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EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
by and among
PENSECO FINANCIAL SERVICES CORPORATION,
PENN SECURITY BANK AND TRUST COMPANY
and
OLD FORGE BANK
Dated as of December 5, 2008
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TABLE OF CONTENTS
ARTICLE 1 Definitions........................................................1
Section 1.1. Defined Terms...............................................1
Section 1.2. Other Defined Terms.........................................3
ARTICLE 2 The Merger.........................................................6
Section 2.1. The Merger..................................................6
Section 2.2. Effective Time..............................................6
Section 2.3. Effects of the Merger.......................................6
Section 2.4. Tax Consequences............................................6
Section 2.5. Board of Directors; Officers................................6
Section 2.6. Articles of Incorporation...................................7
Section 2.7. Bylaws......................................................7
ARTICLE 3 Conversion of Shares; Delivery of Merger Consideration.............7
Section 3.1. Conversion of Common Stock; Merger Consideration............7
Section 3.2. Procedures for Exchange of Old Forge Common Stock..........11
Section 3.3. Reservation of Shares......................................15
ARTICLE 4 Representations and Warranties of Old Forge.......................15
Section 4.1. Corporate Organization.....................................15
Section 4.2. Capitalization.............................................15
Section 4.3. Authority; No Violation....................................16
Section 4.4. Consents and Approvals.....................................17
Section 4.5. Reports; Regulatory Matters................................17
Section 4.6. Financial Statements.......................................18
Section 4.7. Broker's Fees..............................................19
Section 4.8. Absence of Certain Changes or Events.......................19
Section 4.9. Legal Proceedings..........................................21
Section 4.10. Taxes......................................................21
Section 4.11. Employee Matters...........................................22
Section 4.12. Compliance with Applicable Law.............................24
Section 4.13. Certain Contracts..........................................25
Section 4.14. Risk Management Instruments................................25
Section 4.15. Investment Securities and Commodities......................26
Section 4.16. Property...................................................26
Section 4.17. Intellectual Property......................................27
Section 4.18. Environmental Liability....................................27
Section 4.19. Personal Property Leases...................................28
Section 4.20. Securitizations............................................28
Section 4.21. Reorganization; Approvals..................................28
Section 4.22. Opinion....................................................28
Section 4.23. Old Forge Information......................................28
Section 4.24. State Takeover Law.........................................28
Section 4.25. Loan Portfolio.............................................29
Section 4.26. Internal Controls..........................................30
Section 4.27. Due Diligence..............................................30
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ARTICLE 5 Representations and Warranties of Penseco and Penn Security.......30
Section 5.1. Corporate Organization.....................................30
Section 5.2. Capitalization.............................................31
Section 5.3. Authority; No Violation....................................32
Section 5.4. Consents and Approvals.....................................33
Section 5.5. Reports; Regulatory Matters................................33
Section 5.6. Financial Statements.......................................34
Section 5.7. Broker's Fees..............................................35
Section 5.8. Absence of Certain Changes or Events.......................35
Section 5.9. Legal Proceedings..........................................36
Section 5.10. Taxes and Tax Returns......................................36
Section 5.11. Compliance with Applicable Law.............................36
Section 5.12. Reorganization; Approvals..................................37
Section 5.13. Opinion....................................................37
Section 5.14. Penseco Information........................................37
Section 5.15. Risk Management Instruments................................37
Section 5.16. Investment Securities and Commodities......................38
Section 5.17. Property...................................................38
Section 5.18. Intellectual Property......................................38
Section 5.19. Environmental Liability....................................38
Section 5.20. Loan Portfolio.............................................39
Section 5.21. Internal Controls..........................................39
Section 5.22. Certain Contracts..........................................39
Section 5.23. Due Diligence..............................................40
Section 5.24. Operations of Merger Sub...................................40
ARTICLE 6 Covenants Relating to Conduct of Business.........................40
Section 6.1. Conduct of Old Forge's Business Before the Effective Time..40
Section 6.2. Old Forge Forbearances.....................................41
Section 6.3. Penseco Covenants..........................................43
ARTICLE 7 Additional Agreements.............................................44
Section 7.1. Form S-4; Proxy Statement-Prospectus.......................44
Section 7.2. Regulatory Approvals.......................................45
Section 7.3. Access to Information; Confidentiality.....................46
Section 7.4. Shareholder Approval.......................................46
Section 7.5. Employee Benefit Plans; Existing Agreements................47
Section 7.6. Indemnification; Directors' and Officers' Insurance........48
Section 7.7. Additional Agreements......................................49
Section 7.8. Advice of Changes..........................................49
Section 7.9. No Solicitation............................................49
Section 7.10. Employment Agreements......................................52
Section 7.11. Appointment of Old Forge Directors.........................52
Section 7.12. Director Agreements........................................53
Section 7.13. Branding...................................................53
Section 7.14. Dividends..................................................53
Section 7.15. Formation of Merger Sub....................................53
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ARTICLE 8 Conditions Precedent..............................................53
Section 8.1. Conditions to Each Party's Obligation to Effect the Merger.53
Section 8.2. Conditions to Obligations of Penseco and Penn Security.....54
Section 8.3. Conditions to Obligations of Old Forge.....................55
ARTICLE 9 Termination and Amendment.........................................56
Section 9.1. Termination................................................56
Section 9.2. Effect of Termination......................................58
Section 9.3. Fees and Expenses..........................................58
Section 9.4. Amendment..................................................60
Section 9.5. Extension; Waiver..........................................60
ARTICLE 10 General Provisions...............................................60
Section 10.1. Closing....................................................60
Section 10.2. Standard...................................................60
Section 10.3. Nonsurvival of Representations, Warranties and Agreements..61
Section 10.4. Notices....................................................61
Section 10.5. Interpretation.............................................62
Section 10.6. Counterparts...............................................62
Section 10.7. Entire Agreement...........................................62
Section 10.8. Governing Law; Jurisdiction................................62
Section 10.9. Publicity..................................................63
Section 10.10. Assignment; Third-Party Beneficiaries......................63
Section 10.11. Enforcement of Agreement...................................63
Section 10.12. Severability...............................................63
Schedule A--List of Shareholders for Voting Agreements
Schedule B--List of Individuals for Employment Protection Agreements
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is dated as of December 5, 2008
(this "AGREEMENT"), by and among Penseco Financial Services Corporation, a
Pennsylvania corporation ("PENSECO"), its direct wholly-owned subsidiary, Penn
Security Bank and Trust Company, a Pennsylvania commercial bank and trust
company ("PENN SECURITY"), and Old Forge Bank, a Pennsylvania commercial bank
("OLD FORGE").
W I T N E S S E T H:
WHEREAS, the boards of directors of Penseco, Penn Security and Old
Forge have determined that it is in the best interests of their respective
companies and their shareholders and, in the case of Old Forge, its customers,
employees and communities, to approve this Agreement and the two-step business
combination transaction provided for in this Agreement pursuant to which (i) an
interim Pennsylvania commercial bank and direct wholly-owned subsidiary of
Penesco ("MERGER SUB") will merge with and into Old Forge (the "REVERSE MERGER")
and (ii) immediately thereafter the First-Step Surviving Corporation (as defined
herein) will merge with and into Penn Security (the "SECOND-STEP MERGER"), with
Penn Security continuing as the surviving corporation, both steps of which will
occur as part of a single integrated plan. As used in this Agreement, "MERGER"
shall mean the Reverse Merger and the Second-Step Merger, collectively or
sequentially, as appropriate;
WHEREAS, for federal income Tax purposes, it is intended that the
Merger qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE"), and this Agreement is
intended to be and is adopted as a "plan of reorganization" within the meaning
of Treasury Regulation Section 1.368-2(g);
WHEREAS, concurrently with the execution of this Agreement, each Old
Forge shareholder included on Schedule A attached hereto has executed an
agreement substantially in the form of Exhibit A attached hereto (collectively,
the "VOTING AGREEMENTS") between such shareholder and Penseco governing the
voting of all shares of Old Forge Common Stock (as defined herein) owned by such
shareholder at the Old Forge Shareholders Meeting (as defined herein); and
WHEREAS, the parties desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained in this Agreement, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties agree
as follows:
ARTICLE 1
Definitions
Section 1.1 Defined Terms. As used in this Agreement, the following
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terms have the following meanings.
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"BCL" means the Pennsylvania Business Corporation Law of 1988, as amended.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
"CASH COMPONENT" means $17,400,000.
"CERTIFICATE" means each certificate evidencing shares of Old Forge Common
Stock.
"DETERMINATION DATE" means the third calendar day immediately prior to the
Effective Time, or if such calendar day is not a trading day on the OTC Bulletin
Board, then the trading day immediately preceding such calendar day.
"DISSENTING HOLDER" means a holder of Dissenting Shares.
"DISSENTING SHARES" means shares of Old Forge Common Stock owned beneficially or
of record by persons who assert dissenters rights and who perform every act
required for the assertion of those rights under the applicable provisions of
the Banking Code and the BCL, and who, as of the Effective Time, have not
withdrawn or lost such dissenters rights.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" means such bank or trust company or other agent designated by
Penseco, and reasonably acceptable to Old Forge, which shall act as agent for
Penseco in connection with the exchange procedures for converting shares of Old
Forge Common Stock evidenced by Certificates into the Merger Consideration.
"EXCHANGE RATIO" means the quotient, rounded to the nearest one ten thousandth,
of (i) the Per Share Amount divided by (ii) the Penseco Closing Price.
"LIEN" means any lien, pledge, charge, security interest or similar encumbrance.
"MERGER SUB COMMON STOCK" means the class of common stock of Merger Sub.
"OLD FORGE COMMON STOCK" means the class of common stock, $2.50 par value per
share, of Old Forge.
"OWNED PROPERTIES" means all the properties and assets reflected in the latest
audited balance sheet as being owned by Old Forge or Penseco or one of its
Subsidiaries, as the case may be, or acquired after the date thereof (except
properties sold or otherwise disposed of since the date thereof in the ordinary
course of business).
"PENN SECURITY COMMON STOCK" means the class of common stock, $10.00 par value
per share, of Penn Security.
"PENSECO CLOSING PRICE" means the average, rounded to the nearest one tenth of a
cent, of the closing prices of Penseco Common Stock as reported on the OTC
Bulletin Board for the Determination Date and the nineteen trading days
immediately preceding the Determination Date (as adjusted, if necessary, for any
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other similar change in capitalization during such
period).
