Audited Financial Statements NOTE 20: REGULATORY RESTRICTIONS AND CAPITAL RATIOS The Company and the Bank are subject to various regulatory capital requirements and policies administered by federal  and State of Alabama banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory – and  possibly additional discretionary – actions by regulators that, if undertaken, could have a material effect on the consolidated  financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the  Company and the 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, including anticipated capital needs, and the Federal Reserve is encouraging  the maintenance of higher levels of capital well above the minimum ratios and is expected to propose higher capital  requirements to implement the Dodd-Frank Act and Basel III capital requirements. Supervisory assessments of capital  adequacy may differ significantly from conclusions based solely upon risk-based capital ratios. Quantitative measures  established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and  ratios (set forth in the table below) Tier 1 leverage capital ratio, Tier 1 risk-based ratio and total risk-based ratio. Management believes, as of December 31, 2011, that the Company and the Bank meet all capital adequacy requirements to  which they are subject. As of December 31, 2011, the Bank is “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. Management has not received any notification from the Company’s or the Bank's  regulators that changes the Bank’s regulatory capital status. The actual capital amounts and ratios and the aforementioned minimums as of December 31, 2011 and 2010 are  presented below.  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 law and Federal Reserve policy 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  page 75 Minimum for capital Minimum to be  Actual adequacy purposes well capitalized (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio At December 31, 2011: Tier 1 Leverage Capital Auburn National Bancorporation $ 68,220 8.82 % $ 30,927 4.00 % N/A N/A AuburnBank 67,542 8.75 30,868 $ 38,585 5.00 % Tier 1 Risk-Based Capital Auburn National Bancorporation $ 68,220 15.40 % $ 17,715 4.00 % N/A N/A AuburnBank 67,542 15.23 17,742 $ 26,614 6.00 % Total Risk-Based Capital Auburn National Bancorporation $ 73,800 16.66 % $ 35,430 8.00 % N/A N/A AuburnBank 73,122 16.49 35,485 $ 44,356 10.00 % At December 31, 2010: Tier 1 Leverage Capital Auburn National Bancorporation $ 65,644 8.47 % $ 30,999 4.00 % N/A N/A AuburnBank 61,707 8.00 30,835 $ 38,544 5.00 % Tier 1 Risk-Based Capital Auburn National Bancorporation $ 65,644 14.57 % $ 18,017 4.00 % N/A N/A AuburnBank 61,707 13.82 17,863 $ 26,795 6.00 % Total Risk-Based Capital Auburn National Bancorporation $ 71,269 15.82 % $ 36,035 8.00 % N/A N/A AuburnBank 67,332 15.08 35,727 $ 44,658 10.00 %