Exhibit
10.3


 


TERMINATION
AND RELEASE AGREEMENT


 


This Termination and
Release Agreement (this “Agreement”) is entered into as of December 8, 2004
by and among Thomas M. Petro (the “Executive”), Northeast Pennsylvania
Financial Corp., a Delaware corporation (the “Company”), First Federal Bank, a federally-chartered
savings bank and a wholly-owned subsidiary of the Company (the “Bank”), and KNBT
Bancorp, Inc., a Delaware corporation (“Parent”).


 


RECITALS


 


WHEREAS, the Company and
Parent are entering into an Agreement and Plan of Merger, dated as of December 8,
2004 (the “Merger Agreement”); and


 


WHEREAS, the Company, the
Bank and the Executive are parties to an Employment Agreement effective as of September 17,
2003 (the “Employment Agreement”); and


 


WHEREAS, as an inducement
to Parent to enter into the Merger Agreement, the Company, the Bank and the
Executive agree that the Employment Agreement shall be terminated as of the
Effective Date of the Merger (as such terms are defined in the Merger
Agreement), and that the Executive shall be entitled to the rights and payments
set forth herein in lieu of any rights and payments under the Employment
Agreement.


 


NOW THEREFORE, in
consideration of the foregoing and the mutual covenants set forth herein, the
parties hereto agree as follows:


 


1.  Certain Actions to Be Taken in 2004 and
2005.


 


(a)                                  The
Company, the Bank and their respective boards and committees, and the Executive,
hereby agree to take the following actions between the date hereof and December 31,
2004, it being the intention of the parties hereto that all of such actions
shall be fully effective and consummated no later than December 31, 2004:


 


(i)                                     the
Executive may exercise all or any portion of the vested non-qualified stock
options granted to the Executive under the Company’s 1998 Stock-Based Incentive
Plan  (as amended and restated), 2000
Stock Option Plan and 2004 Stock Plan (the “Option Plans”) (i.e., all vested
non-qualified options under each plan to be exercised), and the Executive
acknowledges that a failure to do the foregoing could result in the cash
payable under Section 2(a) being reduced pursuant to Section 2(b)
hereof;


 


(ii)                                  the
Company and/or the Bank shall pay to the Executive a cash amount equal to $375,000,
minus applicable withholding taxes, with such amount representing a prepayment
of a portion of the cash severance that would otherwise be paid to the
Executive at the Effective Date of the Merger.


 


(b)                                 The
Company, the Bank and their respective boards and committees agree to take all
necessary actions so that, at the Effective Date of the Merger, all then
unvested stock options held by the Executive at that time shall become vested
and exercisable and each unexercisable stock option held by the Executive shall
be treated in accordance with Section 3.04 of the Merger


 





















 


Agreement and each share
of restricted stock shall vest and shall be treated in accordance with Section 3.05
of the Merger Agreement.


 


(c)                                  The
Company, the Bank and their respective boards and committees agree to take such
actions as may be necessary or advisable by them in order to permit the
Executive to take the actions set forth in Section 1(a) above and have
them be fully effective and consummated no later than December 31, 2004,
including without limitation making the cash payment specified in Section 1(a)(ii)
above.


 


2.                                      Acknowledgement
of Payment, Release and Waiver.


 


(a)                                  Provided
the Executive’s employment has not been terminated for cause (as defined in the
Executive’s Employment Agreement), death, disability or voluntarily terminated by
the Executive and the Company, the Bank and their respective boards and
committees have taken the actions necessary pursuant to Sections 1(a), 1(b) and
1(c) hereof prior to the Effective Date, the Bank shall pay to the Executive an
amount equal to (i) $1,193,806 on the
Effective Date, subject to adjustment as set forth in Section 2(b)
below (the “Maximum Amount”), minus (ii) the Initial Present Value Amount (as
defined in Section 3(c) below) of the welfare benefits to be provided to
the Executive pursuant to Section 3(a) below, with applicable withholding
taxes to be subtracted from the amount payable to the Executive.  In consideration of such payment and the
other provisions of this Agreement, the Executive, the Company, the Bank and Parent
hereby agree that, except as provided in Section 4 below, the Employment
Agreement shall be terminated without any further action of any parties hereto,
effective immediately prior to the Effective Date of the Merger.