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"PENSECO COMMON STOCK" means the class of common stock, $.01 par value per
share, of Penseco.
"PER SHARE AMOUNT" means the sum, rounded to the nearest one-tenth of a cent, of
(A) $31.127 plus (B) the product, rounded to the nearest one tenth of a cent, of
the Share Ratio times the Penseco Closing Price.
"RELEVANT GROUP" means any affiliated, combined, consolidated, unitary or
similar group.
"SARBANES-OXLEY ACT" means the Sarbanes-Oxley Act of 2002, as amended.
"SHARE RATIO" means the quotient, rounded to the nearest one ten thousandth, of
(i) 72.631 divided by (ii) the Penseco Closing Price, subject to a minimum of
2.0183 and a maximum of 1.8261.
"STARTING PRICE" means $37.88.
"TAX" or "TAXES" means all federal, state, local, or foreign net or gross
income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, bank shares, withholding, payroll, employment, excise, property,
deed, stamp, alternative or add-on minimum, environmental, profits, windfall
profits, transaction, license, lease, service, use, occupation, severance,
energy, unemployment, social security, worker's compensation, capital, premium,
or other taxes, assessments, customs, duties, fees, levies, or other
governmental charges of any nature whatever, whether disputed or not, together
with any interest, penalties, additions to tax, or additional amounts with
respect thereto.
"TAX RETURN" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
Section 1.2 Other Defined Terms. Other capitalized terms used herein
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are defined elsewhere in this Agreement.
TERM SECTION
Agreement Introduction
Alternative Proposal Section 7.9.1
Alternative Transaction Section 7.9.1
Approval Recommendation Section 7.4.1
Articles of Merger Section 2.2
Banking Code Section 2.1
Cash Consideration Section 3.1.3(a)
Cash Conversion Number Section 3.1.6
Cash Election Section 3.1.3(a)
Cash Election Number Section 3.1.6(b)(i)
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TERM SECTION
Cash Election Shares Section 3.1.3(a)
Claim Section 7.6.1
Closing Section 10.1
Closing Date Section 10.1
Code Preamble
Confidentiality Agreement Section 7.3.3
Covered Employees Section 7.5.1
Derivative Transactions Section 4.14.1
DPC Common Shares Section 3.1.2
Effective Time Section 2.2
Election Section 3.2.1(a)
Election Deadline Section 3.2.1(d)
Environmental Laws Section 4.18
ERISA Section 4.11.1
ERISA Affiliate Section 4.11.3(d)
Exchange Agent Agreement Section 3.2.1(d)
Exchange Fund Section 3.2.2
Expense Reimbursement Section 9.3.2(c)
FDIC Section 4.1.3
Federal Reserve Board Section 4.4 First-Step
Surviving Corporation Section 2.1
Form of Election Section 3.2.1(b)
Form S-4 Section 4.4
GAAP Section 5.1.3
Governmental Entity Section 4.4
Holder Section 3.2.1
HSR Act Section 4.4
Indemnified Parties Section 7.6.1
Index Price Section 9.1.7
Index Ratio Section 9.1.7
Injunction Section 8.1.3
Insurance Amount Section 7.6.2
Intellectual Property Section 4.17
Leased Properties Section 5.17
Letter of Transmittal Section 3.2.3(a)
Loan(s) Section 4.25.1
Material Adverse Effect Section 4.8.1
Materially Burdensome Regulatory Section 7.2
Condition Merger Preamble
Merger Consideration Section 3.1.3
Merger Sub Preamble
Non-Election Shares Section 3.1.3(c)
Notice Period Section 7.9.3
Old Forge Introduction
Old Forge Articles Section 4.1.2
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TERM SECTION
Old Forge Board Section 4.3.1
Old Forge Bylaws Section 4.1.2
Old Forge Contract Section 4.13.1
Old Forge Directors Section 7.11
Old Forge Disclosure Schedule Article 4
Old Forge Employees Section 7.5.3
Old Forge Regulatory Agreement Section 4.5.2
Old Forge Requisite Regulatory Section 8.3.3
Approvals Old Forge Shareholder Meeting Section 7.4.1
Other Regulatory Approvals Section 4.4
Payment Holdback Amount Section 7.12
Penn Security Introduction
Penn Security Articles Section 5.1.3
Penn Security Bylaws Section 5.1.3
Penseco Introduction
Penseco Articles Section 5.1.2
Penseco Bylaws Section 5.1.2
Penseco Capitalization Date Section 5.2.1
Penseco Contracts Section 5.22.1
Penseco Disclosure Schedule Article 5
Penseco Ratio Section 9.1.7
Penseco Regulatory Agreement Section 5.5.2
Penseco Requisite Regulatory Approvals Section 8.2.3
Penseco SEC Reports Section 5.5.3
Penseco Stock Plans Section 5.2.1
Penseco Subsidiary Section 5.1.3
Permitted Liens Section 4.16
Personal Property Lease Section 4.19
Plans Section 4.11.1
Policies, Practices and Procedures Section 4.15.2
Proxy Statement-Prospectus Section 7.1.1
Real Property Section 5.17
Regulatory Agencies Section 4.5.1
Reverse Articles of Merger Section 2.2
Reverse Merger Preamble
SEC Section 4.4
Second-Step Articles of Merger Section 2.2
Second-Step Effective Time Section 2.2
Second-Step Merger Preamble
Securities Act Section 4.2.1
Shortfall Number Section 3.1.6(b)(ii)
Stock Consideration Section 3.1.3(b)
Stock Election Section 3.1.3(b)
Stock Election Shares Section 3.1.3(b)
Subsidiary Section 5.1.3
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TERM SECTION
Superior Proposals Section 7.9.5
Surviving Corporation Section 2.1
Termination Fee Section 9.3.2
Trust Account Common Shares Section 3.1.2
Voting Agreements Preamble
Voting Debt Section 4.2.1
ARTICLE 2
The Merger
Section 2.1 The Merger. Subject to the terms and conditions of this
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Agreement, in accordance with the Pennsylvania Banking Code of 1965, as amended
(the "BANKING CODE"), at the Effective Time, as part of a single integrated
plan, Merger Sub shall be merged with and into Old Forge, and immediately
thereafter (and in no event later than the same business day), the resulting
institution from such merger shall be merged with and into Penn Security. As a
result of the Reverse Merger, the separate existence of Merger Sub shall cease
and Old Forge shall be the resulting institution of the Reverse Merger (the
"FIRST-STEP SURVIVING CORPORATION") and a wholly owned subsidiary of Penseco and
shall succeed to and assume all the rights and obligations of Old Forge in
accordance with the laws of the Commonwealth of Pennsylvania. As a result of the
Second-Step Merger the separate corporate existence of the First-Step Surviving
Corporation shall cease and Penn Security shall continue as the resulting
institution (the "SURVIVING CORPORATION") of the Second-Step Merger and a wholly
owned subsidiary of Penseco and shall continue its existence under the laws of
the Commonwealth of Pennsylvania.
Section 2.2 Effective Time. The Reverse Merger shall become effective
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as set forth in the articles of merger that shall be filed with the Secretary of
State of the Commonwealth of Pennsylvania (the "REVERSE ARTICLES OF MERGER").
The Second-Step Merger shall become effective as set forth in the articles of
merger that shall be filed with the Secretary of State of the Commonwealth of
Pennsylvania (the "SECOND-STEP ARTICLES OF MERGER"). The "EFFECTIVE TIME" shall
be the date and time when the Reverse Merger becomes effective as set forth in
the Reverse Articles of Merger. The "SECOND-STEP EFFECTIVE TIME" shall be the
date and time when the Second-Step Merger becomes effective as set forth in the
Second-Step Articles of Merger.
Section 2.3 Effects of the Merger. The Merger shall have the effects
---------------------
set forth in Section 1606 of the Banking Code.
Section 2.4 Tax Consequences. It is intended that the Merger shall
----------------
constitute a "reorganization" within the meaning of Section 368(a) of the Code,
and that this Agreement shall constitute a "plan of reorganization" within the
meaning of Treasury Regulation Section 1.368-2(g).
Section 2.5 Board of Directors; Officers. The directors of Merger Sub
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immediately prior to the Effective Time shall be the directors of the First-Step
Surviving Corporation. At the Second-Step Effective Time, the directors of the
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Surviving Corporation shall be comprised of the directors of Penn Security
immediately prior to the Second-Step Effective Time, and immediately after the
Second-Step Effective Time, certain individuals who are members of the board of
directors of Old Forge on the date of this Agreement shall be appointed to the
board of directors of the Surviving Corporation in accordance with Section 7.11.
The officers of the First-Step Surviving Corporation shall consist of the
officers of Merger Sub immediately prior to the Effective Time. The officers of
the Surviving Corporation shall consist of the officers of Penn Security
immediately prior to the Second-Step Effective Time.
Section 2.6 Articles of Incorporation. At the Effective Time, the
-------------------------
Articles of Incorporation of Old Forge shall be the Articles of Incorporation of
the First-Step Surviving Corporation. At the Second-Step Effective Time the
Articles of Incorporation of Penn Security shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with applicable law.
Section 2.7 Bylaws. At the Effective Time, the Bylaws of Old Forge
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shall be the Bylaws of the First-Step Surviving Corporation. At the Second-Step
Effective Time the Bylaws of Penn Security shall be the Bylaws of the Surviving
Corporation until thereafter amended in accordance with applicable law.
ARTICLE 3
Conversion of Shares; Delivery of Merger Consideration
Section 3.1 Conversion of Common Stock; Merger Consideration. At the
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Effective Time, by virtue of the Reverse Merger, and at the Second-Step
Effective Time, by virtue of the Second-Step Merger, and in both cases without
any action on the part of Penseco, Penn Security, Merger Sub, Old Forge or the
holder of any of the following securities:
3.1.1. At the Effective Time, each share of Merger Sub Common Stock
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of common
stock of the First-Step Surviving Corporation.
3.1.2. At the Effective Time, all shares of Old Forge Common Stock
issued and outstanding immediately prior to the Effective Time that are owned by
Old Forge, Merger Sub, Penn Security or Penseco (other than shares of Old Forge
Common Stock held in trust accounts, managed accounts and the like, or otherwise
held in a fiduciary or agency capacity, that are beneficially owned by third
parties (any such shares, "TRUST ACCOUNT COMMON SHARES") and other than shares
of Old Forge Common Stock held, directly or indirectly, by Old Forge, Merger
Sub, Penseco or Penn Security in respect of a debt previously contracted (any
such shares, "DPC COMMON SHARES")) shall be cancelled and shall cease to exist
and no stock of Penseco or other consideration shall be delivered in exchange
therefor.
