton Financial Services, Inc. The valuation allowance reduced the deferred tax asset created by the first quarter 2009 other-than-temporary impairment charge to an amount management believes will more-likely-than-not be realized.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $358.4 million and $302.7 million as of March 31, 2009 and December 31, 2008, respectively. The net unrealized loss on securities available-for-sale was $1.4 million at March 31, 2009 compared to an unrealized net gain of $1.0 million at December 31, 2008. Decreases in the fair value of securities available-for-sale during the first quarter of 2009 were primarily driven by changes in the values of trust preferred securities.

The average yield earned on total securities was 5.13% in the first quarter of 2009 and 5.35% in the first quarter of 2008.

Loans



                                      2009                                     2008

                                     First            Fourth           Third          Second           First
(In thousands)                      Quarter           Quarter         Quarter         Quarter         Quarter

Commercial, financial and
agricultural                     $       64,126          63,338          60,387          60,418          66,272
Leases - commercial                         316             341             374             431             459
Real estate - construction:
Commercial                                3,088           3,019           4,056           7,549           8,706
Residential                               9,634          10,151          14,194          12,891           9,574
Real estate - mortgage:
Commercial                              216,469         210,353         194,659         183,415         165,402
Residential                              69,931          69,736          68,888          67,408          68,643
Consumer installment                     10,871          12,481          12,649          13,480          12,317

Total loans                             374,435         369,419         355,207         345,592         331,373
Less: unearned income                      (250 )          (257 )          (299 )          (284 )          (290 )

Loans, net of unearned income    $      374,185         369,162         354,908         345,308         331,083

Total loans, net of unearned income, were $374.2 million as of March 31, 2009, an increase of $5.0 million, or 1%, from $369.2 million at December 31, 2008. Growth in commercial real estate mortgage loans was the primary driver of the increase. As of March 31, 2009, commercial real estate mortgage loans increased $6.1 million from December 31, 2008.

Three loan categories represented the majority of the loan portfolio as of March 31, 2009. Commercial real estate mortgage loans represented 58%, residential real estate mortgage loans represented 19% and commercial, financial and agricultural loans represented 17% of the Bank's total loans at March 31, 2009.

The average yield earned on loans and loans held for sale was 5.74% in the first quarter of 2009 and 7.01% in the first quarter of 2008.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management deems appropriate to adequately cover the probable losses in the loan portfolio. As of March 31, 2009 and December 31, 2008, respectively, the allowance for loan losses was $4.5 million and $4.4 million, which management deemed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under "CRITICAL ACCOUNTING POLICIES" on pages 30 - 31 of the Company's annual report on Form 10-K for the year ended December 31, 2008.

A summary of the changes in the allowance for loan losses during the first quarter of 2009 and the previous four quarters are presented below.

                                        2009                                          2008

                                       First              Fourth             Third            Second             First
(In thousands)                        Quarter             Quarter           Quarter           Quarter           Quarter

Balance at beginning of period     $        4,398             4,226             4,049             4,074             4,105
Charge-offs                                  (441 )             (88 )            (238 )            (240 )            (139 )
Recoveries                                     25                10                35                35                48

Net (charge-offs) recoveries                 (416 )             (78 )            (203 )            (205 )             (91 )
Provision for loan losses                     550               250               380               180                60

Ending balance                     $        4,532             4,398             4,226             4,049             4,074

As noted in our critical accounting policies, management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.21% at March 31, 2009, compared to 1.19% at December 31, 2008. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment in their entirety either improve or weaken.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management's evaluation, should be adequate to provide coverage for the probable losses on outstanding loans. The provision for loan losses amounted to $550 thousand and $60 thousand for the quarter ended March 31, 2009 and 2008.

Based upon its evaluation of the loan portfolio, management believes the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at March 31, 2009. An increase in net charge-offs and the credit risk associated with loan portfolio growth in the first quarter of 2009 compared to the first quarter of 2008 was the primary reason for the increased provision expense.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover probable losses in the loan portfolio. While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are necessarily approximate. There exist factors beyond our control, such as general economic conditions both locally and nationally, which may negatively impact, materially, the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.

Nonperforming Assets

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, a general downturn in the economy which could affect employment rates in our market areas, general real estate market conditions, including values, nondistressed sales volumes, availability and costs of credit in the markets, generally, interest rate fluctuations, deteriorated or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and possible violations of laws and regulations.

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. At March 31, 2009, the Company had $4.5 million in loans on nonaccrual, compared to $4.4 million at December 31, 2008. This included approximately $4.3 million in participation interests purchased from Silverton Bank.

. . .