**Exhibit10.71**

 

**AGREEMENT AND PLAN OF REORGANIZATION AND MERGER**

 

 

**DATED: AUGUST 20, 2003**

 

 

**BY AND BETWEEN**

 

 

**WESTERN SIERRA BANCORP**

 

**AND**

 

**AUBURN COMMUNITY BANCORP**

 

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**AGREEMENT AND PLAN OF REORGANIZATION AND MERGER**

 

This Agreement and Plan ofReorganization and Merger (the “Agreement”) is entered into as ofAugust 20, 2003 by and between Western Sierra Bancorp, a Californiacorporation (“Western”), and Auburn Community Bancorp, a California corporation(“Auburn”).

 

**RECITALS:**

 

WHEREAS, the respectiveBoards of Directors of Auburn and Western have determined that it is in thebest interests of Auburn and Western and their respective shareholders forAuburn to be merged with Western, upon the terms and subject to the conditionsset forth in this Agreement and in accordance with the California CorporationsCode and other applicable laws;

 

WHEREAS, Auburn CommunityBank (“AC Bank”) is a wholly-owned subsidiary of Auburn;

 

WHEREAS, each of the Boardsof Directors of Auburn and Western have approved this Agreement and thetransactions contemplated hereby;

 

WHEREAS, Auburn’s Board ofDirectors has resolved to recommend approval of the Merger of Auburn andWestern to its shareholders; and

 

WHEREAS, upon theconsummation of the Merger of Auburn with Western, AC Bank shall become awholly-owned subsidiary of Western.

 

NOW, THEREFORE, inconsideration of these premises and the representations, warranties andagreements herein contained, Auburn and Western hereby agree as follows:

 

**ARTICLE 1. DEFINITIONS**

 

As used in this Agreement, the followingterms shall have the meanings set forth below:

 

“AC Bank” shall mean AuburnCommunity Bank.

 

“Acquisition Event” shallmean any of the following:

 

(a)                                  Auburn’s Board of Directors shall haveapproved or Auburn shall have authorized, recommended, publicly proposed orpublicly announced an intention to authorize, recommend or propose, or shallhave entered or announced an intention to enter into a letter of intent, anagreement-in-principle or a definitive agreement with any Person (other thanWestern or any of its respective Subsidiaries) to effect, an AcquisitionTransaction or failed to publicly oppose a Tender Offer or an Exchange Offer(as defined below).  As used herein, theterm “Acquisition Transaction” shall mean (i) a merger, consolidation orsimilar transaction involving Auburn, (ii) the disposition, by sale, lease,exchange, dissolution or liquidation, or otherwise, of all or substantially allof the assets of Auburn or any asset or assets of Auburn the disposition orlease of which would result in a material change in the business or businessoperations of Auburn, a transfer of any shares of stock or other securities ofAuburn by Auburn, or a material change in the assets, liabilities or results ofoperations or the future prospects of Auburn, including, but not limited to agrant of an option entitling any Person to acquire any shares of stock ofAuburn or any assets material to the business of Auburn; or (iii) the issuance,other than pursuant to outstanding stock options, sale or other disposition byAuburn (including, without limitation, by way of merger, consolidation, shareexchange or any similar transaction) of shares of Auburn Common Stock or otherEquity Securities, or the grant of any option, warrant or other right to acquireshares of Auburn Common Stock or other Equity Securities, representingdirectly, or on an as-exercised, as-exchanged or as-converted

 

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basis (in the case of options, warrants, rights or exchangeable orconvertible Equity Securities), 15% or more of the voting securities of Auburn;or

 

(b)                                 Prior to termination of this Agreement (i)any Person (other than a person who is a party to a Director-ShareholderAgreement) shall have increased the number of shares of Auburn Common Stockover which such person has beneficial ownership (as such term is defined inRule 13d-3 promulgated under the Exchange Act) by a number that is greater than1% of the then outstanding shares of Auburn Common Stock if, after givingeffect to such increase, such Person owns, beneficially, more than 5% of theoutstanding shares of Auburn Common Stock, or (ii) any “group” (as such term isdefined under the Exchange Act) shall have been formed which beneficially owns,or has the right to acquire beneficial ownership of, more than 5% of the thenoutstanding shares of Auburn Common Stock.

 

“Acquisition Proposal” shallhave the meaning given such term in Section 6.2.5.

 

“Affected Party” shall havethe meaning given to it in Section 5.7.

 

“Affiliate” or “affiliate”shall mean, with respect to any other Person, any Person that, directly orindirectly, controls or is controlled by or is under common control with suchPerson.

 

“Affiliate Agreements” shallhave the meaning given to such term in Section 5.3.3.

 

“Auburn” shall mean AuburnCommunity Bancorp.

 

“Auburn Collateralizing RealEstate” shall have the meaning given such term in Section 3.23.1.

 

“Auburn Common Stock” shallmean the common stock, no par value, of Auburn.

 

“Auburn Documents” shallhave the meaning given to such term in Section 3.6.2.

 

“Auburn Fairness Opinion”shall have the meaning given to such term in Section 7.3.6.

 

“Auburn Filings” shall havethe meaning given such term in Section 3.6.1.

 

“Auburn FinancialStatements” shall have the meaning given to such term in Section 3.7.3.

 

“Auburn Material AdverseEvent” shall have the meaning given such term in Section 8.1.8.

 

“Auburn Properties” shallhave the meaning given such term in Section 3.23.1.

 

“Auburn Stock Options” shallmean any options to purchase any shares of Auburn Common Stock or any otherEquity Securities of Auburn granted on or prior to the Effective Time, whetherpursuant to the Auburn Stock Option Plan or otherwise.

 

“Auburn Stock Option Plan”shall mean Auburn’s written Stock Option Plan as described in Schedule 3.5and 3.24 hereto.

 

“Auburn Superior Proposal”shall have the meaning set forth in Section 6.2.5.

 

“Average Closing Price”shall mean the average of the daily closing price of a share of Western CommonStock reported on the NASDAQ National Market System during the 20 consecutivetrading days ending at the end of the third trading day immediately precedingthe Effective Time.

 

“Benefit Arrangement” shallhave the meaning given such term in Section 3.21.4.

 

“BHCA” shall mean the BankHolding Company Act of 1956, as amended.

 

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“Business Day” shall meanany day, other than a Saturday, Sunday or any other day, such as a legalholiday, on which California state banks in California are not open forsubstantially all their banking business.

 

“California CorporationsCode” shall mean the General Corporation Law of the State of California, asamended from time to time.

 

“CDFI” shall mean theCalifornia Department of Financial Institutions.

 

“Certificates” shall havethe meaning given to such term in Section 2.6.4.

 

“Chapter 13” shall have themeaning given to such term in Section 2.7.

 

“Classified Assets” shallhave the meaning given to such term in Section 6.1.15.

 

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“Closing” shall have themeaning given to such term in Section 2.1.

 

“Closing Date” shall havethe meaning given to such term in Section 2.1.

 

“Closing Schedules” shallhave the meaning given to such term in Section 5.7.

 

“Conversion Rate of StockOptions” shall have the meaning given to such term in Section 2.5.

 

“Default” shall mean, as toany party to this Agreement, a failure by such party to perform, in anymaterial respect, any of the agreements or covenants of such party contained inArticles 5 or 6.

 

“Determination Date” shallmean the last business day of the calendar month immediately preceding thecalendar month in which the Effective Time occurs.

 

“Director-ShareholderAgreement” shall have the meaning given such term in Section 7.2.9.

 

“Dissenters’ Set Aside”shall have the meaning given such term in Section 2.6.1 (a).

 

“Dissenting Shares” shallmean shares of Auburn Common Stock or Western Common Stock which come withinall of the descriptions set forth in Subparagraphs (1), (2), (3) and (4) ofParagraph (b) of Section 1300 of the California Corporations Code.

 

“Dissenting ShareholderNotices” shall mean the notice required to be given to record holders ofDissenting Shares pursuant to Paragraph (a) of Section 1301 of theCalifornia Corporations Code.

 

“Effective Time” shall havethe meaning given such term in Section 2.1.

 

“Employee Plan” shall havethe meaning given such term in Section 3.21.3.

 

“Environmental Laws” shallmean and include any and all laws, statutes, ordinances, rules, regulations,orders, or determinations of any Governmental Entity pertaining to health or tothe environment, including, without limitation, the Clean Air Act, as amended,the Comprehensive Environmental Response, Compensation and Liability Act of1980, as amended (“CERCLA”), the Federal Water Pollution Control ActAmendments, the Occupational Safety and Health Act of 1970, as amended, theResource Conservation and Recovery Act of 1976, as amended (“RCRA”), the HazardousMaterials Transportation Act of 1975, as amended, the Safe Drinking Water Act,as amended, and the Toxic Substances Control Act, as amended.

 

“Equity Securities” shallhave the meaning given to such term in the Exchange Act.

 

“ERISA” shall mean the EmployeeRetirement Income Security Act of 1974, as amended.

 

“Exchange Act” shall meanthe Securities Exchange Act of 1934, as amended.

 

“Exchange Agent” shall meanComputershare or such other Person as Western shall have appointed to performthe duties set forth in Section 2.6.1 (a).

 

“Exchange Offer” shall meanthe commencement (as such term is defined in Rule 14d-2 under the Exchange Act)of an exchange offer or the filing by any Person of a registration statementunder the Securities Act with respect to an exchange offer to purchase anyshares of Auburn Common Stock or Western Common Stock such that, uponconsummation of such offer, such Person would own or control 15% or more of thethen outstanding shares of Auburn Common Stock or Western Common Stock.

 

“FDIC” shall mean theFederal Deposit Insurance Corporation.

 

“Federal Reserve Board”shall mean the Board of Governors of the Federal Reserve System.

 

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“GAAP” shall mean generallyaccepted accounting principles.

 

“Governmental Entity” shallmean any court, federal, state, local or foreign government or anyadministrative agency or commission or other governmental authority orinstrumentality whatsoever.

 

“Hazardous Substances” shallhave the meaning given such term in Section 3.23.4.

 

“IRC” shall mean theInternal Revenue Code of 1986, as amended.

 

“Knowledge” shall mean, withrespect to any representation or warranty contained in this Agreement; theactual knowledge, after reasonable inquiry, of any director or executiveofficer of Auburn or Western.

 

“Last Regulatory Approval”shall mean the final Requisite Regulatory Approval required, from anyGovernmental Entity under applicable federal laws of the United States and lawsof any state having jurisdiction over the Merger, to permit the parties toconsummate the Merger.

 

“Material Adverse Effect”shall mean a material adverse effect: (i) on the business, assets, results ofoperations, financial condition or prospects of a Person and its subsidiaries,if any, taken as a whole (unless specifically indicated otherwise); or (ii) onthe ability of a Person that is a party to this Agreement to perform itsobligations under this Agreement or to consummate the transactions contemplatedby this Agreement.

 

“Merger” shall have themeaning set forth in Section 2.1.

 

“Merger Agreement” shallhave the meaning given to such term in Section 2.1.

 

“No Election Shareholder”shall have the meaning given to such term in Section 2.6.2 (c).

 

“OREO” shall have themeaning given such term in Section 3.13.

 

“Perfected DissentingShares” shall mean Dissenting Shares as to which the recordholder has madedemand on Auburn in accordance with Paragraph (b) of Section 1301 of theCalifornia Corporations Code and has not withdrawn such demand prior to theEffective Time.

 

“Persons” or “persons” shallmean an individual, corporation, partnership, limited liability company, jointventure, trust or unincorporated organization, Governmental Entity or any otherlegal entity whatsoever.

 

“Proxy Statement/Prospectus”shall have the meaning given to such term in Section 3.7.2.

 

“Registration Statement”shall have the meaning given to such term in Section 3.7.2.

 

“Regulatory Authority” shallmean any Governmental Entity, the approval of which is legally required forconsummation of the Merger.

 

“Requisite RegulatoryApprovals” shall have the meaning set forth in Section 7.1.2.

 

“Returns” shall mean allreturns, declarations, reports, statements, and other documents required to befiled with respect to federal, state, local and foreign Taxes, and the term“Return” means any one of the foregoing Returns.

 

“SEC” shall mean theSecurities and Exchange Commission.

 

“Securities Act” shall meanthe Securities Act of 1933, as amended.

 

“Subsidiary” shall mean,with respect to any corporation (the “parent”), any other corporation,association or other business entity of which more than 50% of the shares ofthe Voting Stock are owned or controlled,

 

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directly or indirectly, bythe parent or by one or more Subsidiaries of the parent, or by the parent andone or more of its Subsidiaries.

 

“Surviving Corporation”shall have the meaning given to such term in Section 2.1.

 

“Taxes” shall mean allfederal, state, local and foreign net income, gross income, gross receipts,sales, use, ad valorem, transfer, franchise, profits, license, lease, service,service use, withholding, payroll, employment, excise, severance, stamp,occupation, premium, property, windfall profits, customs, duties, or othertaxes, together with any interest and any penalties, additions to tax, oradditional amounts with respect thereto, and the term “Tax” means any one ofthe foregoing Taxes.

 

“Tax Filings” shall mean anyapplications, reports, statements or other Returns required to be filed withany local, state or federal Governmental Entity before the Merger may becomeeffective, including, but not limited to, any filing required to be made withthe California Franchise Tax Board to obtain a Tax Clearance Certificate forthe Merger.

 

“Tender Offer” shall meanthe commencement (as such term is defined in Rule 14d-2 under the Exchange Act)of a tender offer or the filing by any person of a registration statement underthe Securities Act with respect to, a tender offer to purchase any shares ofAuburn Common Stock or Western Common Stock such that, upon consummation ofsuch offer, such person would own or control 15% or more of the thenoutstanding voting securities of Auburn or Western.

 

“Understanding” shall havethe meaning set forth in Section 6.1.5.

 

“Voting Securities” or“Voting Stock” shall mean the stock or other securities or any other interestentitling the holders thereof to vote in the election of the directors,trustees or Persons performing similar functions of the Person in question,including, without limitation, nonvoting securities that are convertible orexchangeable into voting securities, but shall not include any stock or otherinterest so entitling the holders thereof to vote only upon the happening of acontingency (other than a conversion or exchange thereof into votingsecurities), whether or not such contingency has occurred.

 

“Western” shall mean WesternSierra Bancorp.

 

“Western Common Stock” shallmean the common stock, no par value per share, of Western.

 

“Western Documents” shallhave the meaning given to such term in Section 4.5.2.

 

“Western Filings” shall havethe meanings given such term in Section 4.5.1.

 

“Western FinancialStatements” shall mean the financial statements of Western for the year endedDecember 31, 2002.

 

“Western Material AdverseEvent” shall have the meaning given to such term in Section 8.1.9

 

“Western Stock Plans” shallhave the meaning set forth in Section 4.4.

 

**ARTICLE 2.  THEMERGER**

 

Section 2.1  The Merger.  Subject to the terms and conditions of this Agreement, aspromptly as practicable following the receipt of the Last Regulatory Approvaland the expiration of all applicable waiting periods, Auburn shall be mergedwith Western, with Western being the Surviving Corporation of the merger, allpursuant to the Agreement of Merger attached to this Agreement as Exhibit 2.1(the “Merger Agreement”) and in accordance with

 

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theapplicable provisions of the California Corporations Code (the “Merger”).  The closing of the Merger (the “Closing”)shall take place at a location and time and Business Day to be designated byWestern and reasonably concurred to by Auburn (the “Closing Date”) which shallnot, however, be later than thirty (30) days after receipt of the LastRegulatory Approval and expiration of all applicable waiting periods.  The Merger shall be effective when theMerger Agreement (together with any other documents required by law toeffectuate the Merger) shall have been filed with the Secretary of State of theState of California.  When used in thisAgreement, the term “Effective Time” shall mean the time of filing of theMerger Agreement with the Secretary of State, and “Surviving Corporation” shallmean Western.

 

Section 2.2  Effect of Merger.  By virtue of the Merger and at the EffectiveTime, all of the rights, privileges, powers and franchises and all property andassets of every kind and description of Auburn and Western shall be vested inand be held and enjoyed by the Surviving Corporation, without further act ordeed, and all the estates and interests of every kind of Auburn and Western,including all debts due to either of them, shall be as effectively the propertyof the Surviving Corporation as they were of Auburn and Western immediatelyprior to the Effective Time, and the title to any real estate vested by deed orotherwise in either Auburn or Western shall not revert or be in any wayimpaired by reason of the Merger; and all rights of creditors and liens uponany property of Auburn and Western shall be preserved unimpaired and all debts,liabilities and duties of Auburn and Western shall be debts, liabilities andduties of the Surviving Corporation and may be enforced against it to the sameextent as if such debts, liabilities and duties had been incurred or contractedby it, and none of such debts, liabilities or duties shall be expanded,increased, broadened or enlarged by reason of the Merger.

 

Section 2.3  Articles of Incorporation and Bylaws.  The Articles of Incorporation and Bylaws ofWestern in effect immediately prior to the Effective Time shall be the Articlesof Incorporation and Bylaws of the Surviving Corporation until amended, and thename of the Surviving Corporation shall be “Western Sierra Bancorp.”

 

Section 2.4  Conversion of  Western Stock.  Theauthorized and issued capital stock of Western immediately prior to theEffective Time, on and after the Effective Time, pursuant to the MergerAgreement and without any further action on the part of Western shall remain asthe common stock of the Surviving Corporation.

 

Section 2.5  Auburn Stock Options.  Prior to the Effective Time, Auburn shallmake arrangements satisfactory to Western for the cancellation of 4,000 of theAuburn Stock Options and the delivery of an agreement between Auburn and eachOption Holder of those 4,000 Auburn Stock Options, canceling such OptionHolder’s Auburn Stock Options in return for receipt immediately preceding theEffective Time of the difference between the exercise price of the option andthe Per Share Merger Consideration.  Inaddition, as of the Effective Time, the outstanding rights with respect to theremaining Auburn Stock Options for 5,000 shares of Auburn Common Stock pursuantto stock options under the Auburn Stock Option Plan  shall be converted into and become equivalent rights with respectto Western Common Stock determined by dividing the Per Share MergerConsideration by the Average Closing Price (the “Conversion Rate of StockOptions”) with a corresponding adjustment in the option price, and Westernshall assume each of those 5,000 Auburn Stock Options in accordance with theterms of the Auburn Stock Option Plans and the stock option agreement by whichit is evidenced.

 

Section 2.6  Exchange Amount; Conversion of AuburnCommon Stock.

 

2.6.1  Conversion of Auburn Common Stock.

 

At the Effective Time theconversion of each outstanding share of Auburn Common Stock shall proceed asfollows:

 

The terms used in thisprovision shall have the following meanings:

 

Initial Cash Component shallmean $7,500,000 in cash.

 

Initial Stock Componentshall mean 350,000 shares of Western Common Stock.

 

Adjusted Cash Componentshall mean the Initial Cash Component plus or minus the adjustment pursuant to Section 2.6.1(c), if any.

 

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Adjusted Stock Componentshall mean the Initial Stock Component plus the adjustment pursuant toSection 2.6.1 (d), if any.

 

Adjusted Value of the StockComponent shall mean the Adjusted Stock Component multiplied by the AverageClosing Price.

 

Adjusted MergerConsideration shall mean the sum of: (x) the Adjusted Cash Component, plus (y)the Adjusted Value of the Stock Component.

 

Pro Forma Shares shall meanthe sum of all outstanding shares of Auburn Common Stock, issued andoutstanding immediately prior to the Effective Time.