3.1.3. At the Second-Step Effective Time, each share of capital stock
of the First-Step Surviving Corporation issued and outstanding immediately prior
to the Second-Step Effective Time shall be converted into and become one fully
paid and nonassessable share of common stock of the Surviving Corporation. Each
share of capital stock in Penn Security issued and outstanding immediately prior
to the Second-Step Effective Time shall remain outstanding after the Second-Step
Effective Time and together with the converted shares of capital stock of the
First-Step Surviving Corporation shall be the only outstanding shares of capital
stock of the Surviving Corporation.
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3.1.4. At the Effective Time, subject to Sections 3.1.6, 3.1.7 and
3.1.8, each share of Old Forge Common Stock, except for shares of Old Forge
Common Stock owned by Old Forge, Merger Sub, Penn Security or Penseco (other
than Trust Account Common Shares and DPC Common Shares), shall be converted, at
the election of the holder thereof, in accordance with the procedures set forth
in Section 3.2, into the right to receive the following, without interest:
(a) for each share of Old Forge Common Stock with respect to
which an election to receive cash has been effectively made and not revoked or
deemed revoked pursuant to Section 3.2 (a "CASH ELECTION"), the right to receive
in cash from Penseco an amount (the "Cash Consideration") equal to the Per Share
Amount (collectively, the "CASH ELECTION SHARES");
(b) for each share of Old Forge Common Stock with respect to
which an election to receive Penseco Common Stock has been effectively made and
not revoked or deemed revoked pursuant to Section 3.2 (a "STOCK ELECTION"), the
right to receive from Penseco the number of shares of Penseco Common Stock (the
"STOCK CONSIDERATION") as is equal to the Exchange Ratio (collectively, the
"STOCK ELECTION SHARES"); and
(c) for each share of Old Forge Common Stock other than shares
as to which a Cash Election or a Stock Election has been effectively made and
not revoked or deemed revoked pursuant to Section 3.2 (collectively, the
"NON-ELECTION SHARES"), the right to receive from Penseco such Stock
Consideration and/or Cash Consideration as is determined in accordance with
Section 3.1.6(b).
The Cash Consideration and the Stock Consideration are sometimes referred to
herein collectively as the "MERGER CONSIDERATION."
3.1.5. All of the shares of Old Forge Common Stock converted into the
right to receive the Merger Consideration pursuant to this Article 3 shall no
longer be outstanding and shall automatically be cancelled and shall cease to
exist as of the Effective Time, and each Certificate shall thereafter represent
only the right to receive the Merger Consideration and/or cash in lieu of
fractional shares, into which the shares of Old Forge Common Stock represented
by such Certificate have been converted pursuant to this Section 3.1 and Section
3.2.3(f), as well as any dividends to which holders of Old Forge Common Stock
become entitled in accordance with Section 3.2.3(c).
3.1.6. If, between the date of this Agreement and the Effective Time,
the outstanding shares of Penseco Common Stock shall have been increased,
decreased, changed into or exchanged for a different number or kind of shares or
securities as a result of a reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split, or other similar change in
capitalization, an appropriate and proportionate adjustment shall be made to the
Share Ratio.
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3.1.7. Proration.
(a) Notwithstanding any other provision contained in this
Agreement, the total number of shares of Old Forge Common Stock to be converted
into Cash Consideration pursuant to Section 3.1.3 (the "CASH CONVERSION NUMBER")
shall be equal to the quotient obtained by dividing (x) the Cash Component by
(y) the Per Share Amount. All other shares of Old Forge Common Stock shall be
converted into Stock Consideration (other than Dissenting Shares and shares of
Old Forge Common Stock to be cancelled as provided in Section 3.1.2).
(b) Within five business days after the Effective Time, Penseco
shall cause the Exchange Agent to effect the allocation among holders of Old
Forge Common Stock of rights to receive the Cash Consideration and the Stock
Consideration as follows:
(i) If the aggregate number of shares of Old Forge
Common Stock with respect to which Cash Elections shall have been made (the
"CASH ELECTION NUMBER") exceeds the Cash Conversion Number, then all Stock
Election Shares and all Non-Election Shares shall be converted into the right
to receive the Stock Consideration, and Cash Election Shares of each holder
thereof will be converted into the right to receive the Cash Consideration in
respect of that number of Cash Election Shares equal to the product obtained by
multiplying (x) the number of Cash Election Shares held by such holder by (y)
a fraction, the numerator of which is the Cash Conversion Number and the
denominator of which is the Cash Election Number (with the Exchange Agent to
determine, consistent with Section 3.1.6(a), whether fractions of Cash Election
Shares shall be rounded up or down), with the remaining number of such holder's
Cash Election Shares being converted into the right to receive the Stock
Consideration; and
(ii) If the Cash Election Number is less than the Cash
Conversion Number (the amount by which the Cash Conversion Number exceeds the
Cash Election Number being referred to herein as the "SHORTFALL NUMBER"), then
all Cash Election Shares shall be converted into the right to receive the Cash
Consideration and the Non-Election Shares and Stock Election Shares shall be
treated in the following manner:
(A) If the Shortfall Number is less than or
equal to the number of Non-Election Shares, then all Stock Election Shares shall
be converted into the right to receive the Stock Consideration, and the
Non-Election Shares of each holder thereof shall convert into the right to
receive the Cash Consideration in respect of that number of Non-Election Shares
equal to the product obtained by multiplying (x) the number of Non-Election
Shares held by such holder by (y) a fraction, the numerator of which is the
Shortfall Number and the denominator of which is the total number of
Non-Election Shares (with the Exchange Agent to determine, consistent with
Section 3.1.6(a), whether fractions of Non-Election Shares shall be rounded up
or down), with the remaining number of such holder's Non-Election Shares being
converted into the right to receive the Stock Consideration; or
(B) If the Shortfall Number exceeds the number
of Non-Election Shares, then all Non-Election Shares shall be converted into
the right to receive the Cash Consideration, and Stock Election Shares of each
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holder thereof shall convert into the right to receive the Cash Consideration
in respect of that number of Stock Election Shares equal to the product
obtained by multiplying (x) the number of Stock Election Shares held by such
holder by (y) a fraction, the numerator of which is the amount by which (1) the
Shortfall Number exceeds (2) the total number of Non-Election Shares, and the
denominator of which is the total number of Stock Election Shares (with the
Exchange Agent to determine, consistent with Section 3.1.6(a), whether fractions
of Stock Election Shares shall be rounded up or down), with the remaining
number of such holder's Stock Election Shares being converted into the right to
receive the Stock Consideration.
Notwithstanding anything to the contrary in this Section 3.1.6 or any other
provision contained in this Agreement: (i) no Old Forge shareholder shall have
the right to receive Stock Consideration to the extent that the receipt of such
Stock Consideration would result in such Old Forge shareholder beneficially
owning five percent (5%) or more of the number of shares of Penseco Common Stock
outstanding immediately after the issuance of all of the Stock Consideration in
the Merger; and (ii) in the event that the issuance of any Stock Consideration
would result in an Old Forge shareholder beneficially owning five percent (5%)
or more of the number of shares of Penseco Common Stock outstanding immediately
after the issuance of all of the Stock Consideration in the Merger, Penseco, in
its sole discretion, may (1) issue such Stock Consideration, notwithstanding
such result or (2) increase the Cash Component and use the amount of such
increase to pay Cash Consideration in lieu of such Stock Consideration. For
purposes of this Section 3.1.7, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act.
3.1.8. Dissenting Shares. Any Dissenting Shares which, as of the
Effective Time, the holder thereof has not withdrawn or otherwise lost any right
to such appraisal, shall not be entitled to receive the consideration set forth
in Section 3.1.4, as applicable, but instead shall be converted into the right
to receive such amount as may be determined to be due with respect to such
Dissenting Shares pursuant to Section 1222 of the Banking Code and applicable
provisions of the BCL. Old Forge shall give Penseco (i) prompt notice of any
written notice or demands for appraisal of shares of Old Forge Common Stock,
written withdrawals or modifications of such demands, and any other instruments
served pursuant to the Section 1222 of the Banking Code and the applicable
provisions of the BCL and received by Old Forge which relate to any such demand
for appraisal, and (ii) the opportunity to participate in all negotiations and
proceedings which take place prior to the Closing. Old Forge agrees that, except
with the prior written consent of Penseco, it will not make any payment with
respect to or settle any claim, demand or other obligation it may have with
respect to any Dissenting Shares. Each Dissenting Holder who, pursuant to the
provisions of Section 1222 of the Banking Code and the applicable provisions of
the BCL, becomes entitled to payment of the fair value for any Dissenting
Shares, shall receive payment therefor (but only after the value therefor shall
have been agreed upon or finally determined pursuant to the provisions of
Section 1222 of the Banking Code and the applicable provisions of the BCL) and
thereupon such Dissenting Shares shall be canceled and retired, and shall cease
to exist. If, after the Effective Time, any Dissenting Shares shall lose their
status as Dissenting Shares for any reason, including because the Dissenting
Holder withdraws, fails to perfect or otherwise loses the right to appraisal,
then Penseco shall pay (or cause the Surviving Corporation to pay) the
consideration, without interest, which such Dissenting Holder would have been
entitled to receive pursuant to Section 3.1.4, assuming such shares were not
Dissenting Shares at the Effective Time.
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Section 3.2 Procedures for Exchange of Old Forge Common Stock.
-------------------------------------------------
3.2.1. Election Procedures. Each holder of record of shares of Old Forge
Common Stock ("Holder") shall have the right, subject to the limitations set
forth in this Article 3, to submit an election in accordance with the following
procedures:
(a) Each Holder may specify in a request made in accordance with
the provisions of this Section 3.2.1 (herein called an "ELECTION") (i) the
number of shares of Old Forge Common Stock owned by such Holder with respect to
which such Holder desires to make a Stock Election and (ii) the number of shares
of Old Forge Common Stock owned by such Holder with respect to which such Holder
desires to make a Cash Election.
(b) Penseco shall prepare a form reasonably acceptable to Old
Forge (the "FORM OF ELECTION") which shall be mailed to each holder of record of
Certificate(s) so as to permit such holders to exercise their right to make an
Election prior to the Election Deadline.