 


(b)                                 If
the payment pursuant to Section 2(a) hereof, either alone or together with
other payments and benefits which the Executive has the right to receive from the
Company, the Bank or Parent, would constitute a “parachute payment” under Section 280G
of the Code, based upon the calculations described below, then the amount
payable by Parent pursuant to Section 2(a) hereof shall be reduced by the
amount which is the minimum necessary to result in no portion of the payment
payable by Parent under Section 2(a) being non-deductible to Parent, the
Company and/or the Bank pursuant to Section 280G of the Code and subject
to the excise tax imposed under Section 4999 of the Code.  The parties hereto agree that the present
value of the payments and benefits payable pursuant to this Agreement to the
Executive upon termination of the Executive’s employment pursuant to Section 2(a)
shall not exceed three times the Executive’s “base amount,” as that term is
defined in Section 280G(b)(3) of the Code, less one dollar.  The determination of any reduction in the
payment to be made pursuant to Section 2(a) shall be based upon an
analysis prepared by Muldoon Murphy Faucette & Aguggia LLP (“Muldoon Murphy”),
which analyses shall be reasonably acceptable to Elias, Matz, Tiernan &
Herrick L.L.P. and paid for by the Company. Muldoon Murphy shall provide its
analysis no later than five (5) business days prior to the Effective Date of
the Merger, and may use such actuaries as it may deem necessary or advisable
for the purpose.


 


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3.                                      Payment
of Welfare Benefits.


 


(a)                                  For
a period of up to sixty (60) full calendar months (as elected by the Executive)
following the Effective Date of the Merger, Parent agrees to cause to be
continued life, medical, dental and disability coverage pursuant to the
policies offered to its employees for the Executive and any of his dependents
covered by the Company or the Bank immediately prior to the Effective Date of
the Merger (except that Parent may elect to continue or convert the existing
life and/or disability insurance policies covering the Executive), except as
set forth in Section 3(b) below. 
During such sixty (60) full calendar month period, the Executive shall
continue to be responsible for paying the employee share of any premiums,
copayments or deductibles.  In the event
the Executive’s participation in any such plan or program is barred, Parent
shall arrange to provide the Executive and his dependents with benefits substantially
similar to those which the Executive and his dependents would otherwise have
received under such plans and programs from which their continued participation
is barred or provide their economic equivalent. 
The Executive’s spouse and other dependents covered by the Company or
the Bank immediately prior to the Effective Date of the Merger shall be
entitled to continued medical and dental coverage for the remainder of the 60
month period (or such shorter period as elected by the Executive), with the
Executive’s spouse and other dependents responsible for paying the employee
share of any premiums, copayments or deductibles.


 


(b)                                 In lieu of receiving one or more of the
coverages specified in Section 3(a) above, the Executive may elect to
receive a cash payment equal to the present value of the cost to Parent of providing
such coverage for any number of consecutive months the Executive elects not to
receive coverage, in which event (i) Section 3(a) shall no longer require
such coverage to be provided by Parent, (ii) the cash payment in lieu of such
coverage shall be included in the amount set forth in Section 2(a)(i)
hereof, without any increase in such amount, and (iii) the present value of
such coverage shall not be included in the deduction specified in Section 2(a)(ii)
hereof; provided, however, that if the Executive will continue as an employee
of Parent or its Subsidiaries subsequent to the Effective Date of the Merger,
he will not be able to elect a cash payment for the period of time that he
continues to serve as an employee.  If
the Executive desires to receive a cash payment in lieu of receiving one or
more of the coverages specified in Section 3(a) above, the Executive shall
give written notice of such election to Parent on or before  March 31, 2005.


 


(c)                                  The
value of the benefits to be provided by Parent pursuant to Section 3(a)
above shall be discounted to present value in accordance with Section 280G
of the Code, and an amount equal to 50% of such present value shall be added to
the present value amount to cover anticipated premium increases over the 60 month
period specified in Section 3(a) above. 
The present value calculations shall be based on the discount rates
published by the Internal Revenue Service for the month in which the Effective
Date of the Merger occurs.  The aggregate present value of the coverages
actually provided by Parent pursuant to Section 3(a) hereof (excluding
those coverages, if any, which the Executive has elected to receive a cash
payment in lieu of such coverage), as determined as of the Effective Date of
the Merger and as increased by the 50% factor set forth in the first
sentence of this Section 3(c), is
referred to herein as the “Initial Present Value Amount.”


 


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(d)                                 In
the event the costs to Parent of providing the benefits set forth in Section 3(a)
(excluding those coverages, if any,
which the Executive has elected to receive a cash payment in lieu of such
coverage) increase due to increases in premiums, changes in coverage or
otherwise and the effect of such increase is to increase the present value of
the benefits provided by Parent above the Initial Present Value Amount (the “Adjusted
Present Value Amount”), then the Executive shall elect to either reduce one or
more of his insurance coverages or pay a higher share of the total premium cost
so that the Adjusted Present Value Amount does not exceed the Initial Present
Value Amount.