 

Adjusted Per Share MergerConsideration shall mean the Adjusted Merger Consideration divided by the ProForma Shares.

 

Remaining Adjusted CashComponent shall mean the remainder of (x) the Adjusted Cash Component, minus(y) cash equal to the Adjusted Per Share Merger Consideration multiplied by thetotal number of Perfected Dissenting Shares.

 

Adjusted Value of the PerShare Stock Component shall mean the Adjusted Value of the Stock Componentdivided by the remainder of (x) Pro Forma Shares, minus (y) the total number ofPerfected Dissenting Shares.

 

Remaining Adjusted Per ShareCash Component shall mean the Remaining Adjusted Cash Component divided by theremainder of (x) Pro Forma Shares, minus (y) the total number of PerfectedDissenting Shares.

 

Per Share MergerConsideration shall mean the combined value of the Adjusted Value of the PerShare Stock Component and the Remaining Adjusted Per Share Cash Component as ofthe Effective Time.

 

(a)  Western shall deliver to the Exchange Agentthe Adjusted Stock Component and the Remaining Adjusted Cash Component.  Each share of Auburn Common Stock, (exceptfor Perfected Dissenting Shares, if applicable) shall, by virtue of the Mergerand without any action on the part of the holder thereof, but subject toSections 2.6.2 and 2.6.5 hereof, be converted into the right to receive cash,Western Common Stock, or a combination thereof.  Western shall set aside, in cash out of the Adjusted CashComponent, for each Perfected Dissenting Share the Adjusted Per Share MergerConsideration (the “Dissenters’ Set Aside”).

 

(b)  The holders of certificates formerlyrepresenting shares of Auburn Common Stock shall cease to have any rights asshareholders of Auburn, except such rights, if any, as they may have pursuantto the California Corporations Code. Except as provided above, until certificates representing shares ofAuburn Common Stock are surrendered for exchange, the certificates of eachholder shall, after the Effective Time, represent for all purposes only theright to receive the Per Share Merger Consideration.

 

(c)  If the Average Closing Price remains between$30.00 and $34.00, there will be no adjustment to the Initial CashComponent.  If the Average Closing Priceis less than $30.00, then Western will increase the Initial Cash Component byan amount, up to $1,000,000, equal to $18,000,000 minus the sum of the InitialCash Component and the Adjusted Value of the Stock Component.  If the Average Closing Price is greater than$34.00, Western will subtract from the Initial Cash Component an amount, up to$1,000,000, equal to the sum of the Initial Cash Component and Adjusted Valueof the Stock Component minus $19,400,000.

 

(d)  If, subsequent to the date of this Agreementbut prior to the Effective Time, the outstanding shares of Western Common Stockshall, through a reclassification, recapitalization, stock dividend, stocksplit or reverse stock split have been increased, decreased, changed into orexchanged for a different number or kind of shares or securities, appropriateadjustment will be made to the Initial Stock Component.

 

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2.6.2  Cash/Stock Election.

 

The terms used in thisprovision shall have the following meanings:

 

Cash/Stock Election shallmean the process described herein by which each Auburn shareholder other than aholder of Perfected Dissenting Shares shall be permitted to state a preferenceto receive all cash or all stock or cash and/or stock in exchange for his orher shares of Auburn Common Stock.

 

Stock Elector shall mean anAuburn shareholder who has timely submitted the proper form expressing arequest to receive all shares of Western Common Stock as his or her Per ShareMerger Consideration.

 

Cash Elector shall mean anAuburn shareholder who has timely submitted the proper form expressing arequest to receive all cash as his or her Per Share Merger Consideration.

 

Cash/Stock Elector shallmean an Auburn shareholder who has timely submitted the proper form expressinga request to receive cash and/or shares of Western Common Stock as his or herPer Share Merger Consideration.

 

(a)  Each Auburn shareholder other than a holderof Perfected Dissenting Shares may state a preference to receive his or her PerShare Merger Consideration in any of the following: (x) all shares of WesternCommon Stock; (y) all cash; or (z) cash and/or shares of Western CommonStock.  The Adjusted MergerConsideration shall be allocated in accordance with the following provisions ofthis Section 2.6.2.

 

(b)  The Cash/Stock Election is subject to thelimitation that the aggregate shall not exceed the Remaining Adjusted CashComponent and the Adjusted Stock Component. Shares of Western Common Stock paid pursuant to the Cash/Stock Electionshall be valued at the Average Closing Price.

 

(c)  First, the election of the Stock Electorsshall be fulfilled by providing to each Stock Elector for each share of AuburnCommon Stock he or she owns the Per Share Merger Consideration in shares ofWestern Common Stock from the Adjusted Stock Component.  If the elections of all of the StockElectors cannot be fulfilled, then the Adjusted Stock Component shall be dividedamong the Stock Electors pro rata by the number of shares of their AuburnCommon Stock, and each Stock Elector shall receive cash from the RemainingAdjusted Cash Component for the remainder of the Per Share Merger Considerationfor each share of Auburn Common Stock which is not converted into shares ofWestern Common Stock and all other shareholders will only receive cash.

 

If there are any shares ofWestern Common Stock remaining from the Adjusted Stock Component after paymentto the Stock Electors, then each Cash/Stock Elector shall receive for eachshare of Auburn Common Stock he or she owns the Per Share Merger Considerationin shares of Western Common Stock.  Inthe event there are insufficient shares of Western Common Stock available topay all the Cash/Stock Electors in full with shares of Western Common Stock,then the left over Adjusted Stock Component shall be divided among theCash/Stock Electors pro rata by the number of shares of their Auburn CommonStock and each such Cash/Stock Elector shall receive cash from the Remaining AdjustedCash Component for the remainder of the Per Share Merger Consideration for eachshare of Auburn Common Stock which is not converted into shares of WesternCommon Stock and all other shareholders will only receive cash.

 

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If there are any shares ofWestern Common Stock remaining after payment to the Stock Electors andCash/Stock Electors, then, each holder of Auburn Common Stock other than aholder of Perfected Dissenting Shares that makes no election or an improperelection (“No Election Shareholder”) shall receive for each share of AuburnCommon Stock he or she owns the Per Share Merger Consideration in shares ofWestern Common Stock.  In the eventthere are insufficient shares of Western Common Stock available to pay all theNo Election Shareholders in full with shares of Western Common Stock, then theleft over Adjusted Stock Component shall be divided among the No ElectionShareholders pro rata by the number of shares of their Auburn Common Stock andeach such No Election Shareholder shall receive cash from the RemainingAdjusted Cash Component for the remainder of the Per Share Merger Considerationfor each share of Auburn Common Stock which is not converted into shares ofWestern Common Stock and all other shareholders will only receive cash.

 

If there are any shares ofWestern Common Stock remaining after payment to the Stock Electors, Cash/StockElectors and the No Election Shareholders, then the left over Adjusted StockComponent shall be divided among the Cash Electors pro rata by the number ofshares of their Auburn Common Stock and each such Cash Elector shall receivecash from the Remaining Adjusted Cash Component for the remainder of the PerShare Merger Consideration for each share of Auburn Common Stock which is notconverted into shares of Western Common Stock.

 

(d)  An Auburn shareholder may not make aCash/Stock Election until after the Effective Time and need not make aCash/Stock Election at all.  Promptlyfollowing the Effective Time, Western shall send to each Auburn shareholder aletter of transmittal describing the Cash/Stock Election in more detail andproviding forms for making the Cash/Stock Election, as desired.

 

(e)  The Cash/Stock Election, if made, must bemade by the Auburn shareholder and received by the Exchange Agent within 30calendar days following the Effective Time (the “Election Deadline”) for allshares held in the name of the Auburn shareholder (the “Effective ElectionStatement”).  An Auburn shareholder whoholds shares in two or more capacities or in different names may make aseparate Cash/Stock Election for each name or capacity in which shares areheld.  However, holders whose shares arerepresented by one or more certificates may make only one Cash/Stock Electionfor each such certificate.

 

(f)  Auburn shareholders who make Cash/StockElections have no assurance that they will receive all cash or all stock or anyspecific proportion thereof.

 

2.6.3  Reservation of Shares.  Prior to the Effective Time, the Board ofDirectors of Western shall reserve for issuance a sufficient number of sharesof Western Common Stock for the purpose of issuing its shares to theshareholders of Auburn in accordance herewith.

 

2.6.4  Exchange of Auburn Common Stock.

 

(a)  As soon as reasonably practicable after theEffective Time, holders of record of certificates formerly representing sharesof Auburn Common Stock (“Certificates”) shall be instructed to tender suchCertificates to the Exchange Agent pursuant to a letter of transmittal thatWestern shall deliver or cause to be delivered to such holders.  Such letter of transmittal shall specifythat risk of loss and title to Certificates shall pass only upon acceptance ofsuch Certificates by Western or the Exchange Agent.

 

(b)  After the Effective Time, each holder of aCertificate that surrenders such Certificate to Western or the Exchange Agentwill, upon acceptance thereof by Western or the Exchange Agent, be entitled tothe Per Share Merger Consideration payable in respect of the shares representedthereby as determined under Section 2.6.2.

 

(c)  Western or the Exchange Agent shall acceptCertificates upon compliance with such reasonable terms and conditions asWestern or the Exchange Agent may impose to effect an orderly exchange thereofin accordance with customary exchange practices.  Certificates shall be appropriately endorsed or accompanied bysuch instruments of transfer as Western or the Exchange Agent may reasonablyrequire.

 

(d)  Each outstanding Certificate, other thanthose representing Perfected Dissenting Shares, shall until duly surrendered toWestern or the Exchange Agent be deemed to evidence the right to receive thePer Share Merger Consideration payable in respect of the shares representedthereby.

 

(e)  After the Effective Time, holders ofCertificates shall cease to have rights with respect to the Auburn Common Stockpreviously represented by such Certificates, and their sole rights (other thanthe holders of Certificates representing Perfected Dissenting Shares) shall beto exchange such Certificates for the Per Share Merger Consideration.  At the Effective Time, Auburn shall delivera certified copy of a list of its shareholders to Western or the ExchangeAgent.  After the Effective Time, thereshall be no further transfer of Certificates on the records of Auburn, and ifsuch Certificates are presented to Auburn for transfer, they shall be canceledagainst delivery of the Per Share Merger Consideration.  Western shall not be obligated to deliverany Per Share Merger Consideration to any holder of Auburn Common Stock untilsuch holder surrenders the Certificates as

 

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providedherein.  No dividends declared will beremitted, nor any voting rights granted, to any person entitled to receiveWestern Common Stock under this Agreement until such person surrenders theCertificate representing the right to receive such Western Common Stock, atwhich time such dividends on whole shares of Western Common Stock with a recorddate on or after the Effective Time shall be remitted to such person, withoutinterest and less any taxes that may have been imposed thereon, and votingrights will be restored.  Certificatessurrendered for exchange by any person constituting an “affiliate” of Auburnfor purposes of Rule 145 under the Securities Act of 1933 and the rules andregulations thereunder (the “Securities Act”) shall not be exchanged forcertificates representing Western Common Stock until Western has received awritten agreement from such person as specified in Section 5.3.  Neither the Exchange Agent nor any party tothis Agreement nor any affiliate thereof shall be liable to any holder ofAuburn Common Stock represented by any Certificate for any consideration paidto a public official pursuant to applicable abandoned property, escheat orsimilar laws.  Western and the ExchangeAgent shall be entitled to rely upon the stock transfer books of Auburn toestablish the identity of those persons entitled to receive considerationspecified in this Agreement, which books shall be conclusive with respectthereto.  In the event of a dispute withrespect to ownership of stock represented by any Certificate, Western or theExchange Agent shall be entitled to deposit any consideration in respect thereofin escrow with an independent third party and thereafter be relieved withrespect to any claims thereto.

 

(f)  If any Per Share Merger Consideration is tobe issued to a person other than a person in whose name a surrenderedCertificate is registered, it shall be a condition of issuance that thesurrendered Certificate shall be properly endorsed or otherwise in proper formfor transfer and that the person requesting such issuance shall pay to Westernor the Exchange Agent any required transfer or other taxes or establish to thesatisfaction of Western or the Exchange Agent that such tax has been paid or isnot applicable.

 

(g)  In the event any Certificate shall have beenlost, stolen or destroyed, the owner of such lost, stolen or destroyedCertificate shall deliver to Western or the Exchange Agent an affidavit statingsuch fact, in form satisfactory to Western, and, at Western’s discretion, abond in such reasonable sum as Western or the Exchange Agent may direct asindemnity against any claim that may be made against Western or Auburn or itssuccessor or any other party with respect to the Certificate alleged to havebeen lost, stolen or destroyed.  Uponsuch delivery, the owner shall have the right to receive the Per Share MergerConsideration with respect to the shares represented by the lost, stolen ordestroyed Certificate.

 

2.6.5  No Fractional Shares.  Notwithstanding any other provision of thisAgreement, neither certificates nor scrip for fractional shares of WesternCommon Stock shall be issued in the Merger. Each holder who otherwise would have been entitled to a fraction of ashare of Western Common Stock (after taking into account all Certificates ofsuch holder) shall receive in lieu thereof cash (without interest) in an amountdetermined by multiplying the fractional share interest to which such holderwould otherwise be entitled by the Average Closing Price.  No such holder shall be entitled todividends, voting rights or any other rights in respect of any fractional shareinterest.

 

2.7 Dissenters’ Rights.  Shares of Auburn Common Stock, the holdersof which have lawfully dissented from the Merger in accordance with Chapter 13of the California Corporations Code (“Chapter 13”) and have timely filed withAuburn a written demand for purchase of his or her shares and have surrenderedhis or her stock certificates pursuant to Section 1302 of Chapter 13, areherein called “Dissenting Shares.” Dissenting Shares, the holders of which have not effectively withdrawnor lost their dissenters’ rights under Chapter 13 (“Perfected DissentingShares”), shall not be converted pursuant to Section 2.6 but the holdersthereof shall be entitled only to such rights as are granted by Chapter13.  Each holder of Perfected DissentingShares who is entitled to payment for his or her Auburn Common Stock pursuantto the provisions of Chapter 13 shall receive payment therefor from Western(but only after the amount thereof shall have been agreed upon or finallydetermined pursuant to such provisions).

 

If any holder of DissentingShares has effectively withdrawn or lost his or her dissenter’s rights underChapter 13 prior to the Election Deadline, an Effective Election Statement  submitted with respect to such shares willbe given effect in the same manner as other Effective Election Statements butif no Effective Election Statement is submitted, such shares will be treated asNo Election Shares.  If any holder ofDissenting Shares shall effectively withdraw or lose his or her dissenter’srights under Chapter 13 after the Election Deadline, the Dissenting Sharesowned by such holder shall be treated as No Election Shares.

 

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Section 2.8  Board of Directors of Western and AC Bankfollowing the Effective Time.  Atthe Effective Time, Jan T. Haldeman, or another director of Auburn if Mr.Haldeman is unable to serve, shall be appointed as a director of Western toserve until the next annual meeting of shareholders of Western and until suchsuccessors are elected and qualified. At the Effective Time, the then existing Board of Directors of AC Bankshall total nine directors with the seven existing directors of AC Bank and twopersons to be selected by Western.  TheChairman of the Board of Western shall be an attendee of the Board of Directorsof AC Bank and all committees of the Board of Directors of AC Bank.

 

**ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF AUBURN**

 

Auburn represents and warrants to Western asfollows (it being understood that all references to Auburn relative to theperiod on or before February 14, 2003 shall be deemed to refer to AC Bankwhere appropriate in the context):

 

Section 3.1  Organization; Corporate Power; Etc.  Auburn is a California corporation dulyorganized, validly existing and in good standing under the laws of the State ofCalifornia and has all requisite corporate power and authority to own, leaseand operate its properties and assets and to carry on its businesssubstantially as it is being conducted on the date of this Agreement.  Auburn is a bank holding company registeredunder the BHCA.  Each of Auburn’sSubsidiaries has all requisite corporate power and authority to own, lease andoperate its properties and to carry on its business substantially as it isbeing conducted on the date of this Agreement, except where the failure to havesuch power or authority would not have a Material Adverse Effect on Auburntaken as a whole or the ability of Auburn to consummate the transactionscontemplated by this Agreement.  Auburnhas all requisite corporate power and authority to enter into this Agreementand, subject to obtaining all requisite Regulatory Approvals, Auburn will havethe requisite corporate power and authority to perform its respectiveobligations hereunder with respect to the consummation of the transactionscontemplated hereby.  Auburn is the soleshareholder of AC Bank.  AC Bank is aCalifornia state-chartered bank authorized by the CDFI to conduct a generalbanking business in California.  AC Bankis not a member of the Federal Reserve System. AC Bank’s deposits are insured by the FDIC in the manner and to the fullextent provided by law.  Neither thescope of business or Auburn, or any Subsidiary of Auburn, including AC Bank,nor the location of any of their respective properties, requires that Auburn orany of its respective Subsidiaries be licensed or qualified to conduct businessin any jurisdiction other than those jurisdictions in which they are licensedor qualified to do business as a foreign corporation, where the failure to beso licensed or qualified would, individually or in the aggregate, have aMaterial Adverse Effect on Auburn taken as a whole.

 

Section 3.2  Licenses and Permits.  Except as disclosed on Schedule 3.2,Auburn and its Subsidiaries have all material licenses, certificates,franchises, rights and permits that are necessary for the conduct of theirrespective businesses, and such licenses are in full force and effect, exceptfor any failure to be in full force and effect that would not, individually orin the aggregate, have a Material Adverse Effect on Auburn or on the ability ofAuburn to consummate the transactions contemplated by this Agreement.  The properties, assets, operations andbusinesses of Auburn, and those of its Subsidiaries, including AC Bank, are andhave been maintained and conducted, in all material respects, in compliancewith all applicable licenses, certificates, franchises, rights and permits.

 

Section 3.3  Subsidiaries.  Other than as set forth onSchedule 3.3, there is no corporation, partnership, joint venture or otherentity in which Auburn owns, directly or indirectly (except as pledgee pursuantto loans or stock or other interest held as the result of or in lieu offoreclosure pursuant to pledge or other security arrangement) any equity orother voting interest or position.

 

Section 3.4  Authorization of Agreement; No Conflicts.

 

3.4.1  The execution and delivery of this Agreementand the Merger Agreement by Auburn, and the consummation of the transactionscontemplated hereby and thereby, have been duly authorized by all necessarycorporate action on the part of Auburn, subject only to the approval of thisAgreement, the Merger Agreement and the Merger by Auburn’s shareholders.  This Agreement has been duly executed anddelivered by Auburn and constitutes a legal, valid and binding obligation ofAuburn, enforceable in accordance with its terms, except as the enforceabilitythereof may be limited by bankruptcy, insolvency, moratorium or other similarlaws affecting the

 

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rightsof creditors generally and by general equitable principles.  The Merger Agreement, upon the receipt ofall Requisite Regulatory Approvals and the due execution and filing of suchMerger Agreement in accordance with the applicable provisions of the CaliforniaCorporations Code, will constitute a legal, valid and binding obligation ofAuburn, enforceable in accordance with its terms, except as the enforceabilitythereof may be limited by bankruptcy, insolvency, moratorium or other similarlaws affecting the rights of creditors generally and by general equitableprinciples.