(c) Penseco shall make the Form of Election initially available
not less than twenty (20) business days prior to the anticipated Election
Deadline and shall use all reasonable efforts to make available as promptly as
possible a Form of Election to any shareholder of Old Forge who requests such
Form of Election following the initial mailing of the Forms of Election and
prior to the Election Deadline.
(d) Any Election shall have been made properly only if the
person authorized to receive Elections and to act as Exchange Agent, pursuant
to an agreement (the "EXCHANGE AGENT AGREEMENT") entered into prior to the
mailing of the Form of Election to Old Forge shareholders, shall have received,
by the Election Deadline, a Form of Election properly completed and signed and
accompanied by Certificates to which such Form of Election relates or by an
appropriate customary guarantee of delivery of such certificates, as set forth
in such Form of Election, from a member of any registered national securities
exchange or a commercial bank or trust company in the United States; provided,
that such Certificates are in fact delivered to the Exchange Agent by the time
required in such guarantee of delivery. Failure to deliver shares of Old Forge
Common Stock covered by such a guarantee of delivery within the time set forth
on such guarantee shall be deemed to invalidate any otherwise properly made
Election, unless otherwise determined by Penseco, in its sole discretion. As
used herein, unless otherwise agreed in advance by the parties, "ELECTION
DEADLINE" means 5:00 p.m. local time (in the city in which the principal office
of the Exchange Agent is located) on the day prior to the Old Forge Shareholder
Meeting. Old Forge and Penseco shall cooperate to issue a press release
reasonably satisfactory to each of them announcing the date of the Election
Deadline not more than fifteen (15) business days before, and at least five (5)
business days prior to, the Election Deadline.
(e) Any Old Forge shareholder may, at any time prior to the
Election Deadline, change his or her Election by written notice received by the
Exchange Agent prior to the Election Deadline accompanied by a properly
completed and signed revised Form of Election. Subject to the terms of the
Exchange Agent Agreement, if Penseco shall determine in its reasonable
discretion that any Election is not properly made with respect to any shares of
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Old Forge Common Stock (neither Penseco nor Old Forge nor the Exchange Agent
being under any duty to notify any shareholder of any such defect), such
Election shall be deemed to be not in effect, and the shares of Old Forge
Common Stock covered by such Election shall, for purposes hereof, be deemed to
be Non-Election Shares, unless a proper Election is thereafter timely made.
(f) Any Old Forge shareholder may, at any time prior to the
Election Deadline, revoke his or her Election by written notice received by the
Exchange Agent prior to the Election Deadline or by withdrawal prior to the
Election Deadline of his or her Certificates, or of the guarantee of delivery
of such Certificates, previously deposited with the Exchange Agent. All
Elections shall be automatically deemed revoked upon receipt by the Exchange
Agent of written notification from Penseco or Old Forge that this Agreement has
been terminated in accordance with Article 9.
(g) Subject to the terms of the Exchange Agent Agreement,
Penseco, in the exercise of its reasonable, good faith discretion, shall have
the right to make all determinations, not inconsistent with the terms of this
Agreement, governing (i) the validity of the Forms of Election and compliance
by any Old Forge shareholder with the Election procedures set forth herein,
(ii) the manner and extent to which Elections are to be taken into account in
making the determinations prescribed by Section 3.1.3, (iii) the issuance and
delivery of certificates representing the whole number of shares of Penseco
Common Stock into which shares of Old Forge Common Stock are converted in the
Reverse Merger and (iv) the method of payment of cash for shares of Old Forge
Common Stock converted into the right to receive the Cash Consideration and cash
in lieu of fractional shares of Penseco Common Stock.
3.2.2. Deposit of Merger Consideration. At or prior to the Effective
-------------------------------
Time, Penseco shall deposit, or shall cause to be deposited, with the Exchange
Agent (i) certificates representing the number of shares of Penseco Common Stock
sufficient to deliver, and Penseco shall instruct the Exchange Agent to timely
deliver, the aggregate Stock Consideration, and (ii) immediately available funds
equal to the aggregate Cash Consideration (together with, to the extent then
determinable, any cash payable in lieu of fractional shares pursuant to Section
3.2.3(f)) (collectively, the "EXCHANGE FUND") and Penseco shall instruct the
Exchange Agent to timely pay the Cash Consideration, and such cash in lieu of
fractional shares, in accordance with this Agreement.
3.2.3. Delivery of Merger Consideration.
--------------------------------
(a) As soon as reasonably practicable after the Effective Time,
the Exchange Agent shall mail to each holder of record of Certificate(s) which
immediately prior to the Effective Time represented outstanding shares of Old
Forge Common Stock whose shares were converted into the right to receive the
Merger Consideration pursuant to Section 3.1 and any cash in lieu of fractional
shares of Penseco Common Stock to be issued or paid in consideration therefor
who did not properly complete and submit an Election Form (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to Certificate(s) shall pass, only upon delivery of
Certificate(s) (or affidavits of loss in lieu of such Certificates) to the
Exchange Agent and shall be substantially in such form and have such other
provisions as shall be prescribed by the Exchange Agent Agreement) (the "LETTER
OF TRANSMITTAL") and (ii) instructions for use in surrendering Certificate(s)
in exchange for the Merger Consideration and any cash in lieu of fractional
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<Page>17
shares of Penseco Common Stock to be issued or paid in consideration therefor
in accordance with Section 3.2.3(f) upon surrender of such Certificate and any
dividends or distributions to which such holder is entitled pursuant to
Section 3.2.3(c).
(b) Upon surrender to the Exchange Agent of its Certificate or
Certificates, accompanied by a properly completed Form of Election or a properly
completed Letter of Transmittal, a holder of Old Forge Common Stock will be
entitled to receive promptly after the Effective Time the Merger Consideration
(with the aggregate Cash Consideration paid to each such holder rounded to the
nearest whole cent) and any cash in lieu of fractional shares of Penseco Common
Stock to be issued or paid in consideration therefor in respect of the shares of
Old Forge Common Stock represented by its Certificate or Certificates. Until so
surrendered, each such Certificate shall represent after the Effective Time, for
all purposes, only the right to receive the Merger Consideration and any cash in
lieu of fractional shares of Penseco Common Stock to be issued or paid in
consideration therefor upon surrender of such Certificate in accordance with,
and any dividends or distributions to which such holder is entitled pursuant to,
this Section 3.2.
(c) No dividends or other distributions with respect to Penseco
Common Stock shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Penseco Common Stock represented thereby, in each case
until the surrender of such Certificate in accordance with this Section 3.2.
Subject to the effect of applicable abandoned property, escheat or similar laws,
following surrender of any such Certificate in accordance with this Section 3.2,
the record holder thereof shall be entitled to receive, without interest, (i)
the amount of dividends or other distributions with a record date after the
Effective Time theretofore payable with respect to the whole shares of Penseco
Common Stock represented by such Certificate and not paid and/or (ii) at the
appropriate payment date, the amount of dividends or other distributions payable
with respect to shares of Penseco Common Stock represented by such Certificate
with a record date after the Effective Time (but before such surrender date) and
with a payment date subsequent to the issuance of the Penseco Common Stock
issuable with respect to such Certificate.
(d) In the event of a transfer of ownership of a Certificate
representing Old Forge Common Stock that is not registered in the stock transfer
records of Old Forge, the proper amount of cash and/or shares of Penseco Common
Stock shall be paid or issued in exchange therefor to a person other than the
person in whose name the Certificate so surrendered is registered if the
Certificate formerly representing such Old Forge Common Stock shall be properly
endorsed or otherwise be in proper form for transfer and the person requesting
such payment or issuance shall pay any transfer or other similar Taxes required
by reason of the payment or issuance to a person other than the registered
holder of the Certificate or establish to the satisfaction of Penseco that the
Tax has been paid or is not applicable.
(e) After the Effective Time, there shall be no transfers on the
stock transfer books of Old Forge of the shares of Old Forge Common Stock that
were issued and outstanding immediately prior to the Effective Time other than
to settle transfers of Old Forge Common Stock that occurred prior to the
Effective Time. If, after the Effective Time, Certificates representing such
shares are presented for transfer to the Exchange Agent, they shall be cancelled
and exchanged for the Merger Consideration and any cash in lieu of fractional
shares of Penseco Common Stock to be issued or paid in consideration therefor in
accordance with the procedures set forth in this Section 3.2.
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<Page>18
(f) Notwithstanding anything to the contrary contained in this
Agreement, no certificates or scrip representing fractional shares of Penseco
Common Stock shall be issued upon the surrender of Certificates for exchange,
no dividend or distribution with respect to Penseco Common Stock shall be
payable on or with respect to any fractional share, and such fractional share
interests shall not entitle the owner thereof to vote or to any other rights of
a shareholder of Penseco. In lieu of the issuance of any such fractional share,
Penseco shall pay to each former shareholder of Old Forge who otherwise would be
entitled to receive such fractional share an amount in cash (rounded to the
nearest cent) determined by multiplying (i) the Penseco Closing Price by (ii)
the fraction of a share (after taking into account all shares of Old Forge
Common Stock held by such holder at the Effective Time and rounded to the
nearest thousandth when expressed in decimal form) of Penseco Common Stock to
which such holder would otherwise be entitled to receive pursuant to Section
3.1.
(g) Any portion of the Exchange Fund that remains unclaimed by
the shareholders of Old Forge as of the first anniversary of the Effective Time
may, to the extent permitted by applicable law, be paid to Penseco. In such
event, any former shareholders of Old Forge who have not theretofore complied
with this Section 3.2 shall thereafter look only to Penseco with respect to the
Merger Consideration, any cash in lieu of any fractional shares and any unpaid
dividends and distributions on the Penseco Common Stock deliverable in respect
of each share of Old Forge Common Stock such shareholder holds as determined
pursuant to this Agreement, in each case, without any interest thereon.
Notwithstanding the foregoing, none of Penseco, Penn Security, Merger Sub, Old
Forge, the Exchange Agent or any other person shall be liable to any former
holder of shares of Old Forge Common Stock for any amount delivered in good
faith to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(h) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if reasonably
required by Penseco or the Exchange Agent, the posting by such person of a bond
in such amount as Penseco may determine is reasonably necessary as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration deliverable in respect thereof pursuant to
this Agreement.
