content_image/249937.jpg
## NOTE 3: VARIABLE INTEREST ENTITIES 

The Company is involved in various entities that are considered to be variable interest entities (“VIEs”), as defined by authoritative accounting literature. Generally, a VIE is a corporation, partnership, trust or other legal structure that does not have equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. 

At December 31, 2011, the Company did not have any consolidated VIEs to disclose but did have certain nonconsolidated VIEs, discussed below. 

## Trust Preferred Securities 

The Company owns the common stock of a subsidiary business trust, Auburn National Bancorporation Capital Trust I, which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $7.0 million at the time of issuance. This trust meets the definition of a VIE of which the Company is not the primary beneficiary; the trust’s only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures of approximately $7.2 million are included in long-term debt and the Company’s equity interest in the business trust is included in other assets. Interest expense on the junior subordinated debentures is reported in interest expense on long-term debt. For regulatory reporting and capital adequacy purposes, the Federal Reserve Board has indicated that such trust preferred securities will continue to constitute Tier 1 Capital until further notice. 

## Affordable Housing Investments 

Periodically, the Company may invest in various limited partnerships that sponsor affordable housing projects in its primary markets and surrounding areas as a means of supporting local communities. These investments are designed to generate a return primarily through the realization of federal tax credits. These projects are funded through a combination of debt and equity and the partnerships meet the definition of a VIE. While the Company’s investment as a limited partner in a single entity may at times exceed 50% of the outstanding equity interests, the Company does not consolidate the partnerships due to the nature of the management activities of the general partner and the performance guaranties provided by the project sponsors. The Company typically provides financing during the construction and development of the properties; however, permanent financing is generally obtained from independent parties upon completion of a project. 

At December 31, 2011 and December 31, 2010, the Company had limited partnership investments of $5.2 million and $3.4 million, respectively, related to these projects, which are included in other assets. At December 31, 2011 the Company had no unfunded commitments related to affordable housing investments. At December 31, 2010, the Company had unfunded commitments related to affordable housing investments of $4.4 million, of which $1.9 million was included in accrued expenses and other liabilities. 

Additionally, the Company had no outstanding loan commitments or funded loans outstanding with any of the partnerships at December 31, 2011. The company had outstanding loan commitments with certain of the partnerships totaling $11.4 million at 2010. The funded portion of these loans was approximately $8.9 million at December 31, 2010. The funded portions of these loans are included in loans, net of unearned income. 

The following table summarizes VIEs that are not consolidated by the Company as of December 31, 2011. 

<img src='content_image/249937.jpg'>

(a) Maximum loss exposure represents the Company's current net investment of $5.2 million included in other assets. 