 

3.4.2  Except as disclosed on Schedule 3.4,the execution and delivery of this Agreement and the Merger Agreement, and theconsummation of the transactions contemplated hereby and thereby, do not andwill not conflict with, or result in any violation of or default or loss of amaterial benefit under, any provision of the Articles of Incorporation orBylaws of Auburn, or except for the necessity of obtaining Requisite RegulatoryApprovals, and the approval of the shareholders of Auburn, any materialmortgage, indenture, lease, agreement or other material instrument or anypermit, concession, grant, franchise, license, judgment, order, decree,statute, law, ordinance, rule or regulation applicable to Auburn or any of itsassets or properties, other than any such conflict, violation, default or losswhich (i) will not have a Material Adverse Effect on Auburn, or on Westernfollowing consummation of the Merger; or (ii) will be cured or waived prior tothe Effective Time.  No materialconsent, approval, order or authorization of, or registration, declaration orfiling with, any Governmental Entity is required in connection with theexecution and delivery of this Agreement or the Merger Agreement by Auburn orthe performance by Auburn of its obligations hereunder and thereunder, exceptfor (a) filings required in order to obtain the Requisite Regulatory Approvals;(b) the filing and approval of the Merger Agreement with the Secretary of theState of California; and (c) Tax Filings.

 

Section 3.5  Capital Structure .  The authorized capital stock of Auburnconsists of 10,000,000 shares of Auburn Common Stock, no par value pershare.  On the date of this Agreement, 62,958shares of Auburn Common Stock were outstanding and 9,000 shares of AuburnCommon Stock were reserved for issuance pursuant to outstanding Auburn StockOptions under the Auburn Stock Option Plan. All outstanding shares of Auburn Common Stock are validly issued, fullypaid and nonassessable and do not possess any preemptive rights and were notissued in violation of any preemptive rights or any similar rights of anyPerson.  Except for the Auburn StockOptions described on Schedule 3.5 to this Agreement, Auburn does not haveoutstanding any options, warrants, calls, rights, commitments, securities oragreements of any character to which Auburn is a party or by which it is boundobligating Auburn to issue, deliver or sell, or cause to be issued, deliveredor sold, additional shares of capital stock of Auburn or obligating Auburn togrant, extend or enter into any such option, warrant, call, right, commitmentor agreement.

 

Section 3.6  Auburn Filings.

 

3.6.1  Since January 1, 2000, Auburn and itsSubsidiaries have filed all reports, registrations and statements, togetherwith any amendments required to be made with respect thereto, that wererequired to be filed with (a) the Federal Reserve Board or any Federal ReserveBank; (b) the CDFI; (c) the FDIC; and (d) any other applicable federal, stateor local governmental or regulatory authority. All such reports, registrations and filings, and all reports sent toAuburn’s shareholders during the three-year period ended December 31, 2002(whether or not filed with any Regulatory Authority), are collectively referredto as the “Auburn Filings.”  Except tothe extent prohibited by law, copies of the Auburn Filings have been madeavailable to Western.  As of theirrespective filing or mailing dates, each of the past Auburn Filings (a) wastrue and complete in all material respects (or was amended so as to be sopromptly following discovery of any discrepancy); and (b) complied in allmaterial respects with all of the statutes, rules and regulations enforced orpromulgated by the governmental or regulatory authority with which it was filed(or was amended so as to be so promptly following discovery of any suchnoncompliance) and none contained any untrue statement of a material fact oromitted to state a material fact required to be stated therein or necessary tomake the statements therein, in light of the circumstances under which theywere made, not misleading.  The AuburnFinancial Statements, together with the financial statements contained in theAuburn Filings, have been prepared in accordance with GAAP, or applicableregulatory accounting principles, applied on a consistent basis during theperiods involved (except as may be indicated in the notes thereto) and fairlypresent (subject, in the case of the unaudited statements, to recurringadjustments normal in nature and amount) the financial position of Auburn as ofthe dates thereof and the results of its operations, cash flows and changes inshareholders’ equity for the periods then ended.

 

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3.6.2  Auburn, or AC Bank, as the case may be, hasfiled each report, schedule and amendments to each of the foregoing sinceJanuary 1, 2000 that Auburn or AC Bank was required to file with theFederal Reserve Bank, the CDFI or the FDIC (the “Auburn Documents”), all ofwhich have been made available to Western. As of their respective dates, the Auburn Documents complied in allmaterial respects with the applicable requirements of the BHCA, the CaliforniaFinancial Code and the FDIC Rules and Regulations, as the case may be, and therules and regulations of the Federal Reserve Bank, the CDFI and the FDICthereunder applicable to such Auburn Documents, and none of the AuburnDocuments contained any untrue statement of a material fact or omitted to statea material fact required to be stated therein or necessary to make thestatements therein, in light of the circumstances under which they were made,not misleading.  The financial statementsof Auburn included in the Auburn Filings comply in all material respects withapplicable regulatory accounting requirements and with the published rules andregulations of the Federal Reserve Bank, the CDFI or the FDIC (as applicable)with respect thereto, and have been prepared in accordance with GAAP, orapplicable regulatory accounting principles, applied on a consistent basisduring the periods involved (except as may be indicated in the notes theretoor, in the case of the unaudited statements, as permitted by regulations of theFederal Reserve Bank, the CDFI or the FDIC) and fairly present (subject, in thecase of the unaudited statements, to recurring adjustments normal in nature andamount) the financial position of Auburn as of the dates thereof and theconsolidated results of its operations and cash flows or changes in financialposition for the periods then ended.

 

Section 3.7  Accuracy of Information Supplied.

 

3.7.1  No representation or warranty of Auburncontained herein or any statement, schedule, exhibit or certificate given or tobe given by or on behalf of Auburn or any of its Subsidiaries, including ACBank, to Western in connection herewith and none of the information supplied orto be supplied by Auburn or its Subsidiaries, including AC Bank, to Westernhereunder to the best of Auburn’s Knowledge contains or will contain any untruestatement of material fact or omit to state any material fact required to bestated therein or necessary in order to make the statements therein, in lightof the circumstances under which they are made, not misleading.

 

3.7.2  None of the information supplied or to besupplied by Auburn or relating to Auburn and approved by Auburn which isincluded or incorporated by reference in (i) the Registration Statement on FormS-4 to be filed with the SEC by Western in connection with the issuance ofshares of Western Common Stock in the Merger (including the Proxy Statement ofAuburn and the Prospectus of Western (“Proxy Statement/Prospectus”)constituting a part thereof, the “Registration Statement”) will, at the timethe Registration Statement becomes effective under the Securities Act, containany untrue statement of a material fact or omit to state a material factrequired to be stated therein or necessary to make the statements therein, inlight of the circumstances under which they were made, not misleading; (ii) theProxy Statement/Prospectus and any amendment or supplement thereto will, at alltimes from the date of mailing to shareholders of Auburn through the date ofthe meeting of shareholders of Auburn to be held in connection with the Merger,contain any untrue statement of a material fact or omit to state a materialfact required to be stated therein or necessary to make the statements therein,in light of the circumstances under which they were made, not misleading; and(iii) the applications and forms to be filed with securities or “blue sky”authorities, self regulatory authorities, or any Governmental Entity inconnection with the Merger, the issuance of any shares of Western Common Stockin connection with the Merger, or any Requisite Regulatory Approvals will, atthe time filed or at the time they become effective, contain any untruestatement of a material fact or omit to state any material fact required to bestated therein or necessary to make the statements therein, in light of thecircumstances under which they were made, not misleading.  The Proxy Statement/Prospectus (except forsuch portions thereof that relate only to Western and its Subsidiaries) willcomply in all material respects with the provisions of the Exchange Act and therules and regulations thereunder.

 

3.7.3  Auburn has delivered or will deliver toWestern copies of: (a) the audited balance sheets of AC Bank as ofDecember 31, 2002, 2001 and 2000 and the related statements of income,changes in shareholders’ equity and cash flows for the years then ended and therelated notes to such financial statements, all as audited by Perry-Smith LLP,independent public accountants (the “Auburn Financial Statements”), and Auburnwill hereafter until the Closing Date deliver to Western copies of additionalfinancial statements of Auburn and its Subsidiaries as provided in Sections5.1.1(iii) and 6.1.11(iii).  The AuburnFinancial Statements have been prepared (and all of said additional financialstatements will be prepared) in accordance with GAAP, or applicable regulatoryaccounting principles applied on a consistent basis during the periods involved(except as may be indicated in the notes thereto) consistently followedthroughout the periods covered by such statements, and present (and, whenprepared, will

 

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present)fairly the financial position of Auburn and its Subsidiaries, including ACBank,  as of the respective datesindicated and the results of operations, cash flows and changes inshareholders’ equity at the respective dates and for the respective periodscovered by such financial statements (subject, in the case of the unauditedstatements, to recurring adjustments normal in nature and amount).  In addition, Auburn has delivered or madeavailable to Western copies of all management or other letters delivered toAuburn or AC Bank by its independent accountants in connection with any of theAuburn Financial Statements or by such accountants or any consultant regardingthe internal controls or internal compliance procedures and systems of Auburnor AC Bank issued at any time since January 1, 2000, and will makeavailable for inspection by Western or its representatives, at such times andplaces as Western may reasonably request, reports and working papers producedor developed by such accountants or consultants.

 

Section 3.8  Compliance with Applicable Laws.  Except as disclosed on Schedule 3.8, tothe best of Auburn’s Knowledge the respective businesses of Auburn and itsSubsidiaries are not being conducted in violation of any law, ordinance orregulation, except for violations which individually or in the aggregate wouldnot have a Material Adverse Effect on Auburn, or Western at or following theEffective Time.  Except as set forth inSchedule 3.8, to the Knowledge of Auburn no investigation or review by anyGovernmental Entity with respect to Auburn or AC Bank is pending or threatened,nor has any Governmental Entity indicated to Auburn or AC Bank an intention toconduct the same.

 

Section 3.9  Litigation.  Except as set forth in Schedule 3.9, to the Knowledge ofAuburn there is no suit, action or proceeding or investigation pending orthreatened against or affecting Auburn or any of its Subsidiaries which, ifadversely determined, would have a Material Adverse Effect on Auburn or itsSubsidiaries; nor is there any judgment, decree, injunction, rule or order ofany Governmental Entity or arbitrator outstanding against Auburn or any of itsSubsidiaries that has, or which, insofar as reasonably can be foreseen, in thefuture would have, any such Material Adverse Effect.  Except as disclosed on Schedule 3.9, there are no facts orcircumstances to the Knowledge of Auburn that could reasonably be expected togive rise to any material suit, action or proceeding against Auburn.  Schedule 3.9 contains a true, correctand complete list, including identification of the applicable insurance policycovering such litigation, if any, subject to reservation of rights, if any, theapplicable deductible and the amount of any reserve therefor, of all pendinglitigation in which Auburn or any of its Subsidiaries is a named party of whichAuburn has Knowledge, and except as disclosed on Schedule 3.9, all of thelitigation shown on such Schedule is adequately covered by insurance inforce, except for applicable deductibles, or has been adequately reserved forin accordance with Auburn’s prior business practices.

 

Section 3.10  Agreements with Banking Authorities.  Neither Auburn nor any Subsidiary of Auburnis a party to any written agreement or memorandum of understanding with, ororder or directive from, any Governmental Entity.

 

Section 3.11  Insurance.  Auburn and its Subsidiaries have in full force and effectpolicies of insurance with respect to their assets and businesses against suchcasualties and contingencies and in such amounts, types and forms as arecustomarily appropriate for their businesses, operations, properties andassets.  Schedule 3.11 contains alist of all policies of insurance and bonds carried and owned by Auburn or anySubsidiary.  None of Auburn or any ofits Subsidiaries is in default under any such policy of insurance or bond suchthat it can be canceled and all material current claims outstanding thereunderhave been filed in timely fashion. Auburn and its Subsidiaries have filed claims with, or given notice ofclaim to, their insurers or bonding companies in timely fashion with respect toall material matters and occurrences for which they believe they have coverage.

 

Section 3.12  Title to Assets other than Real Property.  Each of Auburn and its respectiveSubsidiaries has good and marketable title to or a valid leasehold interest inall properties and assets (other than real property which is the subject toSection 3.13), it owns or leases, free and clear of all mortgages,covenants, conditions, restrictions, easements, liens, security interests,charges, claims, assessments and encumbrances, except for: (a) rights of lessors,lessees or sublessees in such matters as are reflected in a written lease; (b)encumbrances as set forth in the Auburn Financial Statements; (c) current Taxes(including assessments collected with Taxes) not yet due which have been fullyreserved for; (d) encumbrances, if any, that are not individually in excess of$25,000; and (e) other matters as described in Schedule 3.12.  Materially all such properties and assetsare, and require only routine maintenance to keep them, in good workingcondition, normal wear and tear excepted. All properties used in Auburn’s operations are reflected in the AuburnFinancial Statements to the extent GAAP requires the same to be reflected.

 

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Section 3.13  Real Property.  Schedule 3.13 is an accurate list andgeneral description of all real property owned or leased by Auburn or any ofits Subsidiaries, including Other Real Estate Owned (“OREO”).  Each of Auburn and its respectiveSubsidiaries has good and marketable title to the real properties that it owns,as described in such Schedule, free and clear of all mortgages, covenants,conditions, restrictions, easements, liens, security interests, charges,claims, assessments and encumbrances, except for (a) rights of lessors, lesseesor sublessees in such matters as are reflected in a written lease; (b) currentTaxes (including assessments collected with Taxes) not yet due and payable; (c)encumbrances, if any, that are not individually in excess of $25,000 and (d)other matters as described in Schedule 3.13. Auburn and its Subsidiarieshave valid leasehold interests in the leaseholds they respectively hold, freeand clear of all mortgages, liens, security interest, charges, claims,assessments and encumbrances, except for (a) claims of lessors, co-lessees orsublessees in such matters as are reflected in a written lease; (b) titleexceptions affecting the fee estate of the lessor under such leases; and (c)other matters as described in Schedule 3.13.  To the best of Auburn’s Knowledge, the activities of Auburn andits Subsidiaries with respect to all real property owned or leased by them foruse in connection with their operations are in all material respects permittedand authorized by applicable zoning laws, ordinances and regulations and alllaws and regulations of any Governmental Entity.  Except as set forth in Schedule 3.13, Auburn and itsSubsidiaries enjoy quiet possession under all real property leases to whichthey are the lessees and all of such leases are valid and in full force andeffect, except as the enforceability thereof may be limited by bankruptcy,insolvency, moratorium or other similar laws affecting the rights of creditorsgenerally and by general equitable principles. Materially all buildings and improvements on real properties owned orleased by Auburn or any of its Subsidiaries are in good condition and repair,and do not require more than normal and routine maintenance, to keep them insuch condition, normal wear and tear excepted.

 

Section 3.14  Taxes.

 

3.14.1  Filing of Returns.  Except as set forth on Schedule 3.14.1,Auburn and its Subsidiaries have duly prepared and filed or caused to be dulyprepared and filed all federal, state, and local Returns (for Tax orinformational purposes) which were required to be filed by or in respect ofAuburn and its Subsidiaries, or any of their properties, income and/oroperations on or prior to the Closing Date. As of the time they were filed, the foregoing Returns accurately reflectedthe material facts regarding the income, business, asset, operations,activities, status, and any other information required to be shownthereon.  Except as set forth onSchedule 3.14.1, no extension of time within which Auburn or any of itsSubsidiaries may file any Return is currently in force.

 

3.14.2  Payment of Taxes.  Except as disclosed on Schedule 3.14.2with respect to all amounts in respect of Taxes imposed on Auburn or anySubsidiary or for which Auburn or any Subsidiary is or could be liable, whetherto taxing authorities (as, for example, under law) or to other Persons (as, forexample, under Tax allocation agreements), with respect to all taxable periodsor portions of periods ending on or before the Closing Date, all applicable taxlaws and agreements have been or will be fully complied with in all materialrespects, and all such amounts required to be paid by or on behalf of Auburn orany Subsidiary to taxing authorities or others on or before the date hereofhave been paid.

 

3.14.3  Audit History.  Except as disclosed on Schedule 3.14.3,there is no review or audit by any taxing authority of any Tax liability ofAuburn or any Subsidiary currently in progress of which Auburn hasKnowledge.  Except as disclosed onSchedule 3.14.3, Auburn and its Subsidiaries have not received any writtennotices within the three years preceding the Closing Date of any pending orthreatened audit, by the Internal Revenue Service or any state, local orforeign agency, for any Returns or Tax liability of Auburn or any Subsidiaryfor any period.  Auburn and itsSubsidiaries currently have no unpaid deficiencies assessed by the InternalRevenue Service or any state, local or foreign taxing authority arising out ofany examination of any of the Returns of Auburn or any Subsidiaries filed forfiscal years ended on or after December 31, 1998 through the Closing Date,nor to the Knowledge of Auburn is there reason to believe that any materialdeficiency will be assessed.

 

3.14.4  Statute of Limitations.  Except as disclosed on Schedule 3.14.4,no agreements are in force or are currently being negotiated by or on behalf ofAuburn or any Subsidiaries for any waiver or for the extension of any statuteof limitations governing the time of assessments or collection of any Tax.  No closing agreements or compromisesconcerning Taxes of Auburn or any Subsidiaries are currently pending.

 

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3.14.5  Withholding Obligations.  Except as set forth on Schedule 3.14.5,Auburn and its Subsidiaries have withheld from each payment made to any oftheir respective officers, directors and employees, the amount of allapplicable Taxes, including, but not limited to, income tax, social securitycontributions, unemployment contributions, backup withholding and otherdeductions required to be withheld therefrom by any Tax law and have paid thesame to the proper taxing authorities within the time required under anyapplicable Tax law.

 

3.14.6  Tax Liens.  There are no Tax liens, whether imposed by any federal, state,local or foreign taxing authority, outstanding against any assets owned byAuburn or its Subsidiaries, except for liens for Taxes that are not yet due andpayable.

 

3.14.7  Tax Reserves.  Auburn and its Subsidiaries have made fulland adequate provision and reserve for all federal, state, local or foreignTaxes for the current period for which Tax and information returns are not yetrequired to be filed.  The AuburnFinancial Statements contain fair and sufficient accruals for the payment ofall Taxes for the periods covered by the Auburn Financial Statements and allperiods prior thereto.

 

3.14.8  IRC Section 382 Applicability.  None of Auburn or any of its Subsidiaries,including any party joining in any consolidated return to which Auburn is amember, underwent an “ownership change” as defined in IRC Section 382(g)within the “testing period” (as defined in IRC Section 382) endingimmediately before the Effective Time, and not taking into account anytransactions contemplated by this Agreement.

 

3.14.9  Disclosure Information.  Within 45 days of the date of thisAgreement, Auburn will deliver to Western a schedule setting forth thefollowing information with respect to Auburn and as of the most recentpracticable date (as well as on an estimated pro forma basis as of the Closinggiving effect to the consummation of the transactions contemplated hereby): (a)Auburn’s basis in its assets; (b) the amount of any net operating loss, netcapital loss, unused investment or other credit, unused foreign tax, or excesscharitable contribution allocable to Auburn; and (c) the amount of any deferredgain or loss allocable to Auburn and arising out of any deferred intercompanytransactions.

 

Section 3.15  Performance of Obligations.  Auburn and its Subsidiaries have performedall material obligations required to be performed by them to date and none ofAuburn or any of its Subsidiaries is in material default under or in breach ofany term or provision of any covenant, contract, lease, indenture or any otheragreement, written or oral, to which any is a party, is subject or is otherwisebound, and no event has occurred that, with the giving of notice or the passageof time or both, would constitute such a default or breach, where such defaultor breach or failure to perform would have a Material Adverse Effect on Auburnor its Subsidiaries.  To Auburn’sKnowledge, and except as disclosed on Schedule 3.15 or in the portion ofSchedule 3.16 that identifies 90-day past due or classified or nonaccrualloans, no party with whom Auburn or any of its Subsidiaries has an agreementthat is of material importance to the businesses of Auburn or its Subsidiariesis in default thereunder.