3.2.4. Withholding Rights. The Exchange Agent (or, subsequent to the
------------------
first anniversary of the Effective Time, Penseco) shall be entitled to deduct
and withhold from the Merger Consideration and any cash in lieu of fractional
shares of Penseco Common Stock otherwise payable pursuant to this Agreement to
any holder of Old Forge Common Stock such amounts as the Exchange Agent or
Penseco, as the case may be, is required to deduct and withhold under federal,
state, local or foreign law, with respect to the making of such payment. To the
extent the amounts are so withheld by the Exchange Agent or Penseco, as the case
may be, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of shares of Old Forge Common Stock
in respect of whom such deduction and withholding was made by the Exchange Agent
or Penseco, as the case may be.
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Section 3.3 Reservation of Shares. Penseco shall reserve for issuance a
---------------------
sufficient number of shares of Penseco Common Stock for the purpose of issuing
shares of Penseco Common Stock to the Old Forge shareholders in accordance with
this Article 3.
ARTICLE 4
Representations and Warranties of Old Forge
Old Forge has delivered a disclosure schedule (the "OLD FORGE
DISCLOSURE SCHEDULE") to Penseco and Penn Security in connection with the
execution of this Agreement setting forth, among other things, items the
disclosure of which is necessary or appropriate either in response to an express
disclosure requirement contained in a provision hereof or as an exception to one
or more representations or warranties contained in this Article 4 or to one or
more of Old Forge's covenants contained herein. Except as set forth on the Old
Forge Disclosure Schedule, Old Forge hereby represents and warrants to Penseco
and Penn Security as follows:
Section 4.1 Corporate Organization.
----------------------
4.1.1. Old Forge is a commercial bank duly incorporated, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania. Old Forge has the power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, other than in such jurisdictions where to failure to be
so licensed or qualified, individually or in the aggregate, would not have a
Material Adverse Effect. Old Forge has no Subsidiaries (as defined below).
4.1.2. True, complete and correct copies of the Articles of
Incorporation of Old Forge, as amended (the "Old Forge Articles"), and the
Bylaws of Old Forge (the "Old Forge Bylaws"), as in effect as of the date of
this Agreement, have previously been made available to Penseco.
4.1.3. The deposit accounts of Old Forge are insured by the Federal
Deposit Insurance Corporation (the "FDIC") through the Deposit Insurance Fund
to the fullest extent permitted by law, and all premiums and assessments
required to be paid in connection therewith have been paid when due.
Section 4.2 Capitalization.
--------------
4.2.1. The authorized capital stock of Old Forge consists of 1,000,000
shares of Old Forge Common Stock, of which, 558,994 shares are issued and
outstanding. No shares of Old Forge Common Stock are reserved for issuance. All
of the issued and outstanding shares of Old Forge Common Stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights. No bonds, debentures, notes or other indebtedness of Old
Forge having the right to vote on any matters on which its shareholders may
vote ("VOTING DEBT") are issued or outstanding. Except pursuant to this
Agreement, Old Forge does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, rights, commitments or agreements of
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<Page>20
any character calling for the purchase or issuance of, or the payment of any
amount based on, any shares of Old Forge Common Stock, Voting Debt or any other
equity securities of Old Forge or any securities representing the right to
purchase or otherwise receive any shares of Old Forge Common Stock, Voting Debt
or other equity securities of Old Forge. Except as set forth in Section 4.2.1
of the Old Forge Disclosure Schedule, there are no contractual obligations of
Old Forge (i) to repurchase, redeem or otherwise acquire any shares of capital
stock of Old Forge or any equity security of Old Forge or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of Old Forge or (ii) pursuant to which Old
Forge is or could be required to register shares of Old Forge capital stock or
other securities under the Securities Act of 1933, as amended (the "SECURITIES
ACT"). No equity-based awards are outstanding. Except as set forth on Section
4.2.1 of the Old Forge Disclosure Schedule, since December 31, 2007, through the
date hereof, Old Forge has not (A) issued or repurchased any shares of Old Forge
Common Stock, Voting Debt or other equity securities of Old Forge, or (B) issued
or awarded any options, restricted shares or any other equity-based awards.
Except as set forth on Schedule 4.2.1 of the Old Forge Disclosure Schedule,
neither the Old Forge Common Stock nor any other class of securities of Old
Forge is held, or has been held at any one time, of record by five hundred or
more persons.
4.2.2. Section 4.2.2 of the Old Forge Disclosure Schedule sets forth Old
Forge's capital stock, equity interest or other direct or indirect ownership
interest in any person, where such ownership interest is equal to or greater
than five percent of the total ownership interest of such person.
Section 4.3 Authority; No Violation.
-----------------------
4.3.1. Old Forge has requisite power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
board of directors of Old Forge (the "OLD FORGE BOARD"). The Old Forge Board has
determined that the Merger, on substantially the terms and conditions set forth
in this Agreement, is advisable and in the best interests of Old Forge and its
shareholders, customers, employees and communities, has resolved to recommend
that Old Forge's shareholders vote in favor of the Merger, on substantially the
terms and conditions set forth in this Agreement, and has directed that the
Merger, on substantially the terms and conditions set forth in this Agreement,
be submitted to Old Forge's shareholders for consideration at a duly held
meeting of such shareholders and, except for the approval of this Agreement by
the affirmative vote of the holders of two thirds of the outstanding shares of
Old Forge Common Stock entitled to vote at such meeting, no other proceedings on
the part of Old Forge are necessary to approve this Agreement or to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Old Forge and (assuming due authorization, execution
and delivery by Penseco and Penn Security) constitutes the valid and binding
obligation of Old Forge, enforceable against Old Forge in accordance with its
terms (except as may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting the rights of creditors generally and
subject to general principles of equity).
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<Page>21
4.3.2. Neither the execution and delivery of this Agreement by Old Forge
nor the consummation by Old Forge of the transactions contemplated hereby, nor
compliance by Old Forge with any of the terms or provisions of this Agreement,
will (i) violate any provision of the Old Forge Articles or the Old Forge Bylaws
or (ii) assuming that the consents, approvals and filings referred to in Section
4.4 are duly obtained and/or made, (A) violate any statute, code, ordinance,
rule, regulation, judgment, order, writ, decree or Injunction applicable to Old
Forge or any of its respective properties or assets or (B) violate, conflict
with, result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event that, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective properties or
assets of Old Forge under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Old Forge is a party or by which any of
them or any of their respective properties or assets is bound.
Section 4.4 Consents and Approvals. Except for (a) the filing of
----------------------
applications and notices, as applicable, with the Board of Governors of the
Federal Reserve System (the "FEDERAL RESERVE BOARD") under the BHC Act and the
Pennsylvania Department of Banking and approval of such applications and
notices, (b) the filing of any required applications, filings or notices with
the FDIC and any other federal or state banking, insurance or other regulatory
or self-regulatory authorities or any courts, administrative agencies or
commissions or other governmental authorities or instrumentalities (each a
"GOVERNMENTAL ENTITY") and approval of such applications, filings and notices
(the "OTHER REGULATORY APPROVALS"), (c) the filing with the Securities and
Exchange Commission (the "SEC") of the Proxy Statement-Prospectus in definitive
form relating to the meeting of Old Forge's shareholders to be held in
connection with this Agreement and the transactions contemplated by this
Agreement and of a registration statement on Form S-4 (the "FORM S-4") in which
the Proxy Statement-Prospectus will be included as a prospectus, and declaration
of effectiveness of the Form S-4, (d) the filing of the Articles of Merger with
the Secretary of State of the Commonwealth of Pennsylvania after approval by the
Pennsylvania Department of Banking pursuant to the Banking Code, (e) notices or
filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR ACT"), if any, and (f) such filings and approvals as are
required to be made or obtained under the securities or "Blue Sky" laws of
various states in connection with the issuance of the shares of Penseco Common
Stock pursuant to this Agreement, no consents or approvals of or filings or
registrations with any Governmental Entity are necessary in connection with the
consummation by Old Forge of the Merger and the other transactions contemplated
by this Agreement. No consents or approvals of or filings or registrations with
any Governmental Entity are necessary in connection with the execution and
delivery by Old Forge of this Agreement.
Section 4.5 Reports; Regulatory Matters.
---------------------------
4.5.1. Except as set forth on Section 4.5.1 of the Old Forge Disclosure
Schedule, Old Forge has timely filed all reports, registrations and statements,
together with any amendments required to be made with respect thereto, that they
were required to file since January 1, 2005 with (i) the Federal Reserve Board,
(ii) the FDIC, (iii) the Pennsylvania Department of Banking or any state
regulatory authority, (iv) any foreign regulatory authority, (v) any applicable
industry self-regulatory organization, and (vi) the SEC (collectively,
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"REGULATORY AGENCIES") and with each other applicable Governmental Entity, and
all other reports and statements required to be filed by them since January 1,
2005, including any report or statement required to be filed pursuant to the
laws, rules or regulations of the United States, any state, any foreign entity
or any Regulatory Agency or Governmental Entity, and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by a Regulatory Agency or Governmental Entity in the
ordinary course of the business of Old Forge, no Regulatory Agency or
Governmental Entity has initiated since January 1, 2005 or has pending any
proceeding, enforcement action or, to the knowledge of Old Forge, investigation
into the business, disclosures or operations of Old Forge. Except as set forth
on Section 4.5.1 of the Old Forge Disclosure Schedule, since January 1, 2005, no
Regulatory Agency or Governmental Entity has resolved any proceeding,
enforcement action or, to the knowledge of Old Forge, investigation into the
business, disclosures or operations of Old Forge. Except as set forth on Section
4.5.1 of the Old Forge Disclosure Schedule, there is no unresolved violation,
criticism, comment or exception by any Regulatory Agency or Governmental Entity
with respect to any report or statement relating to any examinations or
inspections of Old Forge. Except as set forth on Section 4.5.1 of the Old Forge
Disclosure Schedule, since January 1, 2005, there has been no formal or informal
inquiries by, or disagreements or disputes with, any Regulatory Agency or
Governmental Entity with respect to the business, operations, policies or
procedures of Old Forge (other than normal examinations conducted by a
Regulatory Agency or Governmental Entity in Old Forge's ordinary course of
business).