 


4.                                      Releases.


 


(a)                                  Upon
payment of the amounts set forth in Section 2(a) (as such amount may be
adjusted pursuant to Section 2(b) hereof), the Executive, for himself and
for his heirs, successors and assigns, does hereby release completely and
forever discharge the Company, the Bank and their successors from any
obligation under the Employment Agreement. The obligations of Parent to provide
benefits pursuant to Section 3 above shall continue for the period
specified therein.


 


(b)                                 Upon
payment of the amounts set forth in Section 2(a) (as such amount may be
adjusted pursuant to Section 2(b) hereof), each of the Company and the
Bank for itself, and for its successors and assigns, does hereby release
completely and forever discharge the Executive and his heirs, successors and
assigns, to the fullest extent permitted by applicable law, from any obligation
under the Employment Agreement, provided that, notwithstanding the foregoing,
the Company and the Bank (and their successors) do not hereby release the
Executive from any obligation under Sections 6, 9 and 10 of the Employment
Agreement; it being specifically understood and agreed that the geographic area
of the Executive’s non-competition obligations under Section 10 thereof
shall be limited to the Pennsylvania counties of Monroe, Luzerne, Schuylkill,
Carbon and Columbia and that such obligations shall expire one year from the
Effective Date of the Merger.


 


5.                                      General.


 


(a)                                  Heirs,
Successors and Assigns.  The
terms of this Agreement shall be binding upon the parties hereto and their
respective heirs, successors and assigns.


 


(b)                                  Final
Agreement.  This Agreement
represents the entire understanding of the parties with respect to the subject
matter hereof and supersedes all prior understandings, written or oral. The
terms of this Agreement may be changed, modified or discharged only by an
instrument in writing signed by each of the parties hereto.


 


(c)                                  Governing
Law.  This Agreement shall be
construed, enforced and interpreted in accordance with and governed by the laws
of the Commonwealth of Pennsylvania, without reference to its principles of
conflicts of law, except to the extent that federal law shall be deemed to
preempt such state laws.


 


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(d)                                  Defined
Terms.  Any capitalized terms not
defined in this Agreement shall have as their meaning the definitions contained
in the Merger Agreement.


 


(e)                                  Voluntary
Action and Waiver. The Executive acknowledges that by his free and
voluntary act of signing below, the Executive agrees to all of the terms of
this Agreement and intends to be legally bound thereby. The Executive
acknowledges that he has been advised to consult with an attorney prior to
executing this Agreement.


 


(f)                                    Counterparts.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original, and all of which shall constitute one and the same
Agreement.


 


(g)                                 Gender.
References herein to the masculine gender shall be deemed to refer to the
feminine gender where appropriate.


 


6.                                      Effectiveness.  Notwithstanding anything to the contrary
contained herein, this Agreement shall be subject to consummation of the Merger
in accordance with the terms of the Merger Agreement, as the same may be
amended by the parties thereto in accordance with its terms.  In the event the Merger Agreement is
terminated for any reason, this Agreement shall be deemed null and void.


 


[Signature
Page Follows]


 


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IN WITNESS WHEREOF, the
Company, the Bank and Parent have each caused this Agreement to be executed by
their duly authorized officers, and the Executive has signed this Agreement,
effective as of the date first above written.


 


	
  WITNESS:

  	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Jerry D. Holbrook

  	
   

  	
  /s/ Thomas M. Petro

  
	
  Name: Jerry D. Holbrook

  	
   

  	
  Name: Thomas M. Petro

  
	
  Title: Corporate
  Secretary

  	
   

  	
  Title: President and
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  NORTHEAST PENNSYLVANIA

  FINANCIAL CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Jerry D. Holbrook

  	
   

  	
  By:

  	
  /s/ Thomas L. Kennedy

  	
   

  
	
  Name: Jerry D. Holbrook

  	
   

  	
   

  	
  Name: Thomas L. Kennedy

  
	
  Title: Corporate
  Secretary

  	
   

  	
   

  	
  Title: Chairman of the
  Board

  
	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  FIRST FEDERAL BANK

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Jerry D. Holbrook

  	
   

  	
  By:

  	
  /s/ Thomas L. Kennedy

  	
   

  
	
  Name: Jerry D. Holbrook

  	
   

  	
   

  	
  Name: Thomas L. Kennedy

  
	
  Title: Corporate
  Secretary

  	
   

  	
   

  	
  Title: Chairman of the
  Board

  
	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  KNBT BANCORP, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Michelle A. Linsky

  	
   

  	
  By:

  	
  /s/ Scott V. Fainor

  	
   

  
	
  Name: Michelle A.
  Linsky

  	
   

  	
   

  	
  Name: Scott V. Fainor

  
	
  Title: Corporate
  Secretary

  	
   

  	
   

  	
  Title:
  President and Chief Executive

  Officer

  



 


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