 

Section 3.16  Loans and Investments.  Except as set forth on Schedule 3.16,all loans, leases and other extensions of credit, and guaranties, securityagreements or other agreements supporting any loans or extensions of credit,and investments of Auburn or its Subsidiaries, including AC Bank,  are, and constitute, in all material respects,the legal, valid and binding obligations of the parties thereto and areenforceable against such parties in accordance with their terms, except as theenforceability thereof may be limited by applicable law and otherwise bybankruptcy, insolvency, moratorium or other similar laws affecting the rightsof creditors generally and by general equitable principles.  Except as described on Schedule 3.16,as of June 30, 2003, no loans or investments held by Auburn or anySubsidiary, including AC Bank are:  (i)more than ninety days past due with respect to any scheduled payment ofprincipal or interest, other than loans on a nonaccrual status; (ii) classifiedas “loss,” “doubtful,” “substandard” or “specially mentioned” by AC Bank or anybanking regulators; or (iii) on a nonaccrual status in accordance with ACBank’s loan review procedures.  Exceptas set forth on Schedule 3.16, none of such assets (other than loans) aresubject to any restrictions, contractual, statutory or other, that wouldmaterially impair the ability of the entity holding such investment to disposefreely of any such assets at any time, except restrictions on the publicdistribution or transfer of any such investments under the Securities Act andthe regulations thereunder or state securities laws and pledges or security interestsgiven in connection with government deposits. All loans, leases or other extensions of credit outstanding, orcommitments to make any loans, leases or other extensions of credit made byAuburn or AC Bank to any Affiliates of Auburn or AC Bank are disclosed onSchedule 3.16.  For

 

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outstandingloans or extensions of credit where the original principal amounts are inexcess of $50,000 and which by their terms are either secured by collateral orsupported by a guaranty or similar obligation, the security interests have beenduly perfected in all material respects and have the priority they purport tohave in all material respects, other than by operation of law, and, in the caseof each guaranty or similar obligation, each has been duly executed anddelivered to Auburn or any Subsidiary, including AC Bank, and to Auburn’sKnowledge, is still in full force and effect.

 

Section 3.17  Brokers and Finders.  Except as set forth on Schedule 3.17,none of Auburn or any of its Subsidiaries is a party to or obligated under anyagreement with any broker or finder relating to the transactions contemplatedhereby, and neither the execution of this Agreement, the Merger Agreement, northe consummation of the transactions provided for herein or therein, willresult in any liability to any broker or finder.  Auburn agrees to indemnify and hold harmless Western and itsaffiliates, and to defend with counsel selected by Western and reasonablysatisfactory to Auburn, from and against any liability, cost or expense,including attorneys’ fees, incurred in connection with a breach of thisSection 3.17.

 

Section 3.18  Contracts.  (a) Schedule 3.18(a) to this Agreement contains a completeand accurate written list of all agreements, obligations or understandings,written and oral (each a “Contract” and collectively, the “Contracts”), eachinvolving payments or value in excess of $25,000, to which Auburn or anySubsidiary is a party as of the date of this Agreement (true and completecopies or, if none, reasonably complete and accurate written descriptions ofwhich, together with all amendments and supplements thereto and all waivers ofany terms thereof, have been made available to Western prior to the executionof this Agreement), except for loans and other extensions of credit made byAuburn or AC Bank in the ordinary course of its business and those itemsspecifically disclosed in the Auburn Financial Statements.

 

(b) Schedule 3.18(b)contains a true and complete list of Contracts not terminable by Western upon30 days (or less) notice by Western without penalty of at least $5,000 orobligation to make payments totaling at least $5,000 based on such termination.

 

(c) Each Contract requiredto be disclosed in Section 3.18(a) constitutes a legal, valid and bindingagreement, enforceable in accordance with its terms, and, to Auburn’sKnowledge, no other party to such Contract, is nor has received notice that itis, in violation or breach of or default under any such Contract, or with noticeor lapse of time or both, would be in violation or breach of or default underany such Contract.

 

(d) Auburn is not a party toor bound by any Contract that (i) automatically terminates or allowstermination by the other party thereto upon consummation of the transactionscontemplated by this Agreement, or (ii) contains any covenant or otherprovision that limits Auburn’s or Western’s ability to compete with any Personin a line of business or in any area or territory.

 

Section 3.19  Absence of Material Adverse Effect.  Since January 1, 2003, the respectivebusinesses of Auburn and its Subsidiaries, including AC Bank, have beenconducted only in the ordinary course, in the same manner as theretoforeconducted, and no event or circumstance has occurred or is expected to occurwhich to Auburn’s Knowledge has had or which, with the passage of time orotherwise, could reasonably be expected to have a Material Adverse Effect onAuburn.

 

Section 3.20  Undisclosed Liabilities.  Except as disclosed on Schedule 3.20,none of Auburn or any of its Subsidiaries to Auburn’s Knowledge has anyliabilities or obligations, either accrued, contingent or otherwise, that arematerial to Auburn and its Subsidiaries and that have not been:  (a) reflected or disclosed in the AuburnFinancial Statements; or (b) incurred subsequent to December 31, 2002 inthe ordinary course of business.  Auburnhas no Knowledge of any basis for the assertion against Auburn, or any of itsSubsidiaries, of any liability, obligation or claim (including withoutlimitation that of any Governmental Entity) that will have or cause, or couldreasonably be expected to have or cause, a Material Adverse Effect on Auburnthat is not fully and fairly reflected and disclosed in the Auburn FinancialStatements or on Schedule 3.20.

 

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Section 3.21  Employees; Employee Benefit Plans; ERISA.

 

3.21.1  All material obligations of Auburn or itsSubsidiaries for payment to trusts or other funds or to any Governmental Entityor to any individual, director, officer, employee or agent (or his or herheirs, legatees or legal representatives) with respect to unemploymentcompensation benefits, profit-sharing, pension or retirement benefits or socialsecurity benefits, whether arising by operation of law, by contract or by pastcustom, have been properly accrued for the periods covered thereby on theAuburn Financial Statements and paid when due. All material obligations of Auburn or its Subsidiaries, whether arisingby operation of law, by contract or by past custom for vacation or holiday pay,bonuses and other forms of compensation which are payable to their respectivedirectors, officers, employees or agents have been properly accrued on theAuburn Financial Statements for the periods covered thereby and paid whendue.  Except as set forth onSchedule 3.21.1, there are no unfair labor practice complaints, strikes,slowdowns, stoppages or other controversies pending or, to the Knowledge ofAuburn, attempts to unionize or controversies threatened between Auburn or anySubsidiary or Affiliate and or relating to, any of their employees that arelikely to have a Material Adverse Effect on Auburn and its Subsidiaries, takenas a whole.  None of Auburn or anySubsidiary is a party to any collective bargaining agreement with respect toany of their employees and, except as set forth on Schedule 3.21.1, noneof Auburn or any Subsidiary is a party to a written employment contract withany of their respective employees and there are no understandings with respectto the employment of any officer or employee of Auburn or any Subsidiary whichare not terminable by Auburn or such Subsidiary without liability on not morethan thirty (30) days’ notice.  Exceptas disclosed in the Auburn Financial Statements for the periods coveredthereby, all material sums due for employee compensation have been paid and allemployer contributions for employee benefits, including deferred compensationobligations, and all material benefit obligations under any Employee Plan (asdefined in Section 3.21.3 hereof) or any Benefit Arrangement (as definedin Section 3.21.4 hereof) have been duly and adequately paid or providedfor in accordance with plan documents. Except as set forth on Schedule 3.21.1, no director, officer oremployee of Auburn or any Subsidiary is entitled to receive any payment of anyamount under any existing agreement, severance plan or other benefit plan as aresult of the consummation of any transaction contemplated by this Agreement orthe Merger Agreement.  To Auburn’sKnowledge, Auburn and its Subsidiaries have materially complied with allapplicable federal and state statutes and regulations which govern workers’compensation, equal employment opportunity and equal pay, including, but notlimited to, all civil rights laws, Presidential Executive Order 1124, the FairLabor Standards Act of 1938, as amended, and the Americans with DisabilitiesAct.

 

3.21.2 Auburn has deliveredas Schedule 3.21.2 a complete list of:

 

(a)                                  All current employees of Auburn or any of itsSubsidiaries together with each employee’s tenure with Auburn or suchSubsidiary, title or job classification, and the current annual rate ofcompensation anticipated to be paid to each such employee; and

 

(b)                                 All Employee Plans and Benefit Arrangements,including all plans or practices providing for current compensation or accrualsfor active Employees, including, but not limited to, all employee benefitplans, all pension, profit-sharing, retirement, bonus, stock option, incentive,deferred compensation, severance, long-term disability, medical, dental,health, hospitalization, life insurance or other insurance plans or relatedbenefits.

 

3.21.3  Except as disclosed on Schedule 3.21.3,none of Auburn or any of its Subsidiaries maintains, administers or otherwisecontributes to any “employee benefit plan,” as defined in Section 3(3)of  ERISA, which is subject to anyprovisions of ERISA and covers any employee, whether active or retired, ofAuburn or any of its Subsidiaries (any such plan being herein referred to as an“Employee Plan”).  True and completecopies of each such Employee Plan, including amendments thereto, have beenpreviously delivered or made available to Western, together with (i) allagreements regarding plan assets with respect to such Employee Plans, (ii) atrue and complete copy of the annual reports for the most recent three years(Form 5500 Series including, if applicable, Schedules A and B thereto) preparedin connection with any such Employee Plan, (iii) a true and complete copy ofthe actuarial valuation reports for the most recent three years, if any,prepared in connection with any such Employee Plan covering any active employeeof Auburn or its Subsidiaries, (iv) a copy of the most recent summary plandescription of each such Employee Plan, together with any modificationsthereto, and (v) a copy of the most recent favorable determination letter (ifapplicable) from the Internal Revenue Service for each Employee Plan.  None of the Employee Plans is a “multiemployerplan” as defined in Section 3(37) of ERISA or a “multiple employer plan”as covered in Section 412(c) of the IRC, and none of Auburn or any of itsSubsidiaries has been obligated to make a contribution to any suchmultiemployer or multiple employer plan within the past five years. 

 

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Noneof the Employee Plans of Auburn or any of its Subsidiaries is, or for the lastfive years has been, subject to Title IV of ERISA.  Each Employee Plan which is intended to be qualified underSection 401(a) of the IRC is so qualified and each trust maintainedpursuant thereto is exempt from income tax under Section 501(a) of theIRC, and none of Auburn or any of its Subsidiaries is aware of any fact whichhas occurred which would cause the loss of such qualification orexemption.  Except as disclosed inSchedule 3.21.3, there are no Employee Plans or Benefit Arrangements as towhich, after the Closing, Western will be required to make any contributions orwith respect to which Western shall have any material obligation or liabilityon behalf of any of the current employees of Auburn, or which Western will notbe able to terminate prior to or immediately after the Closing in accordancewith their terms and ERISA.

 

3.21.4  Except as disclosed in Schedule 3.21.4,none of Auburn or any of its Subsidiaries maintains (other than base salary andbase wages) any form of current or deferred compensation, bonus, stock option,stock appreciation right, severance pay, salary continuation, retirement orincentive plan or arrangement for the benefit of any director, officer oremployee, whether active or retired, of Auburn or any of its Subsidiaries orfor any class or classes of such directors, officers or employees.  Except as disclosed in Schedule 3.21.4,none of Auburn or any of its Subsidiaries maintains any group or individualhealth insurance, welfare or similar plan or arrangement for the benefit of anydirector, officer or employee of Auburn or any of its Subsidiaries, whether activeor retired, or for any class or classes of such directors, officers oremployees.  Any such plan or arrangementdescribed in this Section 3.21.4, copies of which have been delivered ormade available to Western, shall be herein referred to as a “BenefitArrangement.”

 

3.21.5  All Employee Plans and Benefit Arrangementsare operated in material compliance with the requirements prescribed by any andall statutes, governmental or court orders, or governmental rules orregulations currently in effect, including but not limited to ERISA and theIRC, applicable to such plans or arrangements, and plan documents relating toany such plans or arrangements, materially comply with or will be amended tomaterially comply with applicable legal requirements.  None of Auburn or any of its Subsidiaries, nor any Employee Plan,nor any trusts created thereunder, nor any trustee, administrator nor any otherfiduciary thereof, has engaged in a “prohibited transaction,” as defined inSection 406 of ERISA and Section 4975 of the IRC, that could subjectAuburn or any of its Subsidiaries or Western to liability underSection 409 or 502(i) of ERISA or Section 4975 of the IRC or thatwould adversely affect the qualified status of such plans; each “plan official”within the meaning of Section 412 of ERISA of each Employee Plan is bondedto the extent required by such Section 412; with respect to each EmployeePlan, to Auburn’s Knowledge, no employee of Auburn or any Subsidiary, nor anyfiduciary of any Employee Plan, has engaged in any breach of fiduciary duty asdefined in Part 4 of Subtitle B of Title I of ERISA which could subject Auburnor any of its Subsidiaries to liability if Auburn or any such Subsidiary isobligated to indemnify such Person against liability.  Except as disclosed in Schedule 3.21.5, Auburn and itsSubsidiaries have not failed to make any material contribution or pay anyamount due and owing as required by law or the terms of any Employee Plan orBenefit Arrangement.

 

3.21.6  Except as set forth on Schedule 3.21.6,no Employee Plan or Benefit Arrangement has any material liability of anynature, accrued or contingent, including, without limitation, liabilities forfederal, state, local or foreign taxes, interest or penalty other thanliability for claims arising in the course of the administration of each suchEmployee Plan.  Except as set forth onSchedule 3.21.6, to Auburn’s Knowledge there is no pending or threatenedlegal action, proceeding or investigation against any Employee Plan which couldresult in material liability to such Employee Plan, other than routine claimsfor benefits, and there is no basis for any such legal action, proceeding orinvestigation.

 

3.21.7  Each Benefit Arrangement which is a grouphealth plan (within the meaning of such term under IRCSection 4980B(g)(2)) materially complies and has materially complied withthe requirements of Section 601 through 608 of ERISA or Section 4980Bof the IRC governing continuation coverage requirements for employee-providedgroup health plans.

 

3.21.8  Except as disclosed in Schedule 3.21.8,none of Auburn or any of its Subsidiaries maintains any Employee Plan orBenefit Arrangement pursuant to which any benefit or other payment will berequired to be made by Auburn or any of its Subsidiaries or Affiliates orpursuant to which any other benefit will accrue or vest in any director,officer or employee of Auburn or any Subsidiary or Affiliate thereof, in eithercase as a result of the consummation of the transactions contemplated by thisAgreement or the Merger Agreement.

 

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3.21.9  There have been no federal or state claimsbased on sex, sexual or other harassment, age, disability, race or otherdiscrimination or common law claims, including claims of wrongful termination,of which Auburn has notice by any employees or by any of the employeesperforming work for Auburn but provided by an outside employment agency, andthere are no facts or circumstances known to Auburn that could reasonably beexpected to give rise to such complaint or claim.  Auburn has complied with all material respects with all lawscurrently applicable to the employment of employees, and Auburn has notreceived any notice of any claim that it has not complied in any materialrespect with any laws, ordinances or regulations relating to the employment ofemployees.

 

Section 3.22  Powers of Attorney.  No power of attorney or similarauthorization given by Auburn or any Subsidiary thereof is presently in effector outstanding other than powers of attorney given in the ordinary course ofbusiness with respect to routine matters.

 

Section 3.23  Hazardous Materials.  Except as set forth on Schedule 3.23:

 

3.23.1  Except for ordinary and necessary quantitiesof cleaning, pest control and office supplies, and other small quantities ofHazardous Substances that are used in the ordinary course of the respectivebusinesses of Auburn and its Subsidiaries and in compliance with applicableEnvironmental Laws, or ordinary rubbish, debris and nonhazardous solid wastestored in garbage cans or bins for regular disposal off-site, or petroleumcontained in and de minimus quantities discharged from motor vehicles in theirordinary operation on any of the Auburn Properties (as defined below), Auburnand its Subsidiaries have not engaged in the generation, use, manufacture,treatment, transportation, storage (in tanks or otherwise), or the disposal, ofHazardous Substances other than as permitted by and only in compliance withapplicable law.  To Auburn’s Knowledge,no material amount of Hazardous Substances have been released, emitted ordisposed of, or otherwise deposited, on, in or from any real property which isnow or has been previously owned since January 1, 2000, or which iscurrently or during the past three years was leased, by Auburn or any of itsSubsidiaries, including OREO (collectively, the “Auburn Properties”), or toAuburn’s Knowledge, on or in any real property in which Auburn or any of itsSubsidiaries now holds any security interest, mortgage or other lien orinterest with an underlying obligation in excess of $25,000 (“AuburnCollateralizing Real Estate”), except for (i) matters disclosed onSchedule 3.23; (ii) ordinary and necessary quantities of cleaning, pestcontrol and office supplies used and stored in compliance with applicableEnvironmental Laws, or ordinary rubbish, debris and nonhazardous solid wastestored in garbage cans or bins for regular disposal off-site, or petroleumcontained in, and de minimus quantities discharged from, motor vehicles intheir ordinary operation on such Auburn Properties; and (iii) such releases,emissions, disposals or deposits which constituted a violation of anEnvironmental Law but did not have a Material Adverse Effect on the AuburnProperty involved and would not result in the incurrence or imposition of anyliability, expense, penalty or fine against Auburn or any of its Subsidiariesin excess of $25,000 individually or in the aggregate.  To Auburn’s Knowledge, no activity has beenundertaken on any of the Auburn Properties since January l, 2000, and tothe Knowledge of Auburn no activities have been or are being undertaken on anyof the Auburn Collateralizing Real Estate, that would cause or contribute to:

 

(a)                                  any of the Auburn Properties or Auburn CollateralizingReal Estate becoming a treatment, storage or disposal facility within themeaning of RCRA or any similar state law or local ordinance;

 

(b)                                 a release or threatened release of anyHazardous Substances under circumstances which would violate any EnvironmentalLaws; or

 

(c)                                  the discharge of Hazardous Substances intoany soil, subsurface water or ground water or into the air, or the dredging orfilling of any waters, that would require a permit or any other approval underthe Federal Water Pollution Control Act, 33 U.S.C. §1251 et seq., the Clean AirAct, as amended, 42 U.S.C. §7401 et seq., or any similar federal or state lawor local ordinance; the cumulative effect of which would have a materialadverse effect on the Auburn Property or Auburn Collateralizing Real Estateinvolved.

 

3.23.2  To the Knowledge of Auburn, there are not,and never have been, any underground storage tanks located in or under any ofthe Auburn Properties or the Auburn Collateralizing Real Estate.

 

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3.23.3  None of Auburn or any of its Subsidiarieshas received any written notice of, and to the Knowledge of Auburn none hasreceived any verbal notice of, any pending or threatened claims,investigations, administrative proceedings, litigation, regulatory hearings orrequests or demands for remedial or responsive actions or for compensation,with respect to any of the Auburn Properties or Auburn Collateralizing RealEstate, alleging noncompliance with or violation of any Environmental Law orseeking relief under any Environmental Law and none of the Auburn Properties orAuburn Collateralizing Real Estate is listed on the United States EnvironmentalProtection Agency’s National Priorities List of Hazardous Waste Sites, or, tothe Knowledge of Auburn, any other list, schedule, log, inventory or record ofhazardous waste sites maintained by any federal, state or local agency.