4.5.2. Except as set forth on Section 4.5.2 of the Old Forge Disclosure
Schedule, Old Forge is not subject to any cease-and-desist or other order or
enforcement action issued by, or is a party to any written agreement, consent
agreement or memorandum of understanding with, or is a party to any commitment
letter or similar undertaking to, or is subject to any order or directive by, or
has been ordered to pay any civil money penalty by, or has been since January 1,
2005 a recipient of any supervisory letter from, or since January 1, 2005 has
adopted any policies, procedures or board resolutions at the request or
suggestion of, any Regulatory Agency or other Governmental Entity (each item in
this sentence, a "OLD FORGE REGULATORY AGREEMENT"), nor has Old Forge been
advised since January 1, 2005 by any Regulatory Agency or other Governmental
Entity that it is considering issuing, initiating, ordering or requesting any
such Old Forge Regulatory Agreement. Except as set forth on Section 4.5.2 of the
Old Forge Disclosure Schedules, to the knowledge of Old Forge, there has not
been any event or occurrence since January 1, 2005 that would result in a
determination that Old Forge is not "well capitalized" and "well managed" as a
matter of U.S. federal banking law, and there has been no notification or
communication from any Governmental Entity (i) threatening to revoke any permit,
license, franchise, certificate of authority or other governmental
authorization, or (ii) threatening or contemplating revocation or limitation of,
or which would have the effect of revoking or limiting, FDIC deposit insurance.
Section 4.6 Financial Statements.
--------------------
4.6.1. The financial statements of Old Forge at and for the years ended
December 31, 2007 and 2006 (including the related notes, where applicable), as
well as the financial statements of Old Forge at and for the ten-month period
ended October 31, 2008 that have been provided to Penseco (including any notes
thereto), (i) have been prepared from, and are in accordance with, the books and
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records of Old Forge, (ii) fairly present in all material respects the
consolidated results of operations, cash flows, changes in shareholders' equity
and consolidated financial position of Old Forge for the respective fiscal
periods or as of the respective dates therein set forth (subject in the case of
unaudited statements to recurring year-end audit adjustments normal in nature
and amount), and (iii) have been prepared in accordance with GAAP consistently
applied during the periods involved, except, in each case, as indicated in such
statements or in the notes thereto. The books and records of Old Forge have
been, and are being, maintained in all material respects in accordance with GAAP
and any other applicable legal and accounting requirements and reflect only
actual transactions.
4.6.2. Old Forge does not have any material liability of any nature
whatsoever (whether absolute, accrued, contingent or otherwise and whether due
or to become due), except for those liabilities that are reflected or reserved
against on the consolidated balance sheet of Old Forge included in the financial
statements of Old Forge at and for the ten-month period ended October 31, 2008
(including any notes thereto) that have been provided to Penseco and for
liabilities incurred in the ordinary course of business consistent with past
practice since October 31, 2008 or in connection with this Agreement and the
transactions contemplated hereby.
4.6.3. Except as set forth on Section 4.6.3 of the Old Forge Disclosure
Schedules, since December 31, 2007, (i) through the date hereof, neither Old
Forge nor any of its Subsidiaries nor, to the knowledge of Old Forge, any
director, officer, employee, auditor, accountant or representative of Old Forge
has received or otherwise had or obtained knowledge of any material complaint,
allegation, assertion or claim, whether written or oral, regarding the
accounting or auditing practices, procedures, methodologies or methods of Old
Forge or its respective internal accounting controls, including any material
complaint, allegation, assertion or claim that Old Forge has engaged in
questionable accounting or auditing practices, and (ii) no attorney representing
Old Forge, whether or not employed by Old Forge, has reported evidence of a
material violation of securities laws, breach of fiduciary duty or similar
violation by Old Forge or any of its officers, directors, employees or agents to
the Old Forge Board or any committee thereof or to any director or officer of
Old Forge.
Section 4.7 Broker's Fees. Neither Old Forge nor any of its officers,
-------------
directors, employees, agents and representatives, has employed any broker or
finder or incurred any liability for any broker's fees, commissions or finder's
fees in connection with the Merger or related transactions contemplated by this
Agreement, other than as set forth on Section 4.7 of the Old Forge Disclosure
Schedule and pursuant to letter agreements, true, complete and correct copies of
which have been previously delivered to Penseco.
Section 4.8 Absence of Certain Changes or Events.
------------------------------------
4.8.1. Except as set forth in the financial statements of Old Forge at
and for the ten-month period ended October 31, 2008 that have been provided to
Penseco, since December 31, 2007, no event has occurred that has had or is
reasonably likely to have, either individually or in the aggregate with all
other events, a Material Adverse Effect on Old Forge. As used in this Agreement,
the term "MATERIAL ADVERSE EFFECT" means, with respect to Penseco, Old Forge or
the Surviving Corporation, as the case may be, a material adverse effect on (i)
the business, results of operations or financial condition of such party and its
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Subsidiaries taken as a whole (provided, however, that, with respect to this
clause (i), a Material Adverse Effect shall not be deemed to include effects to
the extent resulting from (A) changes, after the date hereof, in generally
accepted accounting principles or regulatory accounting requirements applicable
to banks or savings associations and their holding companies, generally, (B)
changes, after the date hereof, in laws, rules or regulations of general
applicability to banks or savings associations and their holding companies,
generally, or interpretations thereof by courts or Governmental Entities, (C)
changes, after the date hereof, in global or national political conditions
(including national emergencies, the outbreak of war or acts of terrorism) or in
general economic or market conditions affecting banks, savings associations or
their holding companies generally, (D) consummation or public disclosure of this
Agreement or the transactions contemplated hereby or compliance with the terms
hereof, or (E) actions or omissions of Penseco or Old Forge taken with the prior
written consent of the other in contemplation of the transactions contemplated
hereby or required hereunder; and provided, further, that, with respect to this
clause (i) a Material Adverse Effect shall be deemed to include the
circumstances and conditions discussed in clauses (A), (B) and (C) to the extent
such changes have a disproportionate impact on either Penseco and its
Subsidiaries (on a consolidated basis) or Old Forge, as the case may be, in
comparison to the banking industry generally), or (ii) the ability of such party
to timely consummate the transactions contemplated by this Agreement.
4.8.2. Since December 31, 2007 through and including the date of this
Agreement, Old Forge has carried on its respective business in all material
respects in the ordinary course of business consistent with their past practice.
4.8.3. Except as set forth on Section 4.8.3 of the Old Forge Disclosure
Schedule, since December 31, 2007, Old Forge has not (i) except for (A) normal
increases for employees (other than officers subject to the reporting
requirements of Section 16(a) of the Exchange Act) made in the ordinary course
of business consistent with past practice or (B) as required by applicable law
or pre-existing contractual obligations, increased the wages, salaries,
compensation, pension or other fringe benefits or perquisites payable to any
executive officer, employee or director from the amount thereof in effect as of
December 31, 2007, granted any severance or termination pay, entered into any
contract to make or grant any severance or termination pay (in each case, except
as required under the terms of agreements or severance plans listed on Section
4.11 of the Old Forge Disclosure Schedule, as in effect as of the date hereof),
or paid any bonus other than the customary year-end bonuses in amounts
consistent with past practice, (ii) granted any stock appreciation rights or
options to purchase shares of Old Forge Common Stock, any restricted shares of
Old Forge Common Stock or any right to acquire any shares of its capital stock
to any executive officer, director or employee, (iii) changed any accounting
methods, principles or practices of Old Forge affecting its assets, liabilities
or business, including any reserving, renewal or residual method, practice or
policy, (iv) suffered any strike, work stoppage, slow-down or other labor
disturbance, (v) declared, set aside or paid any dividend or other distribution
(whether in cash, stock or property) with respect to any Old Forge Common Stock,
other than customary dividends, (vi) effected or authorized any issuance, split,
combination or reclassification of Old Forge Common Stock, or (vii) made any
agreement or commitment (contingent or otherwise) to do any of the foregoing.
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Section 4.9 Legal Proceedings.
-----------------
4.9.1. Except as disclosed on Section 4.9 of the Old Forge Disclosure
Schedule, Old Forge is not a party to any, and there are no pending or, to the
knowledge of Old Forge, threatened, legal, administrative, arbitral or other
material proceedings, claims, actions or governmental or regulatory
investigations of any nature against Old Forge, or otherwise challenging the
validity or propriety of the transactions contemplated by this Agreement. None
of the proceedings, claims, actions or governmental or regulatory investigations
set forth on Section 4.9 of the Old Forge Disclosure Schedule would reasonably
be expected to have, either individually or in the aggregate, a Material Adverse
Effect on Old Forge.
4.9.2. There is no Injunction, judgment or regulatory restriction (other
than those of general application that apply to similarly situated Pennsylvania
commercial banks or their Subsidiaries) imposed upon Old Forge or the assets of
Old Forge.
Section 4.10 Taxes.
-----
4.10.1. All Tax Returns required to have been filed by or with respect
to Old Forge have been duly and timely filed, and each such Tax Return correctly
and completely reflects liability for Taxes and all other information required
to be reported thereon. All Taxes owed by Old Forge (whether or not shown on any
Tax Return) have been timely paid. Old Forge has adequately provided for, in its
books of account and related records, liability for all unpaid Taxes, being
current Taxes not yet due and payable.
4.10.2. There is no action, audit, dispute or claim now proposed,
threatened or pending against, or with respect to, Old Forge in respect of any
Taxes. Old Forge is not the beneficiary of any extension of time within which to
file any Tax Return, nor has it requested such an extension. No claim has ever
been made by an authority in a jurisdiction where Old Forge does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction. There are
no liens on any of the stock or assets of Old Forge with respect to Taxes.
4.10.3. Old Forge has withheld and timely paid all Taxes required to
have been withheld and paid and has complied with all information reporting and
backup withholding requirements
4.10.4. Section 4.10.4 of the Old Forge Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to Old
Forge for taxable periods ended on or after December 31, 2005, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. Old Forge has delivered to Penseco correct
and complete copies of all federal income Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by Old Forge since
December 31, 2005. Old Forge has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
4.10.5. Old Forge has never been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code. Old Forge has
not made any payments, is not obligated to make any payments, and is not a party
to any agreement that under certain circumstances could obligate it to make
payments that would result in a nondeductible expense under Section 280G of the
Code. Old Forge has never been a member of a Relevant Group.
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4.10.6. Old Forge has not agreed to and is not required to make by
reason of a change in accounting method and could not be required to make by
reason of a proposed or threatened change in accounting method, any adjustment
under Section 481(a) of the Code. Old Forge has not been the "distributing
corporation" or the "controlled corporation" with respect to a transaction
described in Section 355 of the Code within the 5-year period ending as of the
date of this Agreement. Old Forge is not subject to any ruling from or agreement
with any taxing authority. Old Forge has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Section 6662 of the
Code. Old Forge has not participated in any "reportable transaction" within the
meaning of Treasury Regulation Section 1.6011-4.
4.10.7. Old Forge is not a party to any Tax allocation or sharing
agreement. Old Forge does not have any liability for the Taxes of any Person
under Section 1.1502-6 of the Treasury regulations (or any similar provision of
state, local, or foreign law) as a transferee or successor, by contract or
otherwise. Old Forge is not a party to any joint venture, partnership or other
arrangement that is treated as a partnership for federal income Tax purposes.
4.10.8. Old Forge will not be required to include any item of income in,
or exclude any item of deduction from, taxable income for any taxable period (or
portion thereof) ending after the Closing Date as a result of any installment
sale or open transaction disposition made on or prior to the Closing Date, or
prepaid amount received on or prior to the Closing Date. There is no power of
attorney in force with respect to Taxes with respect to Old Forge.
4.10.9. The amount of the bad debt reserve of Old Forge that must be
recaptured for federal income Tax purposes as a result of the Merger is
$571,334.
4.10.10. Old Forge has no equity interest in any corporation,
partnership, limited liability company, trust or other entity.
Section 4.11 Employee Matters.
----------------
4.11.1. Section 4.11.1 of the Old Forge Disclosure Schedule sets forth
a true and correct list of each deferred compensation plan, incentive
compensation plan, equity compensation plan, "welfare" plan, fund or program
(within the meaning of Section 3(1) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")); "pension" plan, fund or program (within the
meaning of Section 3(2) of ERISA); each employment, termination or severance
agreement; and each other employee benefit plan, fund, program, agreement or
arrangement, in each case, that is sponsored, maintained or contributed to or
required to be contributed to by Old Forge or any of its ERISA Affiliates, for
the benefit of any employee or former employee, director or consultant of Old
Forge or with respect to which Old Forge has any liability or obligation,
contingent or otherwise (the "PLANS").
4.11.2. Old Forge has heretofore made available to Penseco with respect
to each of the Plans true and correct copies of each of the following documents,
if applicable: (i) the Plan document and any amendment thereto (or if there is
no Plan document, a summary of the material terms of the Plan); (ii) any related
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trust or other funding vehicle; (iii) the actuarial report and annual report for
such Plan for the most recent two years for which such reports are available;
(iv) the most recent determination letter from the IRS for such Plan, and (v)
the most recent summary plan description and related summaries of material
modifications.
4.11.3. Except as may be set forth in Section 4.11.3 of the Old Forge
Disclosure Schedule:
(a) each of the Plans has been established and has at all times
been operated and administered in material compliance with the applicable law,
including the Code and ERISA;
(b) there is no material liability relating to the Plans (with
materiality determined with respect to the Plans in the aggregate) that has not
been disclosed on Old Forge's financial statements in accordance with GAAP and
any other applicable legal and accounting requirements and such liability with
respect to any Plan will not materially increase as a result of the Merger;
(c) with respect to each of the Plans intended to be "qualified"
within the meaning of Section 401(a) of the Code, Old Forge has received a
favorable determination notification or opinion letter from the IRS, and, to Old
Forge's knowledge, no event has occurred that would reasonably be expected to
affect such determination and each of the Plans has been timely amended to
comply with current laws and regulations (or time remains to make such
amendments under Section 401(b) of the code or other similar statutory,
regulatory or administrative relief);
(d) Old Forge and its ERISA Affiliates do not sponsor,
participate in or contribute to, and have not in the past sponsored,
participated in or contributed to, and have no current or contingent obligation
with respect to: (1) any defined benefit pension plan subject to Title IV of
ERISA, (2) any multi-employer Plan (as defined in Section 3(37) of ERISA), (3)
any plan or arrangement that provides medial benefits, life insurance benefits
or other welfare benefits following cessation of employment, except to the
extent required by COBRA or any similar state law or (4) any "welfare benefit
fund" (within the meaning of Section 419 of the Code), and for purposes of this
Agreement, "ERISA AFFILIATE" shall mean all persons that are treated as being
under common control with Old Forge or any affiliate under Code Section 414(b),
(c), (m), or (o);
(e) Old Forge has not incurred any liability for any Tax
(including any excise tax) or penalty with respect to any Plan, and no event
has occurred and no circumstance exists or has existed that could reasonably be
expected to give rise to the imposition of any such Tax or penalty;
(f) to Old Forge's knowledge, no non-exempt "prohibited
transaction" (within the meaning of Section 4975 of the Code or Section 406 of
ERISA) or breach of any fiduciary duty described in Section 404 of ERISA has
occurred that could result in any material liability, direct or indirect, for
Old Forge or any of its ERISA Affiliates or any shareholder, officer, director
or employee of Old Forge or an ERISA Affiliate;
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(g) each Plan that is a group health plan (within the meaning of
section 5000(b)(1) of the Code) complies, and in each and every case has
complied, with all material requirements of ERISA and section 4980B of the Code;
(h) all amounts that Old Forge and its ERISA Affiliates are
required to pay as contributions to each of the Plans have been paid or properly
accrued and fully deducted by Old Forge for federal income tax purposes;
(i) all benefits accrued under any funded or unfunded Plan have
been paid, accrued or otherwise adequately reserved in accordance with GAAP; and
all monies withheld from employee paychecks with respect to Plans have been
transferred to the appropriate Plan or otherwise applied to pay premiums or
benefits in a timely manner as required by applicable law;
(j) except as specifically described in this Agreement, the
execution of and performance of the transactions contemplated by herein will not
(either alone or upon the occurrence of any additional or subsequent events)
result in: (i) any payment to or acceleration, vesting or increase in the rights
of any current or former service provider of Old Forge, or (ii) any "excess
parachute payment" (as defined in Section 280G of the Code) to any current or
former service provider of Old Forge;
(k) there are no pending or, to the knowledge of Old Forge,
threatened or anticipated (i) claims (other than routine claims for benefits)
by, on behalf of or against any of the Plans or any trusts related thereto, or
(ii) any audit or investigation by any Governmental Entity with respect to a
Plan;
(l) each Plan that is subject to Section 409A of the Code has
been maintained and operated in good faith based on the regulations promulgated
by the IRS and related IRS guidance issued with respect to Section 409A of the
Code and has been timely amended in accordance therewith;
(m) all persons classified by Old Forge or its ERISA Affiliates
as independent contractors satisfy and have at all times satisfied the
requirements of applicable law to be so classified; and Old Forge and its ERISA
Affiliates have fully and accurately reported their compensation on IRS Forms
1099 when required to do so;
(n) no individuals are currently providing services to Old Forge
or its ERISA Affiliates pursuant to an employee leasing agreement or similar
type of arrangement, nor is Old Forge or its ERISA Affiliates party to any such
arrangement; and
(o) each Plan may be amended or terminated at any time
determined by Old Forge in its sole discretion without the consent of any third
party.
Section 4.12 Compliance with Applicable Law. Old Forge holds all
-----------------------------
material licenses, franchises, permits and authorizations necessary for the
lawful conduct of its business and has complied in all respects with and is not
in default in any material respect under any, applicable law, statute, order,
rule, regulation, policy or guideline of any Governmental Entity relating to Old
Forge. Old Forge does not act as a fiduciary for any person, or administer any
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<Page>29
account for which it acts as a fiduciary, including as a trustee, agent,
custodian, personal representative, guardian, conservator or investment advisor.
Since the enactment of the Sarbanes-Oxley Act, Old Forge has been and is in
compliance in all material respects with the provisions of the Sarbanes-Oxley
Act applicable to Old Forge and its business. Section 4.12 of the Old Forge
Disclosure Schedule sets forth a schedule of all officers and directors of Old
Forge who have outstanding loans from Old Forge, and there has been no default
on, or forgiveness or waiver of, in whole or in part, any such loan during the
two years immediately preceding the date hereof.
Section 4.13 Certain Contracts.
-----------------
4.13.1. Except as disclosed on Section 4.13.1 of the Old Forge
Disclosure Schedule, Old Forge is not a party to or bound by any contract,
arrangement, commitment or understanding (whether written or oral) (i) with
respect to the employment of any directors, officers, employees or consultants,
other than in the ordinary course of business consistent with past practice,
(ii) that, upon execution of this Agreement or consummation or shareholder
approval of the transactions contemplated by this Agreement, will (either alone
or upon the occurrence of any additional acts or events) result in any payment
or benefits (whether of severance pay or otherwise) becoming due from Penseco,
Old Forge, the Surviving Corporation, or any of their respective Subsidiaries
to any officer or employee thereof, (iii) that materially restricts the conduct
of any line of business by Old Forge or, to the knowledge of Old Forge, upon
consummation of the Merger will materially restrict the ability of the Surviving
Corporation to engage in any line of business in which a bank holding company
may lawfully engage, (iv) with or to a labor union or guild (including any
collective bargaining agreement), (v) including any stock option plan, stock
appreciation rights plan, restricted stock plan, stock purchase plan or benefits
plan in which any of the benefits of which will be increased, or the vesting of
the benefits of which will be accelerated, by the execution of this Agreement,
the occurrence of any shareholder approval or the consummation of any of the
transactions contemplated by this Agreement, or the value of any of the benefits
of which will be calculated on the basis of or affected by any of the
transactions contemplated by this Agreement, or (vi) which is otherwise
material. Each contract, arrangement, commitment or understanding of the type
described in this Section 4.13.1, whether or not set forth in the Old Forge
Disclosure Schedule, is referred to as an "Old Forge Contract," and Old Forge
does not know of, and has not received notice of, any material violation of any
Old Forge Contract by any of the other parties thereto.
4.13.2. (i) Each Old Forge Contract is valid and binding on Old Forge
and is in full force and effect, (ii) Old Forge has in all material respects
performed all obligations required to be performed by it to date under each Old
Forge Contract and (iii) except as set forth on Section 4.13.2 of the Old Forge
Disclosure Schedule, no event or condition exists that constitutes or, after
notice or lapse of time or both, will constitute, a material default on the part
of Old Forge under any such Old Forge Contract.
Section 4.14 Risk Management Instruments.
---------------------------
4.14.1. "DERIVATIVE TRANSACTIONS" means any swap transaction, option,
warrant, forward purchase or sale transaction, futures transaction, cap
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transaction, floor transaction or collar transaction relating to one or more
currencies, commodities, bonds, equity securities, loans, interest rates,
prices, values, or other financial or nonfinancial assets, credit-related events
or conditions or any indexes, or any other similar transaction or combination of
any of these transactions, including collateralized mortgage obligations or
other similar instruments or any debt or equity instruments evidencing or
embedding any such types of transactions, and any related credit support,
collateral or other similar arrangements related to such transactions.