 

3.23.4 “HazardousSubstances” shall mean any hazardous, toxic or infectious substance, material,gas or waste which is regulated by any local, state or federal GovernmentalEntity, or any of their agencies.

 

Section 3.24  Stock Options.   Schedule 3.24 to this Agreementcontains a description of the Auburn Stock Option Plan and list of all AuburnStock Options outstanding, indicating for each: (a) the grant date andexpiration date; (b) whether vested or unvested; (c) exercise price; and (d) avesting schedule by optionee.

 

Section 3.25 Parachute Payments.  Except as set forth in Schedule 3.25, the consummation ofthe Merger will not entitle any director, officer, shareholder, independentcontractor or employee of Auburn to any payment that would constitute aparachute payment under IRC 280G or would result in an excise tax to arecipient of such payment under Section 4999 of the IRC.

 

Section 3.26  Affiliate Transactions.  Other than in the ordinary course ofAuburn’s business, (i) there are no Contracts or liabilities between Auburn andany current or former officer, director or 10% or more shareholder, (ii) Auburndoes not provide or cause to be provided any assets, services or facilities toany such current or former officer, director or shareholder, (iii) neitherAuburn nor any such current or former officer, director or shareholder providesfor fees or causes to be provided for fees any assets, services or facilitiesto Auburn, and (iv) Auburn does not beneficially own, directly or directly anydebentures, notes, other evidence of indebtedness, stock, securities (includingrights to purchase and securities convertible into or exchangeable for othersecurities), or interests in other assets of any such current or formerofficer, director or shareholder.

 

Section 3.27  Risk Management Instruments.  Neither Auburn nor any Subsidiary of Auburnis a party or has agreed to enter into an exchange traded or over-the-counterequity, interest rate, foreign exchange or other swap, forward, future, option,cap, floor or collar or any other contract that is not included on the balancesheet and is a derivatives contract (including various combinations thereof)(each, a “Derivatives Contract”) or owns securities that (i) are referred togenerally as “structured notes,” “high risk mortgage derivatives,” “cappedfloating rate notes” or “capped floating rate mortgage derivatives,” or (ii)are likely to have changes in value as a result of interest or exchange ratechanges that significantly exceed normal changes in value attributable tointerest or exchange rate changes, except for those Derivatives Contracts andother instruments legally purchased or entered into in the ordinary course ofbusiness consistent with safe and sound banking practices and regulatoryguidance.

 

Section 3.28  Liability Under Regulation C, Truth inLending Law and HMDA.  Auburn has noliabilities or obligations, accrued, contingent or otherwise that are materialto Auburn with respect to Regulation C, Truth in Lending Law and HMDAdisclosures.

 

Section 3.29  Effective Date of Representations,Warranties, Covenants and Agreements. Each representation, warranty, covenant and agreement of Auburn setforth in this Agreement shall be deemed to be made on and as of the date hereofand as of the Effective Time.

 

**ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF WESTERN**

 

Western represents andwarrants to Auburn that:

 

Section 4.1  Organization; Corporate Power; Etc.  Western is a California corporation dulyorganized, validly existing and in good standing under the laws of the State ofCalifornia and has all requisite corporate power

 

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andauthority to own, lease and operate its properties and assets and to carry onits business substantially as it is being conducted on the date of thisAgreement.  Western is a bank holdingcompany registered under the BHCA.  Eachof Western’s Subsidiaries has all requisite corporate power and authority toown, lease and operate its properties and to carry on its businesssubstantially as it is being conducted on the date of this Agreement, exceptwhere the failure to have such power or authority would not have a MaterialAdverse Effect on Western taken as a whole or the ability of Western toconsummate the transactions contemplated by this Agreement.  Western has all requisite corporate powerand authority to enter into this Agreement and, subject to obtaining allRequisite Regulatory Approvals, Western will have the requisite corporate powerand authority to perform its respective obligations hereunder with respect tothe consummation of the transactions contemplated hereby.  Neither the scope of business of Western orany Subsidiary, nor the location of any of their respective properties,requires that Western or any of its respective Subsidiaries be licensed toconduct business in any jurisdiction other than those jurisdictions in whichthey are licensed or qualified to do business as a foreign corporation, wherethe failure to be so licensed or qualified would, individually or in theaggregate, have a Material Adverse Effect on Western taken as a whole.

 

Section 4.2  Licenses and Permits.  Except as disclosed on Schedule 4.2,Western and its Subsidiaries have all material licenses, certificates,franchises, rights and permits that are necessary for the conduct of theirrespective businesses, and such licenses are in full force and effect, exceptfor any failure to be in full force and effect that would not, individually orin the aggregate, have a Material Adverse Effect on Western taken as a whole,or on the ability of Western to consummate the transactions contemplated bythis Agreement.  The properties, assets,operations and businesses of Western and those of its Subsidiaries are and havebeen maintained and conducted, in all material respects, in compliance with allapplicable licenses, certificates, franchises, rights and permits.

 

Section 4.3  Authorization of Agreement; No Conflicts.

 

4.3.1  The execution and delivery of this Agreementand the Merger Agreement and the consummation of the transactions contemplatedhereby and thereby have been duly authorized by all necessary corporate actionon the part of Western.  This Agreementhas been duly executed and delivered by Western and constitutes a legal, validand binding obligation of Western, enforceable in accordance with its terms,except as the enforceability thereof may be limited by bankruptcy, insolvency,moratorium or other similar laws affecting the rights of creditors generallyand by general equitable principles. The Merger Agreement, upon the receipt of all Requisite Regulatory Approvalsand the due execution and filing of such Merger Agreement in accordance withthe applicable provisions of the California Corporations Code, will constitutea legal, valid and binding obligation of Western, enforceable in accordancewith its terms, except as the enforceability thereof may be limited bybankruptcy, insolvency, moratorium or other similar laws affecting the rightsof creditors generally or by general equitable principles.

 

4.3.2 Except as discussed onSchedule 4.3, the execution and delivery of this Agreement and theconsummation of the transactions contemplated hereby does not and will notconflict with, or result in any violation of or default or loss of a materialbenefit under, any provision of the Articles of Incorporation or Bylaws ofWestern, or except for the necessity of obtaining the Requisite RegulatoryApprovals, any material mortgage, indenture, lease, agreement or other materialinstrument, or any permit, concession, grant, franchise, license, judgment,order, decree, statute, law, ordinance, rule or regulation applicable toWestern or any of its assets or properties or any of its Subsidiaries, otherthan any such conflict, violation, default or loss which (i) will not have aMaterial Adverse Effect on Western taken as a whole; or (ii) will be cured orwaived prior to the Effective Time.  Nomaterial consent, approval, order or authorization of, or registration,declaration or filing with, any Governmental Entity is required in connectionwith the execution and delivery of this Agreement by Western or the performanceby Western of its obligations hereunder, except for (a) filings required inorder to obtain Requisite Regulatory Approvals; (b) the filing of theRegistration Statement (including the Proxy Statement/Prospectus constituting apart thereof) with the SEC relating to the Merger and the declaration ofeffectiveness of the Registration Statement by the SEC and any applicable statesecurities law regulatory authorities; (c) the filing and approval of theMerger Agreement with the Secretary of the State of California; (d) anyapprovals required to be obtained pursuant to the BHCA or the Federal DepositInsurance Act or any other required governmental approval for the execution anddelivery of this Agreement by Western or the consummation of the Merger; and(e) any consents, authorizations, approvals, filings or exemptions required tobe made or obtained under the securities or “blue sky” laws of variousjurisdictions in connection with the issuance of shares of Western Common Stockcontemplated by this Agreement.

 

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Section 4.4  Capital Structure of Western.  The authorized capital stock of Westernconsists of 10,000,000 shares of Western Common Stock, no par value per shareand 10,000,000 shares of Western preferred stock.  On August 1, 2003, 4,600,760 shares of Western Common Stockwere outstanding, 420,796 shares of Western Common Stock were reserved forissuance pursuant to employee stock option and other employee stock plans (the“Western Stock Plans”), and no shares of Western preferred stock wereoutstanding or were reserved for issuance by Western.  All outstanding shares of Western Common Stock are validlyissued, fully paid and nonassessable and do not possess any preemptive rightsand were not issued in violation of any preemptive rights or any similar rightsof any Person.  The issuance of theshares of Western Common Stock proposed to be issued pursuant to this Agreementat the Effective Time will have been duly authorized by all requisite corporateaction of Western, and such shares, when issued as contemplated by thisAgreement, will constitute duly authorized, validly issued, fully paid andnonassessable shares of Western Common Stock, and will not have been issued inviolation of any preemptive or similar rights of any Person.  As of the date of this Agreement, and exceptfor this Agreement and the Western Stock Plans, Western does not haveoutstanding any options, warrants, calls, rights, commitments, securities oragreements of any character to which Western is a party or by which it is boundobligating Western to issue, deliver or sell, or cause to be issued, deliveredor sold, additional shares of capital stock of Western or obligating Western togrant, extend or enter into any such option, warrant, call, right, commitmentor agreement.

 

Section 4.5  Western Filings.

 

4.5.1  Since January 1, 2000, Western and itsSubsidiaries have filed all reports, registrations and statements, togetherwith any amendments required to be made with respect thereto, that wererequired to be filed with (a) the Federal Reserve Board or any Federal ReserveBank; (b) the SEC; and (c) any other applicable federal, state or localgovernmental or regulatory authority. All such reports, registrations and filings including the WesternFinancial Statements are collectively referred to as the “WesternFilings.”  Except to the extentprohibited by law, copies of the Western Filings have been made available toAuburn.  As of their respective filingor mailing dates, each of the past Western Filings (a) was true and complete inall material respects (or was amended so as to be so promptly followingdiscovery of any discrepancy); and (b) complied in all material respects withall of the statutes, rules and regulations enforced or promulgated by thegovernmental or regulatory authority with which it was filed (or was amended soas to be so promptly following discovery of any such noncompliance) and nonecontained any untrue statement of a material fact or omitted to state amaterial fact required to be stated therein or necessary to make the statementstherein, in light of the circumstances under which they were made, notmisleading.  The Western FinancialStatements, together with the financial statements contained in the WesternFilings, have been prepared in accordance with GAAP, or applicable regulatoryaccounting principles, applied on a consistent basis during the period involved(except as may be indicated in the notes thereto) and fairly present (subject,in the case of the unaudited statements, to recurring adjustments normal innature and amount) the consolidated financial position of Western as of thedates thereof and the consolidated results of its operations, cash flows andchanges in shareholders’ equity for the period then ended.

 

4.5.2  Western has filed each report, schedule, andamendments to each of the foregoing since January 1, 2000 that Western wasrequired to file with the Federal Reserve Bank (the “Western Documents”), allof which have been made available to Auburn. As of their respective dates, the Western Documents complied in allmaterial respects with the applicable requirements of the BHCA and the rulesand regulations of the Federal Reserve Bank thereunder applicable to suchWestern Documents, and none of the Western Documents contained any untruestatement of a material fact or omitted to state a material fact required to bestated therein or necessary to make the statements therein, in light of thecircumstances under which they were made, not misleading.  The financial statements of Western includedin the Western Filings comply in all material respects with applicableaccounting requirements and have been prepared in accordance with GAAP, orapplicable regulatory accounting principles, applied on a consistent basisduring the periods involved (except as may be indicated in the notes thereto,or in the case of the unaudited statements, as permitted by regulations of theFederal Reserve Bank), and fairly present (subject, in the case of theunaudited statements, to recurring adjustments normal in nature and amount) theconsolidated financial position of Western as of the dates thereof and theconsolidated results of its operations and cash flows or changes in financialposition for the periods then ended.

 

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Section 4.6  Accuracy of Information Supplied.

 

4.6.1  No representation or warranty of Westerncontained herein or any statement, schedule, exhibit or certificate given or tobe given by or on behalf of Western or any of its Subsidiaries to Auburn inconnection herewith and none of the information supplied or to be supplied byWestern or any of its Subsidiaries to Auburn hereunder to the best of Western’sKnowledge contains or will contain any untrue statement of material fact oromit to state any material fact required to be stated therein or necessary inorder to make the statements therein, in light of the circumstances under whichthey are made, not misleading.

 

4.6.2  None of the information supplied or to besupplied by Western or relating to Western which is included or incorporated byreference in (i) the Registration Statement on Form S-4 to be filed with theSEC by Western in connection the issuance of shares of Western Common Stock inthe Merger will, at the time the Registration Statement becomes effective underthe Securities Act, contain any untrue statement of a material fact or omit tostate a material fact required to be stated therein or necessary to make thestatements therein, in light of the circumstances under which they were made,not misleading; (ii) the Proxy Statement/Prospectus and any amendment orsupplement thereto will, at all times from the date of mailing to shareholdersof Auburn through the date of the meeting of shareholders of Auburn to be heldin connection with the Merger, contain any untrue statement of a material factor omit to state a material fact required to be stated therein or necessary tomake the statements therein, in light of the circumstances under which theywere made, not misleading; and (iii) the applications and forms to be filedwith securities or “blue sky” authorities, self regulatory authorities, or anyGovernmental Entity in connection with the Merger, the issuance of any sharesof Western Common Stock in connection with the Merger, or any RequisiteRegulatory Approvals will, at the time filed or at the time they becomeeffective, contain any untrue statement of a material fact or omit to state anymaterial fact required to be stated therein or necessary to make the statementstherein, in light of the circumstances under which they were made, notmisleading.  The Registration Statement(except for such portions thereof that relate only to Auburn and itsSubsidiaries) will comply in all material respects with the applicableprovisions of the Securities Act and the Exchange Act and the rules andregulations thereunder.

 

4.6.3  Western has delivered or will deliver toAuburn copies of:  (a) the auditedbalance sheets of Western and its Subsidiaries as of December 31, 2002,2001 and 2000 and the related statements of income, changes in shareholders’equity and cash flows for the years then ended and the related notes to suchfinancial statements, all as audited by Perry-Smith LLP, independent publicaccountants (the “Western Financial Statements”), and Western will hereafteruntil the Closing Date deliver to Auburn copies of additional financialstatements of Western as provided in Section 5.1.1(iii).  The Western Financial Statements have beenprepared (and all of said additional financial statements will be prepared) inaccordance with GAAP, or applicable regulatory accounting principles, appliedon a consistent basis during the periods involved (except as may be indicatedin the notes thereto) consistently followed throughout the periods covered bysuch statements, and present (and, when prepared, will present) fairly thefinancial position of Western and its Subsidiaries as of the respective datesand for the respective periods covered by such financial statements (subject,in the case of the unaudited statements, to recurring adjustments normal innature and amount).  In addition,Western has delivered or made available to Auburn copies of all management orother letters delivered to Western by its independent accountants in connectionwith any of the Western Financial Statements or by such accountants or anyconsultant regarding the internal controls or internal compliance proceduresand systems of Western issued at any time since January 1, 2000, and willmake available for inspection by Auburn or its representatives, at such timesand places as Auburn may reasonably request, reports and working papersproduced or developed by such accountants or consultants.

 

Section 4.7  Compliance With Applicable Laws.  Except as disclosed on Schedule 4.7, tothe best of Western’s Knowledge, the respective businesses of Western and itsSubsidiaries are not being conducted in violation of any law, ordinance orregulation, except for violations which individually or in the aggregate wouldnot have a Material Adverse Effect on Western and its Subsidiaries, taken as awhole.  No investigation or review byany Governmental Entity with respect to Western is pending or, to the Knowledgeof Western, threatened, nor has any Governmental Entity indicated to Western anintention to conduct the same, other than those the outcome of which, as far ascan be reasonably foreseen, will not have a Material Adverse Effect on Westernand its Subsidiaries, taken as a whole.

 

Section 4.8  Litigation.  Except as set forth in Schedule 4.8, to the Knowledge ofWestern there is no suit, action or proceeding or investigation pending orthreatened against or affecting Western which, if adversely determined, wouldhave a Material Adverse Effect on Western, taken as a whole; nor is there anyjudgment, decree,

 

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injunction,rule or order of any Governmental Entity or arbitrator outstanding againstWestern or its Subsidiaries, that has, or which, insofar as reasonably can beforeseen, in the future would have, any such Material Adverse Effect.  Schedule 4.8 contains a true, correctand complete list, including identification of the applicable insurance policycovering such litigation, if any, subject to reservation of rights, if any, theapplicable deductible and the amount of any reserve therefor, of all pendinglitigation in which Western or its Subsidiaries, is a named party of whichWestern has Knowledge, and except as disclosed on Schedule 4.8, all of thelitigation shown on such Schedule is adequately covered by insurance inforce, except for applicable deductibles, or has been adequately reserved forin accordance with Western’s prior business practices.

 

Section 4.9  Agreements with Banking Authorities.  Neither Western nor any Subsidiary ofWestern is a party to any written agreement or memorandum of understandingwith, or order or directive from, any Governmental Entity.

 

Section 4.10  Performance of Obligations.  Western and its Subsidiaries have performedall material obligations required to be performed by them to date and none ofWestern or any of its Subsidiaries is in material default under or in breach ofany term or provision of any covenant, contract, lease, indenture or any otheragreement, written or oral, to which any is a party, is subject or is otherwisebound, and no event has occurred that, with the giving of notice or the passageof time or both, would constitute such a default or breach, where such defaultor breach or failure to perform would have a Material Adverse Effect on Westernand its Subsidiaries, taken as a whole. To Western’s Knowledge, and except as disclosed on Schedule 4.10,no party with whom Western or any of its Subsidiaries has an agreement that isof material importance to the business of Western and its Subsidiaries, takenas a whole, is in default thereunder.

 

Section 4.11  Absence of Material Adverse Effect.  Since January 1, 2003, the respectivebusinesses of Western and its Subsidiaries have been conducted only in the ordinarycourse, in substantially the same manner as theretofore conducted, and no eventor circumstance has occurred or is expected to occur which to Western’sKnowledge has had or which, with the passage of time or otherwise, couldreasonably be expected to have a Material Adverse Effect on Western and itsSubsidiaries, taken as a whole.

 

Section 4.12  Undisclosed Liabilities.  Except as disclosed on Schedule 4.12,none of Western or any of its Subsidiaries to Western’s Knowledge has anyliabilities or obligations, either accrued, contingent or otherwise, that arematerial to Western and its Subsidiaries, taken as a whole, and that have notbeen: (a) reflected or disclosed in the Western Financial Statements; or (b)incurred subsequent to December 31, 2002 in the ordinary course ofbusiness.  Western has no Knowledge ofany basis for the assertion against Western or any of its Subsidiaries, of anyliability, obligation or claim (including without limitation that of anyGovernmental Entity) that will have or cause, or could reasonably be expectedto have or cause, a Material Adverse Effect on Western and its Subsidiaries,taken as a whole, that is not fairly reflected in the Western FinancialStatements or on Schedule 4.12.

 

Section 4.13  Effective Date of Representations,Warranties, Covenants and Agreements. Each representation, warranty, covenant and agreement of Western setforth in this Agreement shall be deemed to be made on and as of the date hereofand as of the Effective Time.

 

**ARTICLE 5. ADDITIONAL AGREEMENTS**

 

Section 5.1  Access to Information, Due Diligence, etc.

 

5.1.1  Upon reasonable notice, each party shallpermit the other party and its accountants, counsel and other representativesreasonable access to their officers, employees, properties, books, contracts,commitments and records and from the date hereof through the Effective Time,and shall furnish or provide access to each other as soon as practicable, (i) acopy of each of Auburn’s Filings or Western’s Filings filed subsequent to thedate of this Agreement promptly after such document has been filed with theappropriate Governmental Entity, provided, however, that copies of any Returnsrelating to Taxes of Auburn or any of its Subsidiaries shall be furnished toWestern at least 15 Business Days prior to the proposed date of filing thereofand shall not be filed without the prior approval of Western, which approvalshall not be unreasonably withheld or delayed; (ii) unless otherwise prohibitedby law, a copy of each report, schedule and other documents filed orreceived by it during such period with any

 

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RegulatoryAuthority or the Internal Revenue Service, as to documents other than relatedto employees or customers and other than those distributed to banks generally;(iii) as promptly as practicable following the end of each calendar month afterthe date hereof, a balance sheet of Auburn or Western as of the end of suchmonth; and (iv) all other information concerning its business, properties,assets, financial condition, results of operations, liabilities, personnel andotherwise as Auburn or Western may reasonably request.

 

5.1.2  Until the Effective Time, a representativeof Western shall be entitled and shall be invited to attend meetings of theBoards of Directors of Auburn, at least five (5) days’ prior to written noticeof the dates, times and places of such meetings shall be given to Westernexcept that in the case of special meetings Western shall receive the samenumber of days’ prior notice as Auburn’s directors receive for such meetings;provided, however, that such representative shall excuse himself or herselffrom any portion of any such meetings that (i) relate to approval of, or theexercise of any rights under, this Agreement by Auburn, (ii) involvediscussions between such Boards of Directors or such Loan Committees and legalcounsel for Auburn  that are entitled tobe protected from disclosure under an attorney-client privilege which would belost due to the presence of such representative of Western, or (iii) constitutethe Executive Session of any Board of Directors meeting.

 

5.1.3  Western and Auburn each agrees to keepconfidential and not divulge to any other party or Person (other than to theemployees, attorneys, accountants and consultants of each who have a need toreceive such information and other than as may be required by law) anyinformation received from the other, unless and until such documents and otherinformation otherwise becomes publicly available or unless the disclosure ofsuch information is authorized by each party. In the event of termination of this Agreement for any reason, theparties shall promptly return, or at the election of the other party destroy,all nonpublic documents obtained from the other and any copies or notes of suchdocuments (except as otherwise required by law) and, upon the request of theother party, confirm such destruction to the other in writing.

 

Section 5.2  Shareholder Approval.

 

5.2.1  Auburn shall promptly call a meeting of itsshareholders to be held at the earliest practicable date after the date onwhich the initial Registration Statement is filed with the SEC, but in no eventlater than December 31, 2003, for the purpose of approving this Agreementand authorizing the Merger Agreement and the Merger.  Auburn’s Board of Directors will recommend to its shareholdersapproval of this Agreement, the Merger Agreement and the Merger; provided,however, that Auburn’s Board of Directors may withdraw its recommendation ifsuch Board of Directors believes in good faith (based on a written opinion of afinancial advisor that is experienced in evaluating the fairness of AcquisitionProposals) that an Auburn Superior Proposal (defined below) has been made andshall have determined in good faith, after consultation with and based onwritten advice of its outside legal counsel, that the withdrawal of suchrecommendation is necessary for such Board of Directors to comply with itsfiduciary duties under applicable law.

 

5.2.2  If the Merger is approved by vote of theshareholders of Auburn, then, within ten (10) days thereafter Auburn shall senda Dissenting Shareholder Notice to each recordholder of any Dissenting Shares.

 

Section 5.3  Taking of Necessary Action.

 

5.3.1  Subject to the terms and conditions of thisAgreement, each of the parties hereto agrees, subject to applicable laws andthe fiduciary duties of Auburn’s or Western’s Boards of Directors, as advisedin writing by their respective counsel, to use all reasonable efforts promptlyto take or cause to be taken all action and promptly to do or cause to be doneall things necessary, proper or advisable under applicable laws and regulationsto consummate and make effective the transactions contemplated by thisAgreement and the Merger Agreement, including, without limitation, the deliveryof any certificate or other document reasonably requested by counsel to a partyto this Agreement.  Without limiting theforegoing, Western and Auburn will use their reasonable efforts to obtain allconsents of third parties and Government Entities necessary or, in thereasonable opinion of Western or Auburn advisable for the consummation of thetransactions contemplated by this Agreement. Without limiting the foregoing, Western shall take all actions necessaryto execute and file the Merger Agreement and to effect all transactions

 

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contemplatedby this Agreement and Auburn shall take all actions necessary to effect alltransactions contemplated by this Agreement and the Merger Agreement.  In case at any time after the Effective Timeany further action is necessary or desirable to carry out the purposes of thisAgreement, the Merger Agreement, or to vest the Surviving Corporation with fulltitle to all properties, assets, rights, approvals, immunities and franchisesof Auburn, the proper officers or directors of Western or Auburn, as the casemay be, shall take all such necessary action.

 

5.3.2  The obligations of Auburn contained inSection 6.2.5 of this Agreement shall continue to be in full force andeffect despite any Default under Section 6.2.5 or Auburn’s receipt of anAuburn Superior Proposal (defined below) and any Default underSection 6.2.5 by Auburn shall entitle Western to such legal or equitableremedies as may be provided in this Agreement or by law notwithstanding thatany action or inaction of the Board of Directors or officers of the defaultingparty which is required to enable such party to fulfill such obligations may beexcused based on the continuing fiduciary obligations of such party’s Board ofDirectors and officers to its shareholders. Notwithstanding the foregoing, however, in the event of a termination ofthis Agreement by Western or Auburn and the actual payment of the liquidateddamages to the other party as provided for in Section 8.5 of thisAgreement, neither Western, Auburn or their respective directors or officersshall have any obligations or liabilities of any kind under this Agreement byreason of any such Default, and Western or Auburn shall have no furtherobligations of any kind under this Agreement.

 

5.3.3  Auburn shall use its best efforts to causeeach director, executive officer and other Person who is an “Affiliate” ofAuburn (for purposes of Rule 145 under the Securities Act) to deliver toWestern, on the date of this Agreement, a written agreement in the formattached hereto as Exhibit 5.3 (the “Affiliate Agreements”).

 

Section 5.4  Registration Statement and Applications.

 

5.4.1  Western and Auburn will cooperate andjointly prepare and file as promptly as practicable the Registration Statement,the statements, applications, correspondence or forms to be filed withappropriate tate securities law regulatory authorities, and the statements,correspondence or applications to be filed to obtain the Requisite RegulatoryApprovals to consummate the transactions contemplated by this Agreement.  Each of Western and Auburn shall use allreasonable efforts to have the S-4 Registration Statement declared effectiveunder the Securities Act as promptly as practicable after such filing, andthereafter mail the Proxy Statement/Prospectus to the shareholders ofAuburn.  Each party will furnish allfinancial or other information, including accountant comfort letters relating thereto,certificates, consents and opinions of counsel concerning it and itsSubsidiaries received by such party.

 

5.4.2  Each party shall provide to the other at therequest of the other party: (i) immediately prior to the filing thereof, copiesof all material statements, applications, correspondence or forms to be filedwith state securities law regulatory authorities, the SEC and other appropriateregulatory authorities to obtain the Requisite Regulatory Approvals toconsummate the transactions contemplated by this Agreement; provided, however,that no approval need be obtained from any party to which such materials areprovided; and (ii) promptly after delivery to, or receipt from, such regulatoryauthorities all written communications, letters, reports or other documentsrelating to the transactions contemplated by this Agreement.

 

Section 5.5  Expenses.

 

5.5.1  Whether or not the Merger is consummated,all costs and expenses incurred in connection with this Agreement and thetransactions contemplated hereby shall be paid by the party incurring the same,including, without limitation, all costs associated with any resales of WesternCommon Stock by Affiliates of Auburn; provided, however, that Western will fileon a timely basis at its own expense the reports required by Rule 144(c) of theSecurities Act.

 

5.5.2  Auburn and Western shall use their bestefforts to ensure that their attorneys, accountants, financial advisors,investment bankers and other consultants engaged by them in connection with thetransaction contemplated by this Agreement submit full and final bills on orbefore the Determination Date and that all such expenses are paid or properlyaccrued prior to the Determination Date.

 

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Section 5.6  Notification of Certain Events .

 

5.6.1  Auburn shall provide to Western, as soon aspracticable, written notice (sent via facsimile and overnight mail or courier)of the occurrence or failure to occur of any of the events, circumstances orconditions that are the subject of Sections 6.1 and 6.2, which notice shallprovide reasonable detail as to the subject matter thereof.

 

5.6.2  Western shall provide to Auburn, as soon aspracticable, written notice (sent via facsimile and overnight mail or courier)of the occurrence or failure to occur of any of the events, circumstances orconditions that are the subject of Section 6.3 and 6.4, which notice shallprovide reasonable detail as to the subject matter thereof.

 

5.6.3  Each party shall promptly advise the othersin writing of any change or event which could reasonably be expected to have aMaterial Adverse Effect on the business, properties, assets, financialcondition, results of operations, liabilities or personnel of such party or onits ability to consummate the transactions contemplated by this Agreement orthe Merger Agreement.

 

5.6.4  Auburn and Western shall immediately notifythe other in writing in the event that such party becomes aware that theRegistration Statement or Proxy Statement/Prospectus at any time contains anyuntrue statement of a material fact or omits to state a material fact requiredto be stated therein or necessary in order to make the statement therein, inlight of the circumstances under which they were made, not misleading or thatthe Registration Statement or the Proxy Statement/Prospectus otherwise isrequired to be amended and supplemented, which notice shall specify, inreasonable detail, the circumstances thereof. Western shall promptly amend and supplement such materials anddisseminate the new or modified information so as to fully comply with theSecurities Act.  If the amendment orsupplement so required relates to information concerning Auburn, theout-of-pocket costs and expenses of preparing, filing and disseminating suchamendment or supplement shall be borne by Auburn.

 

Section 5.7  Closing Schedules.  Auburn has delivered to Western on or beforethe date of this Agreement all of the Schedules to this Agreement which Auburnis required to deliver to Western hereunder (the “Auburn Schedules”).  Western has delivered to Auburn on or beforethe date of this Agreement all of the Schedules to this Agreement which Westernis required to deliver to Auburn hereunder (the “Western Schedules”).  Immediately prior to the Closing Date,Auburn shall have prepared updates of the Auburn Schedules provided for in thisAgreement and shall deliver to Western revised schedules containing the updatedinformation (or a certificate signed by Auburn’s Chief Executive Officerstating that there have been no changes on the applicable schedules); andWestern shall have prepared updates of the Western Schedules provided for inthis Agreement and shall deliver to Auburn revised Schedules containing updatedinformation (or a certificate signed by Western’s Chief Executive Officerstating that there has been no change on the applicable schedules).  Such updated schedules shall sometimes bereferred to collectively, as the “Closing Schedules.”  The Closing Schedules shall be dated as of the day prior to theClosing Date and shall contain information as of the day prior to the ClosingDate or as of such earlier date as is practicable under the circumstances.  In the event the Closing Schedules disclosean event, occurrence or circumstance that has had or could reasonably beexpected to have a Material Adverse Effect on Auburn, on the one hand, or onWestern, on the other hand, or on consummation of the transactions contemplatedby this Agreement, that was not disclosed in the previously delivered Scheduleshereto, the party delivering such Closing Schedules (the “Affected Party”)shall so notify the other party in the letter of transmittal for such ClosingSchedules, the Closing Date shall be delayed for seven (7) Business Days andsuch other party shall be entitled to terminate this Agreement within five (5)Business Days after receiving such Closing Schedules that disclose such event,occurrence or circumstance.  In theevent of any such termination, the terminating party shall have no liabilityfor such termination.  The AffectedParty shall have no liability to the terminating party in such an event unless(i) as a result of the existence of such event, occurrence or circumstance sodisclosed in the Closing Schedules any of the representations or warranties ofthe Affected Party contained in this Agreement are found to have been untrue inany material respect as of the date of this Agreement, or (ii) the event,occurrence or circumstance could have been prevented in the exercise ofreasonable diligence by any officers or directors of the Affected Party, ineither of which cases the Affected Party shall be liable to the terminatingparty for Liquidated Damages as provided in Section 8.5 hereof.

 

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Section 5.8  Additional Accruals/Appraisals.  Prior to the Closing Date, but after theDetermination Date, at Western’s request, Auburn and/or AC Bank shall,consistent with GAAP and applicable banking regulations, establish suchadditional accruals and reserves immediately prior to the Determination Date asmay be necessary to conform Auburn’s or AC Bank’s accounting and credit andOREO loss reserve practices and methods to those of Western, provided, however,that no accrual or reserve made by Auburn or AC Bank pursuant to thisSection 5.8, or any litigation or regulatory proceeding arising out of anysuch accrual or reserve, or any other effect on Auburn or AC Bank resultingfrom Auburn’s or AC Bank’s compliance with this Section 5.8, shall constituteor be deemed to be a breach, violation of or failure to satisfy anyrepresentation, warranty, covenant, condition or other provision of thisAgreement or otherwise be considered in determining whether any such breach,violation or failure to satisfy shall have occurred.

 

**ARTICLE 6. CONDUCT OF BUSINESS**

 

Section 6.1  Affirmative Conduct of Auburn .  During the period from the date of executionof this Agreement through the Effective Time, Auburn shall carry on itsbusiness, and shall cause each of its respective Subsidiaries to carry on itsbusiness, in the ordinary course in substantially the manner in whichheretofore conducted, subject to changes in law applicable to all nationalbanks or all member banks insured by the FDIC and directives from regulators,and use all commercially reasonable efforts to preserve intact its businessorganization, keep available the services of its officers and employees, (otherthan terminations in the ordinary course of business) and preserve itsrelationships with customers, depositors, suppliers and others having businessdealings with it; and, to these ends, shall fulfill each of the following:

 

6.1.1  Use its commercially reasonable efforts, orcooperate with others, to expeditiously bring about the satisfaction of theconditions specified in Article 7 hereof;

 

6.1.2  Advise Western promptly in writing of anychange that would have a Material Adverse Effect on its capital structure,financial condition, assets, results of operations, business or prospects or ofany matter which would make the representations and warranties set forth inArticle 3 hereof not true and correct in any material respect as of theeffective date of the Registration Statement and at the Effective Time;

 

6.1.3  Keep in full force and effect all of itsexisting material permits and licenses and those of its Subsidiaries;

 

6.1.4  Use its commercially reasonable efforts tomaintain insurance or bonding coverage on all material properties for which itis responsible and on its business operations, and carry not less than the samecoverage for fidelity, public liability, personal injury, property damage andother risks equal to that which is in effect as of the date of this Agreement;and notify Western in writing promptly of any facts or circumstances which couldaffect its ability, or that of any of its Subsidiaries, to maintain suchinsurance or bonding coverage;

 

6.1.5  Perform its contractual obligations and notbreach or come into default on any of such obligations, and not amend, modify,or, except as they may be terminated in accordance with their terms, terminateany material contract, agreement, understanding, commitment, or offer, whetherwritten or oral, (collectively referred to as an “Understanding”) or materiallydefault in the performance of any of its obligations under any Understandingwhere such default would have a Material Adverse Effect on Auburn;

 

6.1.6  Duly observe and conform to all legalrequirements applicable to its business, except for any failure to so observeand conform that would not, individually or in the aggregate, and, in thefuture will not, have a Material Adverse Effect on Auburn;

 

6.1.7  Duly and timely file as and when due allreports and Returns required to be filed with any Governmental Entity;

 

6.1.8  Maintain its tangible assets and propertiesin good condition and repair, normal wear and tear excepted in accordance withprior practices;

 

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6.1.9  Promptly advise Western in writing of anyevent or any other transaction within the Knowledge of Auburn, whereby anyPerson or related group of Persons acquires, after the date of this Agreement,directly or indirectly, record or beneficial ownership (as defined in Rule13d-3 promulgated by the SEC pursuant to the Exchange Act) or control of 5% ormore of the outstanding shares of Auburn Common Stock either prior to or afterthe record date fixed for the Auburn shareholders’ meeting or any adjournedmeeting thereof to approve the transactions contemplated herein;

 

6.1.10 (a)                                                 Maintain a reserve for loan and lease losses(“Loan Loss Reserve”) at a level which is adequate to provide for all known andreasonably expected losses on loans, leases and other extensions of creditoutstanding and other inherent risks in Auburn’s or AC Bank’s portfolio ofloans and leases, in accordance with GAAP and applicable regulatory accountingprinciples and banking laws and regulations;

 

(b)                                 Charge off all loans, receivables and otherassets, or portions thereof, deemed uncollectible in accordance with GAAP,regulatory accounting principles, and applicable law or regulation, or whichhave been classified as “loss” or as directed by any regulatory authority,unless such classification or direction has been disregarded in good faith byAuburn or AC Bank, Auburn or AC Bank has submitted in writing to suchregulatory authority the basis upon which it has so disregarded suchclassification or direction, and such regulatory authority retracts itsdirection requiring such charge-off;

 

6.1.11  Furnish to Western, as soon as practicable,and in any event within five days after it is prepared, or concurrent withdistribution to the Board of Directors or any committees thereof if preparedfor such purpose: (i) a copy of any report or agenda submitted to the Board ofDirectors of Auburn or AC Bank or any of their committees and access to theworking papers and materials related thereto prepared for and distributed tothe Board of Directors, whether prior to, at or subsequent to a meeting,provided, however, that Auburn need not furnish Western any materials relatingto deliberations of Auburn’s Board of Directors or AC Bank’s Board of Directorswith respect to its approval of this Agreement, communications of Auburn’slegal counsel with the Board of Directors or officers of Auburn regardingAuburn’s rights against or obligations to Western or its Subsidiaries underthis Agreement, or books, records and documents covered by the attorney-clientprivilege or which are attorneys’ work product; (ii) copies of all material reports,renewals, filings, certificates, statements, correspondence and other documentsspecific to Auburn or AC Bank or filed with or received from any FederalReserve Bank, the CDFI, the FDIC or any Governmental Entity; (iii) monthlyunaudited balance sheets, statements of income and changes in shareholders’equity for Auburn and AC Bank and quarterly unaudited balance sheets,statements of income and changes in shareholders’ equity for Auburn and ACBank, in each case prepared on a basis consistent with past practice; and (iv)such other reports as Western may reasonably request (which are otherwisedeliverable under this Section 6.1.11) relating to Auburn.  Each of the financial statements of Auburnor AC Bank delivered pursuant to this Section 6.1.11 shall be accompaniedby a certificate of the Chief Financial Officer of Auburn or AC Bank to theeffect that such financial statements fairly present the financial informationpresented therein of Auburn or AC Bank, for the periods covered, subject torecurring adjustments normal in nature and amount, necessary for a fairpresentation and are prepared on a basis consistent with past practice.  Any Board or committee materials to beconcurrently distributed to Western pursuant to this Section 6.1.11 shallbe delivered via facsimile to Gary D. Gall at the number listed inSection 9.2 hereof;

 

6.1.12  Auburn agrees that through the EffectiveTime, as of their respect dates, (i) each Auburn Filing will be true andcomplete in all material respects; and (ii) each Auburn Filing will comply inall material respects with all of the statutes, rules and regulations enforcedor promulgated by the Governmental Entity with which it will be filed and nonewill contain any untrue statement of a material fact or omit to state a materialfact required to be stated therein or necessary to make the statements therein,in light of the circumstances under which they will be made, notmisleading.  Any financial statementcontained in any of such Auburn Filings that is intended to present thefinancial position of Auburn during the periods involved to which it relateswill fairly present in all material respects the financial position of Auburnand will be prepared in accordance with GAAP or consistent with applicableregulatory accounting principles and banking law and banking regulations,except as stated therein;

 

6.1.13  Maintain reserves for contingent liabilitiesin accordance with GAAP or applicable regulatory accounting principles andconsistent with past practices;

 

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6.1.14  Promptly notify Western of the filing, orthreatened filing, of any litigation, or the filing or threatened filing of anygovernment or regulatory action, including an investigation or notice ofinvestigation, or similar proceeding or notice of any material claims againstAuburn or any of its assets;

 

6.1.15  Inform Western of the amounts and categoriesof any loans, leases or other extensions of credit, or other assets, that havebeen classified by any bank regulatory authority or by any unit of AC Bank as“Specially Mentioned,” “Renegotiated,” “Substandard,” “Doubtful,” “Loss” or anycomparable classification (“Classified Assets”).  Auburn will furnish to Western, as soon as practicable, and inany event within fifteen days after the end of each calendar month, schedulesincluding the following: (i) Classified Assets by type (including each creditor other asset in an amount equal to or greater than $10,000), and itsclassification category; (ii) nonaccrual credits by type (including each creditin an amount equal to or greater than $10,000); (iii) renegotiated loans bytype (loans on which interest has been renegotiated to lower than market ratesbecause of the financial condition of the borrowers); (iv) delinquent creditsby type (including each delinquent credit in an amount equal to or greater than$10,000), including an aging into 30-89 and 90+ day categories; (v) loans orleases or other assets charged off, in whole or in part, during the previousmonth by type (including each such loan or lease or other asset in an amountequal to or greater than $10,000); and (vi) OREO or assets owned stating withrespect to each its type;

 

6.1.16  Furnish to Western, upon Western’s request,schedules with respect to the following: (i) participating loans and leases,stating, with respect to each, whether it is purchased or sold and the loan orlease type; (ii) loans or leases (including any commitments) by Auburn to anydirector or officer (at or above the Vice President level) of Auburn or any ofits Subsidiaries, or to any Person holding 5% or more of the capital stock ofAuburn, including, with respect to each such loan or lease, the identity and,to the best Knowledge of Auburn, the relation of the borrower to Auburn or ACBank, the loan or lease type and the outstanding and undrawn amounts; and (iii)standby letters of credit, by type, (including each letter of credit in a faceamount equal to or greater than $10,000);

 

6.1.17  Make available to Western copies of each creditauthorization package, consisting of all applications for and financialinformation regarding loans, renewals of loans or other extensions of credit of$250,000 or more (on a noncumulative basis) for secured loans or securedextensions of credit and $25,000 in the case of unsecured loans or unsecuredextensions of credit, which are approved by Auburn after the date of thisAgreement, within ten Business Days of preparation of such packages; and

 

6.1.18  The Board of Directors of Auburn shallpromptly adopt resolutions required to cause the 401(k) Plan to be rolled intothe 401(k) Plan for Western Sierra at the Effective Time. Except for the AuburnStock Option Plan the Board of Directors of Auburn shall promptly adoptresolutions to terminate any other plan or agreement providing shares of AuburnCommon Stock or equity-based rights to any Person.

 

Section 6.2  Negative Covenants of Auburn.  During the period from the date of executionof this Agreement through the Effective Time, Auburn agrees that withoutWestern’s prior written consent, it shall not and its Subsidiaries shall not:

 

6.2.1 (a)  Declare or pay any dividend on or make anyother distribution in respect of any of its capital stock; (b) split, combineor reclassify any of its capital stock or issue or authorize the issuance ofany other securities in respect of, in lieu of or in substitution for shares ofits capital stock; or (c) repurchase or otherwise acquire any shares of itscapital stock.  Notwithstanding theforegoing, the parties agree that prior to the completion of the Merger, Auburnshall pay a cash dividend to its shareholders in an aggregate amount equal tothe lesser of $350,000 or 35% of Auburn’s pretax income from January 1,2003 through the Determination Date after expensing the payout for the 4,000options to be canceled and other normal expenses and accruals identified withthe Merger;

 

6.2.2  Take any action that would or might resultin any of the representations and warranties of Auburn set forth in theAgreement becoming untrue in any material respect or any of the conditions tothe Merger set forth in Article 7 not being satisfied, except to theextent such actions are required to be undertaken by applicable law, regulationor at the direction of any Regulatory Authority;

 

6.2.3  Issue, deliver, sell, or grant, or authorizethe issuance, delivery, sale or grant of, or purchase, any shares of thecapital stock of Auburn or any securities convertible or exercisable into orexchangeable for such

 

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capitalstock, or any rights, warrants or options, including options under any stockoption plans or enter into any agreements to do any of the foregoing, except inconnection with the issuance of Auburn Common Stock pursuant to the exercise ofAuburn Stock Options;

 

6.2.4  Amend its Articles of Incorporation orBylaws, except as required by applicable law or by the terms of this Agreement;

 

6.2.5  Authorize or knowingly permit any of itsrepresentatives, directly or indirectly, to solicit or encourage anyAcquisition Proposal (as hereinafter defined) or participate in any discussionsor negotiations with, or provide any nonpublic information to, any Person orgroup of persons (other than Western, and its representatives) concerning anysuch solicited Acquisition Proposal. Auburn shall notify Western immediately if any inquiry regarding anAcquisition Proposal is received by Auburn, including the terms thereof.  For purposes of this Section 6.2.5,“Acquisition Proposal” shall mean any (a) proposal pursuant to which any Personother than Western would acquire or participate in a merger or other businesscombination or reorganization involving Auburn or any of its Subsidiaries; (b)proposal by which any Person or group, other than Western, would acquire theright to vote ten percent (10%) or more of the capital stock of Auburn entitledto vote for the election of directors; (c) acquisition of the assets of Auburnother than in the ordinary course of business; or (d) acquisition in excess often percent (10%) of the outstanding capital stock of Auburn, other than ascontemplated by this Agreement. Notwithstanding the foregoing, nothing contained in this Agreement shallprevent Auburn or Auburn’s Board of Directors from (i) furnishing nonpublicinformation to, or entering into discussions or negotiations with, any personor entity in connection with an unsolicited bona fide written AcquisitionProposal by such person or entity, or recommending an unsolicited bona fidewritten Acquisition Proposal to the shareholders of Auburn, if and only to theextent that (A) the Board of Directors of Auburn has determined and believes ingood faith (after consultation with and the concurrence of its financialadvisor) that such Acquisition Proposal would, if consummated, result in atransaction materially more favorable, from a financial point of view, toAuburn’s shareholders than the transaction contemplated by this Agreement (anysuch more favorable Acquisition Proposal being referred to in this Agreement asan “Auburn Superior Proposal”) and Auburn’s Board of Directors has determinedin good faith, after consultation with and based on written advice from itsoutside legal counsel, that such action is necessary for Auburn to comply withits fiduciary duties to shareholders under applicable law, and (B) prior tofurnishing such nonpublic information to, or entering into discussions ornegotiations with, such person or entity, Auburn’s Board of Directors hasreceived from such person or entity an executed confidentiality agreement, withterms no more favorable to such party than those contained in theConfidentiality Agreement between Auburn and Western, or (ii) complying withRule 14e-2 promulgated under the Exchange Act with regard to an AcquisitionProposal, if such Rule is applicable thereto;

 

6.2.6  Acquire or agree to acquire by merging,consolidating with, or by purchasing all or a substantial portion of the assetsof, or in any other manner, any business or any Person or otherwise acquire oragree to acquire any assets which are material to Auburn, other than in theordinary course of business consistent with prior practice;

 

6.2.7  Sell, lease or otherwise dispose of any ofits assets which are material, individually or in the aggregate, to Auburn,except in the ordinary course of business consistent with prior practice;

 

6.2.8  Incur any indebtedness for borrowed money orguarantee any such indebtedness or issue or sell any debt securities of Auburnor any of its Subsidiaries or guarantee any debt securities of others otherthan in the ordinary course of business consistent with prior practice;

 

6.2.9  Enter into any Understanding, except:  (a) deposits incurred, and short-term debtsecurities (obligations maturing within one year) issued, in its ordinarycourse of business consistent with prior practice, and liabilities arising outof, incurred in connection with, or related to the consummation of thisAgreement; (b) commitments to make loans or other extensions of credit in theordinary course of business consistent with prior practice; and (c) loan salesin the ordinary course of business, without any recourse, provided that nocommitment to sell loans shall extend beyond the Effective Time;

 

6.2.10  Make or enter into a commitment to make anyloan or other extension of credit to any director, officer or employee ofAuburn or any of its Subsidiaries, except in accordance with practice or policyin

 

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existenceon the date of this Agreement and in compliance with all applicable laws andall applicable regulations and directives of any Governmental Entity;

 

6.2.11  Except in the ordinary course of businessconsistent with prior practice or as required by an existing contract, andprovided prior disclosure thereof has been made in Schedule 6.2.11, grantany general or uniform increase in the rates of pay of employees or employeebenefits or any increase in salary or employee benefits of any officer,employee or agent or pay any bonus to any Person;

 

6.2.12  Sell, transfer, mortgage, encumber orotherwise dispose of any assets or other liabilities except in the ordinarycourse of business consistent with prior practice or as required by anyexisting contract;

 

6.2.13  Make the credit underwriting policies, standardsor practices relating to the making of loans and other extensions of credit, orcommitments to make loans and other extensions of credit, or the Loan LossReserve policies, less stringent than those in effect on December 31, 2002or reduce the amount of the Loan Loss Reserves or any other reserves forpotential losses or contingencies;

 

6.2.14  Make any capital expenditures, orcommitments with respect thereto, except those in the ordinary course ofbusiness which do not exceed $10,000 individually or $30,000 in the aggregate;

 

6.2.15  Renew, extend or amend any existingemployment contract or agreement, enter into any new employment contract oragreement or make any bonus or any special or extraordinary payments to anyPerson;

 

6.2.16  Except in the ordinary course of businessconsistent with prior practice, and in compliance with applicable laws andregulations, make any material investments, by purchase of stock or securities,contributions of capital, property transfers, purchases of any property orassets or otherwise, in any other individual, corporation or other entity;

 

6.2.17  Except as otherwise required to correct aprior filing, compromise or otherwise settle or adjust any assertion or claimof a deficiency in Taxes (or interest thereon or penalties in connectiontherewith) or file any appeal from an asserted deficiency except in a formpreviously approved by Western, which approval will not be unreasonablywithheld, in writing, or file or amend any federal, foreign, state or local TaxReturn or report or make any tax election or change any method or period ofaccounting unless required by GAAP or applicable law and, then, only aftersubmitting such Tax return or report or proposed Tax election or change in anymethod or period of accounting, to Western for its approval, which it shall notunreasonably withhold or delay;

 

6.2.18  Except as contemplated in this Agreement,terminate any Employee Plan or Benefit Arrangement;

 

6.2.19  Change its fiscal year or methods ofaccounting in effect at December 31, 2002, except as required by changesin GAAP or regulatory accounting principles as concurred to by Auburn’sindependent public accountants;

 

6.2.20  Take or cause to be taken any action whichwould disqualify the Merger as a “reorganization” within the meaning ofSection 368(a) of the IRC as a tax-free reorganization;

 

6.2.21  Take or cause to be taken into OREO anycommercial property without an environmental report reporting no adverseenvironmental condition on such property, with a copy of such report deliveredto Western prior to taking such property into OREO;

 

6.2.22  Make any new elections with respect to Taxesor any changes in current elections with respect to Taxes affecting the assetsowned by Auburn or its Subsidiaries. Western shall be deemed to have consented in writing to any electionAuburn or its Subsidiaries shall desire to make if: (i) the electing Personshall have notified the Chief Executive Officer of Western in writing of itsdesire to make such election, including in such notice a reasonably completesummary of the election it desires to make and the reasons it desires to makesuch election at least 20 Business Days prior to the due date (includingextensions thereof) for filing such election; and

 

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(ii)Western shall not have responded in writing to such notice by the fifthBusiness Day prior to the due date (including extensions thereof) for filingsuch election; or

 

6.2.23  Materially change its pricing practices onloans or deposit products.

 

Section 6.3  Affirmative Conduct of Western.  During the period from the date of executionof this Agreement through the Effective Time, Western shall carry on itsbusiness, and shall cause each of its respective Subsidiaries to carry on itsbusiness, in the ordinary course in substantially the manner in whichheretofore conducted, subject to changes in law applicable to all nationalbanks or all member banks insured by the FDIC and directives from regulators(except to the extent Auburn shall otherwise consent in writing), and use allcommercially reasonable efforts to preserve intact its business organization,keep available the services of its officers and employees, (other thanterminations in the ordinary course of business) and preserve its relationshipswith customers, depositors, suppliers and others having business dealings withit; and, to these ends, shall fulfill each of the following:

 

6.3.1  Use its commercially reasonable efforts, orcooperate with others, to expeditiously bring about the satisfaction of theconditions specified in Article 7 hereof;

 

6.3.2  Advise Auburn promptly in writing of anychange that would have a Material Adverse Effect on its capital structure,consolidated financial condition, consolidated assets, consolidated results ofoperations, business or prospects or of any matter which would make therepresentations and warranties set forth in Article 4 hereof not true andcorrect in any material respect as of the effective date of the RegistrationStatement and at the Effective Time;

 

6.3.3  Duly observe and conform to all legalrequirements applicable to its business, except for any failure to so observeand conform that would not, individually or in the aggregate, and, in thefuture will not, have a Material Adverse Effect on Auburn;

 

6.3.4  Duly and timely file as and when due allreports and Returns required to be filed with any Governmental Entity;

 

6.3.5  File all necessary applications with theFederal Reserve and the CDFI for the transaction as soon as possible, but nolater than October 31, 2003 and furnish to Auburn, as soon as practicable,and in any event within fifteen days after it has prepared all applications tobe submitted to the Federal Reserve and CDFI for approval of the Merger; and

 

6.3.6  Western agrees that through the EffectiveTime, as of their respect dates, (i) each Western Filing will be true andcomplete in all material respects; and (ii) each Western Filing will comply inall material respects with all of the statutes, rules and regulations enforcedor promulgated by the Governmental Entity with which it will be filed and nonewill contain any untrue statement of a material fact or omit to state amaterial fact required to be stated therein or necessary to make the statementstherein, in light of the circumstances under which they will be made, notmisleading.  Any financial statementcontained in any of such Western Filings that is intended to present thefinancial position of Western, on a consolidated basis, during the periodsinvolved to which it relates will fairly present in all material respects thefinancial position of Western, on a consolidated basis, and will be prepared inaccordance with GAAP or consistent with applicable regulatory accountingprinciples and banking law and regulations, except as stated therein.

 

Section 6.4  Negative Covenants of Western.  During the period from the date of executionof this Agreement through the Effective Time, Western agrees that withoutAuburn’s prior written consent, it shall not and its Subsidiaries shall not:

 

6.4.1 (a)  Declare or pay any dividend on, other thanregular cash dividends consistent with past practices or stock dividends inwhich the Initial Stock Component will be adjusted pursuant toSection 2.6.1(d), or make any other distribution in respect of any of itscapital stock; or (b) split, combine or reclassify any of its capital stock orissue or authorize the issuance of any other securities in respect of, in lieuof or in substitution for shares of its capital stock;

 

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6.4.2  Take any action that would or might resultin any of the representations and warranties of Western set forth in theAgreement becoming untrue in any material respect or any of the conditions to theMerger set forth in Article 7 not being satisfied, except to the extentsuch actions are required to be undertaken by applicable law, regulation or atthe direction of any Regulatory Authority; or

 

6.4.3  Take or cause to be taken any action whichwould disqualify the Merger as a “reorganization” within the meaning ofSection 368(a) of the IRC as a tax-free reorganization;

 

**ARTICLE 7. CONDITIONS PRECEDENT TO CLOSING**

 

Section 7.1  Conditions to the Parties’ Obligations.  The obligations of all the parties to thisAgreement to effect the Merger shall be subject to the fulfillment of thefollowing conditions:

 

7.1.1  This Agreement, the Merger Agreement and theMerger shall have been validly approved by the holders of a majority of theoutstanding shares of Auburn Common Stock entitled to vote;

 

7.1.2  All permits, approvals and consents requiredto be obtained, and all waiting periods required to expire, prior to theconsummation of the Merger under applicable federal laws of the United Statesor applicable laws of any state having jurisdiction over the transactionscontemplated by this Agreement and the Merger Agreement shall have beenobtained or expired, as the case may be (all such permits, approvals andconsents and the lapse of all such waiting periods being referred to as the“Requisite Regulatory Approvals”), without the imposition of any conditionwhich in the reasonable judgment of any party to be affected by such conditionis materially burdensome upon such party or its respective Affiliates or theSurviving Corporation;

 

7.1.3  There shall not be any action taken, or anystatute, rule, regulation or order enacted, entered, enforced or deemedapplicable to the Merger, by any Government Entity which: (i) makes theconsummation of the Merger illegal; (ii) requires the divestiture by Western ofany material asset or of a material portion of the business of Western; or(iii) imposes any condition upon Western or its Subsidiaries (other thangeneral provisions of law applicable to all banks and bank holding companies)which in the judgment of Western would be materially burdensome;

 

7.1.4  The Registration Statement shall have becomeeffective under the Securities Act and no stop order suspending theeffectiveness of the Registration Statement shall have been issued and shallremain in effect.  No legal,administrative, arbitration, investigatory or other proceeding by anyGovernmental Entity or any other Person shall have been instituted and, at whatotherwise would have been the Effective Time, remain pending by or before anyGovernmental Entity to restrain or prohibit the transactions contemplatedhereby;

 

7.1.5  Western and Auburn shall have received anopinion from Perry-Smith LLP, dated the Effective Time, subject to assumptionsand exceptions normally included, and in form and substance reasonablysatisfactory to Western and Auburn, to the effect that the Merger will betreated for federal income tax purposes as a reorganization within the meaningof Section 368(a) of the IRC and that Western and Auburn will each be aparty to that reorganization within the meaning of Section 368(b) of theIRC;

 

7.1.6  Western and Auburn shall have receivedopinions of counsel for the other party in substantially the forms previouslyagreed to by the parties as set forth in Exhibits 7.1.6A and 7.1.6B,respectively, dated as of the Closing Date; and

 

7.1.7  No action, suit or proceeding shall havebeen instituted or threatened before any court or governmental body seeking tochallenge or restrain the transactions contemplated by this Agreement or theMerger Agreement which presents a substantial risk that such transactions willbe restrained or that either party hereto may suffer material damages or otherrelief as a result of consummating such transactions.

 

Section 7.2  Conditions to Western’s Obligations.The obligations of Western to effect the Merger shall be subject to thefulfillment (or waiver, in writing, by Western) of the following conditions:

 

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7.2.1  Except as otherwise provided in thisSection 7.2, (a) the representations and warranties of Auburn contained inArticle 3 shall be true in all material respects as of the Effective Timeas though made at the Effective Time, except to the extent they expressly referto an earlier time and except where the failure to be true, individually or inthe aggregate, would not have or would not be reasonably likely to have, aMaterial Adverse Effect on the Surviving Corporation or AC Bank, or upon theconsummation of the transactions contemplated hereby; (b) Auburn shall haveduly performed and complied in all material respects with all agreements andcovenants required by this Agreement to be performed or complied with by itprior to or at the Effective Time, except where the failure to so perform andcomply, individually or in the aggregate, would not have or would not bereasonably likely to have a Material Adverse Effect on Auburn or AC Bank, orupon the consummation of the transactions contemplated hereby; (c) none of theevents or conditions entitling Western to terminate this Agreement underArticle 8 shall have occurred and be continuing; and (d) Auburn shall havedelivered to Western certificates dated the date of the Effective Time andsigned by the President and Chief Executive Officer to the effect set forth inSubsections 7.2.1(a), (b) and (c);

 

7.2.2  There shall have been obtained, without theimposition of any material burden or restriction on any of the parties heretonot in existence on the date hereof, each consent to the consummation of theMerger required to be obtained from any Person under any agreement, contract orlicense to which Auburn is a party or by or under which it is bound orlicensed, the withholding of which might have a Material Adverse Effect onAuburn, the Surviving Corporation or Western at or following the EffectiveTime, or on the transactions contemplated by this Agreement;

 

7.2.3  Auburn shall have delivered its ClosingSchedules to Western on the day immediately preceding the Closing Date and noneof such Closing Schedules shall reflect any item that was not on the AuburnSchedules (or in the Auburn Financial Statements) delivered on the date ofexecution of this Agreement that has had, would have, or could be reasonablylikely to have, a Material Adverse Effect on Auburn, the Surviving Corporationor Western at or after the Effective Time, or on the consummation of thetransactions contemplated hereby;

 

7.2.4  Between the date of this Agreement and theEffective Time, no event or circumstance shall have occurred which has had orcould reasonably be expected to have a Material Adverse Effect on Auburn, orits Subsidiaries, and Western shall have received a certificate signed onbehalf of Auburn by the President and Chief Executive Officer of Auburn to sucheffect;

 

7.2.5  Counsel for Western shall have approved, inthe exercise of counsel’s reasonable discretion, the validity of alltransactions herein contemplated, as well as the form and substance of allopinions, certificates, instruments of transfer and other documents to bedelivered to Western hereunder or that are reasonably requested by suchcounsel;

 

7.2.6  The sale of the Western Common Stockresulting from the Merger shall have been qualified or registered with theappropriate State securities law or “blue sky” regulatory authorities of allStates in which qualification or registration is required under the Statesecurities laws, and such qualifications or registration shall not have beensuspended or revoked;

 

7.2.7  Auburn shall have delivered to Western notlater than the date of this Agreement all of the executed Affiliate Agreementsin the form attached hereto as Exhibit 5.3;

 

7.2.8  None of Auburn or any of its Subsidiariesshall be subject to any memorandum of understanding, cease and desist order, orother agreement with any Governmental Entity restricting the conduct of any oftheir respective businesses, prospects and operations, so as to have a MaterialAdverse Effect;

 

7.2.9  All of Auburn’s director-shareholders shallhave delivered to Western on the date of this Agreement theDirector-Shareholder Agreements in the form attached hereto as Exhibit 7.2.9;and

 

7.2.10 Auburn’sshareholders’ equity as of the Determination Date shall be no less than theDecember 31, 2002 shareholders’ equity of Auburn.

 

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Section 7.3  Conditions to Auburn’s Obligations.  The obligations of Auburn to effect theMerger shall be subject to the fulfillment (or waiver, in writing, by Auburn)of the following conditions:

 

7.3.1  Except as otherwise provided in thisSection 7.3, (a) the representations and warranties of Western containedin Article 4 shall be true in all material respects as of the EffectiveTime as though made at the Effective Time, except to the extent they expresslyrefer to an earlier time and except where the failure to be true, individuallyor in the aggregate, would not have or would not be reasonably likely to have,a Material Adverse Effect on Western, taken as a whole, or upon consummation ofthe transactions contemplated hereby; (b) Western shall have duly performed andcomplied in all material respects with all agreements and covenants required bythis Agreement to be performed or complied with it prior to or at the EffectiveTime, except where the failure to so perform and comply, individually or in theaggregate, would not have or would not be reasonably likely to have a MaterialAdverse Effect on Western, taken as a whole, or upon the consummation of thetransactions contemplated hereby; (c) none of the events or conditionsentitling Auburn to terminate this Agreement under Article 8 shall haveoccurred and be continuing; and (d) Western shall have delivered to Auburncertificates dated the date of the Effective Time and signed by a dulyauthorized officer to the effect set forth in Subsections 7.3.1(a), (b) and(c);

 

7.3.2  Counsel for Auburn shall have approved, inthe exercise of counsel’s reasonable discretion, the validity of alltransactions herein contemplated, as well as the form and substance of allopinions, certificates, instruments of transfer and other documents to bedelivered to Auburn hereunder or that are reasonably requested by such counsel;

 

7.3.3  Western has taken such action as appropriateto convert the Auburn stock options for 5,000 shares into Western stock optionsadjusted for the Conversion Rate of Stock Options;

 

7.3.4  Prior to the Closing Date, Western shallhave taken all corporate action required to effectuate the appointment of JanT. Haldeman, or another director of Auburn if Mr. Haldeman is unable to serve,to its Board of Directors effective immediately after the Effective Time;

 

7.3.5  Western shall have delivered its ClosingSchedules to Auburn on the day immediately preceding the Closing Date and noneof such Closing Schedules shall reflect any item that was not on the WesternSchedules (or in the Western Financial Statements) delivered on the date ofexecution of this Agreement that has had, or would have a Material AdverseEffect on Western and its Subsidiaries, taken as a whole, at or after theEffective Time, or on the consummation of the transactions contemplated hereby;

 

7.3.6  The fairness opinion (the “Auburn FairnessOpinion”) to be commissioned by Auburn’s Board of Directors shall provide thatthe terms of the Merger, from a financial standpoint, are fair to theshareholders of Auburn, and shall not have been revoked, at any time prior tothe meeting of Auburn’s shareholders at which the Merger is to be voted on;

 

7.3.7  The sale of the Western Common Stockresulting from the Merger shall have been qualified or registered with theappropriate State securities law or “blue sky” regulatory authorities of allStates in which qualification or registration is required under the State securitieslaws, and such qualifications or registration shall not have been suspended orrevoked; and

 

7.3.8  Western shall have obtained a three-yeardirector and officer liability insurance tail coverage policy for the benefitof the current directors and executive officers of Auburn.

 

**ARTICLE 8. TERMINATION, AMENDMENTS AND WAIVERS**

 

Section 8.1  Termination .  This Agreement may be terminated at any timeprior to the Effective Time:

 

8.1.1  By mutual consent of the Boards of Directorsof Western and Auburn;

 

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8.1.2  By Western or Auburn upon the failure tosatisfy any conditions specified in Section 7.1 if such failure is notcaused by any action or inaction of the party requesting termination of thisAgreement;

 

8.1.3  By Western if an Acquisition Event involvingAuburn shall have occurred;

 

8.1.4  By Auburn if there shall have been amaterial breach of any of the representations or warranties of Western setforth in this Agreement, which breach, in the reasonable opinion of Auburn, byits nature cannot be cured or is not cured prior to the Closing and whichbreach would, in the reasonable opinion of Auburn, individually or in theaggregate, have, or be reasonably likely to have, a Material Adverse Effect onWestern and its Subsidiaries, taken as a whole, or upon the consummation of thetransactions contemplated hereby;

 

8.1.5  By Western if there shall have been amaterial breach of any of the representations or warranties of Auburn set forthin this Agreement, which breach, in the reasonable opinion of Western, by itsnature cannot be cured or is not cured prior to the Closing and which breachwould, in the reasonable opinion of Western, individually or in the aggregate,have, or be reasonably likely to have, a Material Adverse Effect on Auburn andits Subsidiaries, taken as a whole, or upon the consummation of thetransactions contemplated hereby;

 

8.1.6  By Auburn after the occurrence of a Defaultby Western and the continuance of such Default for a period of 20 Business Daysafter written notice of such Default, if such Default, in the reasonableopinion of Auburn, cannot be cured prior to the Closing or, even though curableby the Closing, it is not cured prior to the Closing;

 

8.1.7  By Western after the occurrence of a Defaultby Auburn and the continuance of such Default for a period of 20 Business Daysafter written notice of such Default, if such Default, in the reasonableopinion of Western, cannot be cured prior to the Closing or, even thoughcurable by the Closing, it is not cured prior to the Closing;

 

8.1.8  By Western if the Closing Schedulesdelivered by Auburn disclose the occurrence of an event or the existence of anyfacts or circumstances, not disclosed in the Schedules or the Auburn Financial Statementsdelivered to Western on or before the date hereof, that has had or couldreasonably be expected to have a Material Adverse Effect on Auburn and itsSubsidiaries, taken as a whole, or after the Effective Time, on Western, or onthe consummation of the transactions contemplated hereby (an “Auburn MaterialAdverse Event”);

 

8.1.9  By Auburn if the Closing Schedules deliveredby Western disclose the occurrence of an event or the existence of any facts orcircumstances, not disclosed in the Schedules or the Western FinancialStatements delivered to Auburn on or before the date hereof, that has had orcould reasonably be expected to have a Material Adverse Effect on Western andits Subsidiaries, taken as a whole, or on the consummation of the transactionscontemplated hereby (a “Western Material Adverse Event”);

 

8.1.10  By Auburn upon the failure of any of theconditions specified in Section 7.3 to have been satisfied prior toMarch 31, 2004 (or April 30, 2004 if any applicable waiting periodfor Requisite Regulatory Approval requires additional time) provided thatAuburn may not terminate this Agreement under this Section 8.1.10 if therelevant condition shall have failed to occur as a result of any act, delay oromission by Auburn; or

 

8.1.11  By Western upon the failure of any of theconditions specified in Section 7.2 to have been satisfied prior toMarch 31, 2004 (or April 30, 2004 if any applicable waiting periodfor Requisite Regulatory Approval requires additional time) provided thatWestern may not terminate this Agreement under this Section 8.1.11 if therelevant conditions shall have failed to occur as a result of any act, delay oromission by Western.

 

Section 8.2  Effect of Termination; Survival.  Except as provided in Section 8.5, notermination of this Agreement as provided in Section 8.1 for any reason orin any manner shall release, or be construed as so releasing, any party heretofrom its obligations pursuant to Sections 5.1.3, 5.5, 8.5 or 9.5 hereof or fromany liability or damage to any other party hereto arising out of, in connectionwith, or otherwise relating to, directly or indirectly, said party’s materialbreach, Default or failure in performance of any of its covenants, agreements,duties or

 

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obligationsarising hereunder, or any breaches of any representation or warranty containedherein arising prior to the date of termination of this Agreement.

 

Section 8.3  Amendment.  This Agreement may be amended by written consent of the partieshereto, at any time before or after approval hereof by the shareholders ofAuburn; provided, however, that after any such approval by such shareholders,no amendments shall be made which by law require further approval by suchshareholders without such further approval.

 

Section 8.4  Waiver.  Any term or provision of this Agreement, other than regulatoryapproval or any of the provisions required by law, may be waived in writing atany time by the party which is, or whose shareholders are, entitled to thebenefits thereof.

 

Section 8.5  Liquidated Damages; Cancellation Fee.

 

8.5.1  In the event of the occurrence of anAcquisition Event involving Auburn, then Auburn shall pay to Western the sum ofEight Hundred Thousand Dollars ($800,000) in cash.

 

8.5.2  In the event of termination of thisAgreement by Auburn pursuant to Section 8.1.10 as a result of therevocation of the Auburn Fairness Opinion; or a termination of this Agreementby Western pursuant to (i) Section 8.1.2, only as a result ofSection 7.1.1 (no approval by Auburn shareholders), or (ii) pursuant toSection 8.1.5 (breach of representations or warranties of Auburn) orSection 8.1.7 (Default) or Section 8.1.8 (disclosure in the ClosingSchedules of an Auburn Material Adverse Event), where such breach ofrepresentation or warranty, Default or Auburn Material Adverse Event shall havebeen caused in whole or in material part by any action or inaction within thecontrol of Auburn or any of its Subsidiaries, or any of their directors orexecutive officers (it being understood that any breach or Default or AuburnMaterial Adverse Event that occurs after the date of this Agreement and wasoutside of the control of Auburn, its directors and executive officers, shallnot come within this Section 8.5.2), then, Auburn shall pay to Western thesum of Five Hundred Thousand Dollars ($500,000), in cash; provided, however,that if an Acquisition Event occurs involving Auburn within one year followingany termination by Western to which this Section 8.5.2 applies, Auburnshall pay to Western an additional Three Hundred Thousand Dollars ($300,000) incash.

 

8.5.3  In the event of the termination of thisAgreement by Western pursuant to Section 8.1.11 as a result of atermination of this Agreement by Auburn pursuant to 8.1.4 (breach ofrepresentations and warranties of Western) or Section 8.1.6 (Default), orSection 8.1.9 (disclosure in Closing Schedules of a Western MaterialAdverse Event), where such breach of representation or warranty, or such Defaultor Western Material Adverse Event shall have been caused in whole or inmaterial part by any action or inaction within the control of Western or any ofits Subsidiaries, or any of their directors or executive officers (it beingunderstood that any breach or Default or Western Material Adverse Event thatoccurs after the date of this Agreement and was outside of the control ofWestern, its Subsidiaries and their directors and executive officers, shall notcome within this Section 8.5.3), then, Western shall pay to Auburn the sumof Five Hundred Thousand Dollars ($500,000), in cash.

 

8.5.4  The parties have determined that theoccurrence of any of the events or circumstances set forth in Sections 8.5.1,8.5.2 and 8.5.3 would cause a substantial damage and loss and lost businessopportunities to the party terminating this Agreement as a result thereof andthat the payments contemplated by Sections 8.5.1, 8.5.2 and 8.5.3 above providereasonable and fair compensation for such damage, loss and lost businessopportunities and are not intended to be and do not constitute a penalty orforfeiture.  Such payments will be madewithin 10 Business Days following a termination of the Agreement that givesrise to the payment of such liquidated damages pursuant to Sections 8.5.1,8.5.2 or 8.5.3, as applicable.  Upon themaking and receipt of payments due under this Section 8.5, neither party,nor any Affiliates of any party, shall have any further obligation or liabilityof any kind under this Agreement to the other party, except pursuant toSection 5.1.3, 5.5, 8.5.2 (in case of an Acquisition Event) and 9.5.

 

8.5.5  In the event of the termination of thisAgreement by Western or Auburn and for any reason other than as specified inSections 8.5.1, 8.5.2 or 8.5.3 above, none of the parties hereto, nor anyAffiliates of any such parties, shall have any further obligation or liabilityof any kind to the other party, except pursuant to Sections 5.1.3, 5.5 and 9.5.

 

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**ARTICLE 9. GENERAL PROVISIONS**

 

Section 9.1  Nonsurvival of Representations andWarranties .  None of therepresentations, warranties, covenants and agreements in this Agreement or inany instrument delivered pursuant to this Agreement shall survive the EffectiveTime, except for those covenants and agreements contained herein and thereinwhich by their terms apply in whole or in part after the Effective Time or to atermination of this Agreement.

 

Section 9.2  Notices.  All notices and other communications hereunder shall be in writingand shall be deemed given if delivered personally, mailed by registered orcertified mail (return receipt requested), sent by confirmed overnight courieror telecopied (with electronic confirmation and verbal confirmation for theperson to whom such telecopy is addressed), on the date such notice is sodelivered, mailed or sent, as the case may be, to the parties at the followingaddresses (or any such other address for a party as shall be specified by likenotice):

 

If to Auburn at:

 

Auburn Community Bancorp

11795 Atwood Road

Auburn, California 95603

Fax No. (530) 889-2750

Attention: John G. Briner,President/CEO

 

with a copy to:

 

Gary Steven Findley &Associates

1470 North Hundley Street

Anaheim, California 92806

Fax No. (714) 630-7910

Attention: Gary StevenFindley, Esq.

 

If to Western at:

 

Western Sierra Bancorp

4080 Plaza Goldorado Circle

Cameron Park, California95682

Fax No. (530) 698-2279

Attention: Gary D. Gall,President/CEO

 

with a copy to:

 

Bartel Eng & Schroder

300 Capitol Mall, Suite 1100

Sacramento, California 95814

Fax No. (916) 442-3442

Attention: Daniel B. Eng,Esq.

 

Section 9.3  Counterparts.  This Agreement may be executed in one ormore counterparts, all of which shall be considered one and the same agreement,and shall become effective when one or more counterparts have been signed byeach of the parties and delivered to the other parties, it being understoodthat all parties need not sign the same counterpart.

 

Section 9.4  Entire Agreement/No Third PartyRights/Assignment.  This Agreement(including the documents and instruments referred to herein): (a) constitutesthe entire agreement and supersedes all prior agreements and understandings,both written and oral, among the parties with respect to the subject matterhereof; (b) except as expressly set forth herein, is not intended to conferupon any person other than the parties hereto any rights or remedies hereunder;(c) shall not be assigned by a party, by operation of law or otherwise, withoutthe consent of the other parties; and (d) subject to the foregoing, shall bebinding upon and shall inure to the benefit of the parties hereto and theirpermitted successors and assigns.

 

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Section 9.5  Nondisclosure of Agreement.  Western and Auburn agree, except as requiredby law or the rules of the NASDAQ, so long as this Agreement is in effect, notto issue any public notice, disclosure or press release with respect to thetransactions contemplated by this Agreement without seeking the consent of theother party, which consent shall not be unreasonably withheld.

 

Section 9.6  Governing Law.  This Agreement shall be governed andconstrued in accordance with the laws of the State of California, withoutregard to any applicable conflicts of law.

 

Section 9.7  Headings/Table of Contents.  The table of contents and headings containedin this Agreement are for reference purposes only and shall not affect in anyway the meaning or interpretation of this Agreement.

 

Section 9.8  Enforcement of Agreement.  The parties hereto agree that irreparabledamage will occur in the event that any of the provisions of this Agreement orthe Bank Merger Agreement is not performed in accordance with its specificterms or is otherwise breached.  It isaccordingly agreed that the parties shall be entitled to an injunction orinjunctions to prevent breaches of this Agreement and to enforce specificallythe terms and provisions hereof in any court of the State of California or anystate having jurisdiction, this being in addition to any remedy to which theyare entitled at law or in equity.

 

Section 9.9  Severability.  Any term or provision of this Agreementwhich is invalid or unenforceable in any jurisdiction shall, as to thatjurisdiction, be ineffective to the extent of such invalidity orunenforceability without rendering invalid or unenforceable the remaining termsand provisions of this Agreement or affecting the validity or enforceability ofany of the terms or provisions of this Agreement in any other jurisdiction.  If any provision of this Agreement is sobroad as to be unenforceable, the provision shall be interpreted to be only sobroad as is enforceable.

 

Section 9.10  Attorneys’ Fees.  If any legal action or any arbitration uponmutual agreement is brought for the enforcement of this Agreement or because ofan alleged dispute, breach or default in connection with this Agreement, theprevailing party shall be entitled to recover reasonable attorneys’ fees andother costs and expenses incurred in that action or proceeding, in addition toany other relief to which it may be entitled.

 

 

IN WITNESS WHEREOF, Western and Auburn havecaused this Agreement to be signed by their respective officers thereunto dulyauthorized, all as of the date first above written.

 
| **WESTERN  SIERRA BANCORP** | **AUBURN  COMMUNITY BANCORP**    |
|-----------------------------|----------------------------------|
|                        |                             |
|                        |                             |   |   |
| By:                         | /s/ Gary D. Gall                 |   | By: | /s/ John G. Briner |   |
| Name:                       | Gary D. Gall, President  and CEO |   | Name: | John G. Briner, President  and CEO |   |
|                             |                                  |  |  |  |  |  |  |  |  |

 

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