4.14.2. All Derivative Transactions, whether entered into for the
account of Old Forge or for the account of a customer of Old Forge, were entered
into in the ordinary course of business consistent with past practice and in
accordance with prudent banking practice and applicable laws, rules, regulations
and policies of any Regulatory Authority and in accordance with the investment,
securities, commodities, risk management and other policies, practices and
procedures employed by Old Forge, and with counterparties believed at the time
to be financially responsible and able to understand (either alone or in
consultation with their advisers) and to bear the risks of such Derivative
Transactions. All of such Derivative Transactions are legal, valid and binding
obligations of Old Forge enforceable against it in accordance with their terms
(except as may be limited by bankruptcy, insolvency, moratorium, reorganization
or similar laws affecting the rights of creditors generally and subject to
general principles of equity), and are in full force and effect. Old Forge has
duly performed its obligations under the Derivative Transactions to the extent
that such obligations to perform have accrued and, to Old Forge's knowledge,
there are no breaches, violations or defaults or allegations or assertions of
such by any party thereunder.
Section 4.15 Investment Securities and Commodities.
-------------------------------------
4.15.1. Except as would not reasonably be expected to have a Material
Adverse Effect on Old Forge, Old Forge has good title to all securities and
commodities owned by it (except those sold under repurchase agreements or held
in any fiduciary or agency capacity), free and clear of any Liens, except to the
extent such securities or commodities are pledged in the ordinary course of
business to secure obligations of Old Forge. Such securities and commodities are
valued on the books of Old Forge in accordance with GAAP in all material
respects.
4.15.2. Old Forge and its business employ and have acted in compliance
in all material respects with investment, securities, commodities, risk
management and other policies, practices and procedures (the "POLICIES,
PRACTICES AND PROCEDURES") that Old Forge believes are prudent and reasonable
in the context of such business. Before the date hereof, Old Forge has made
available to Penseco in writing its material Policies, Practices and Procedures.
Section 4.16 Property. Old Forge (a) has fee simple title to all its
--------
Owned Property, free and clear of all Liens of any nature whatsoever, except (i)
statutory Liens securing payments not yet due, (ii) Liens for real property
Taxes not yet delinquent, (iii) easements, rights of way and other similar
encumbrances and matters of record that do not materially adversely affect the
use of the properties or assets subject thereto or affected thereby as used by
Old Forge on the date hereof and (iv) such imperfections or irregularities of
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title or Liens as do not materially affect the use of the properties or assets
subject thereto or affected thereby or otherwise materially impair business
operations at such properties as conducted by Old Forge on the date hereof
(collectively, "PERMITTED LIENS"). Old Forge is not a lessor or lessee under any
real property lease. Old Forge's Owned Property is in material compliance with
all applicable zoning laws and building codes, and the buildings and
improvements located on such Owned Property are in good operating condition and
in a state of good working order, ordinary wear and tear and casualty excepted.
There are no pending or, to the knowledge of Old Forge, threatened condemnation
proceedings against Old Forge's Owned Property. Old Forge is in material
compliance with all applicable health and safety related requirements for Old
Forge's Owned Property, including those under the Americans with Disabilities
Act of 1990 and the Occupational Health and Safety Act of 1970. Old Forge
currently maintains (or causes to be maintained) insurance on all its property,
including its Owned Property in amounts, scope and coverage reasonably necessary
for its operations. Old Forge has not received any written notice of
termination, nonrenewal or premium adjustment for such policies.
Section 4.17 Intellectual Property. Old Forge owns, or is licensed to
--------------------
use (in each case, free and clear of any Liens), all Intellectual Property used
in or necessary for the conduct of its business as currently conducted. The use
of any Intellectual Property by Old Forge does not, to the knowledge of Old
Forge, infringe on or otherwise violate the rights of any person and is in
accordance with any applicable license pursuant to which Old Forge acquired the
right to use any Intellectual Property. To Old Forge's knowledge, no person is
challenging, infringing on or otherwise violating any right of Old Forge with
respect to any Intellectual Property owned by and/or licensed to Old Forge. Old
Forge has not received any written notice of any pending claim with respect to
any Intellectual Property used by Old Forge and, to Old Forge's knowledge, no
Intellectual Property owned and/or licensed by Old Forge is being used or
enforced in a manner that would result in the abandonment, cancellation or
unenforceability of such Intellectual Property. For purposes of this Agreement,
"INTELLECTUAL PROPERTY" means trademarks, service marks, brand names,
certification marks, trade dress and other indications of origin, the goodwill
associated with the foregoing and registrations in any jurisdiction of, and
applications in any jurisdiction to register, the foregoing, including any
extension, modification or renewal of any such registration or application;
inventions, discoveries and ideas, whether patentable or not, in any
jurisdiction; patents, applications for patents (including divisions,
continuations, continuations in part and renewal applications), and any
renewals, extensions or reissues thereof, in any jurisdiction; nonpublic
information, trade secrets and confidential information and rights in any
jurisdiction to limit the use or disclosure thereof by any person; writings and
other works, whether copyrightable or not, in any jurisdiction; and
registrations or applications for registration of copyrights in any
jurisdiction, and any renewals or extensions thereof; and any similar
intellectual property or proprietary rights.
Section 4.18 Environmental Liability. There are no legal,
-----------------------
administrative, arbitral or other proceedings, claims, actions, causes of action
or notices with respect to any environmental, health or safety matters or any
private or governmental environmental, health or safety investigations or
remediation activities of any nature seeking to impose, or that are reasonably
likely to result in, any liability or obligation of Old Forge arising under
common law or under any local, state or federal environmental, health or safety
statute, regulation or ordinance (collectively, "ENVIRONMENTAL LAWS"), including
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, pending or, to the knowledge of Old Forge, threatened against
Old Forge. To the knowledge of Old Forge, there is no reasonable basis for, or
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circumstances that are reasonably likely to give rise to, any such proceeding,
claim, action, investigation or remediation by any Governmental Entity or any
third party that would give rise to any liability or obligation on the part of
Old Forge. Old Forge is not subject to any agreement, order, judgment, decree,
letter or memorandum by or with any Governmental Entity or third party imposing
any liability or obligation with respect to any of the foregoing. Old Forge is
and has been, and all properties foreclosed upon by Old Forge are, in compliance
with all applicable Environmental Laws.
Section 4.19 Personal Property Leases. Section 4.19 of the Old Forge
------------------------
Disclosure Schedule sets forth a list of each personal property lease involving
annual payments in excess of $100,000 to which Old Forge is a party (each, a
"PERSONAL PROPERTY LEASE"). Each Personal Property Lease is valid and binding on
Old Forge and is in full force and effect. Old Forge has performed, in all
material respects, all obligations required to be performed by it to date under
each Personal Property Lease. Old Forge is not in material default under any
Personal Property Lease beyond any applicable notice and cure period.
Section 4.20 Securitizations. Old Forge is not a party to any agreement
---------------
pursuant to which it has securitized any of its assets.
Section 4.21 Reorganization; Approvals. Old Forge (a) is not aware of
-------------------------
any fact or circumstance, and has not taken or agreed to take any action, that
could reasonably be expected to prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code and (b) knows
of no reason why all regulatory approvals from any Governmental Entity required
for the consummation of the transactions contemplated by this Agreement should
not be obtained on a timely basis.
Section 4.22 Opinion. Before the execution of this Agreement, the Old
-------
Forge Board has received an opinion from Danielson Capital, LLC to the effect
that as of the date thereof and based upon and subject to the matters set forth
therein, the Merger Consideration is fair to the shareholders of Old Forge from
a financial point of view. Such opinion has not been amended or rescinded as of
the date of this Agreement.
Section 4.23 Old Forge Information. The information relating to Old
---------------------
Forge that is provided by Old Forge or its representatives for inclusion in the
Proxy Statement-Prospectus and the Form S-4, or in any application, notification
or other document filed with any other Regulatory Agency or other Governmental
Entity in connection with the transactions contemplated by this Agreement, will
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in light of the circumstances in
which they are made, not misleading. The portions of the Proxy
Statement-Prospectus relating to Old Forge and other portions within the
reasonable control of Old Forge will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
Section 4.24 State Takeover Law. The Old Forge Board has approved the
------------------
transactions contemplated by this Agreement and the Voting Agreements such that
no "moratorium," "control share," "fair price," "business combination" or other
anti-takeover laws are applicable to the Merger or any transactions contemplated
therein.
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Section 4.25 Loan Portfolio.
--------------
4.25.1. Old Forge has made available to Penseco a listing, as of October
31, 2008, of the following: (i) each borrower, customer or other party which has
notified Old Forge during the past 12 months of, or has asserted against Old
Forge, in each case in writing, any "lender liability" or similar claim; (ii)
(A) the aggregate outstanding principal amount of all loan agreements, notes or
borrowing arrangements (including leases, credit enhancements and
interest-bearing assets) payable to Old Forge (each, a "LOAN" and collectively,
the "LOANS"), other than "nonaccrual" Loans, (B) the aggregate outstanding
principal amount of all "nonaccrual" Loans, (C) a summary of all Loans
designated as of such date by either Old Forge, its accountants (whether
internal or external) or its auditors (whether internal or external) as "Special
Mention," "Substandard," "Doubtful," "Loss," "Classified," "Criticized," "Watch
List" or words of similar import, including the aggregate principal amount of
such Loans and the amount of specific reserves with respect to all such Loans,
(D) any Loan where a reasonable doubt exists as to the timely future
collectability of principal and/or interest, whether or not interest is still
accruing or the Loan is less than 90 days past due, (E) any Loan where the
interest rate terms have been reduced and/or the maturity dates have been
extended subsequent to the agreement under which the loan was originally created
due to concerns regarding the borrower's ability to pay and (F) any Loan where a
specific reserve allocation exists in connection therewith; and (iii) all other
assets classified by Old Forge as real estate acquired through foreclosure or in
lieu of foreclosure, including in-substance foreclosures, and all other assets
currently held that were acquired through foreclosure or in lieu of foreclosure.
Since October 31, 2008, no Loans have been designated by either Old Forge, its
accountants (whether internal or external) or its auditors (whether internal or
external) as "Special Mention," "Substandard," "Doubtful," "Loss," "Classified,"
"Criticized," "Watch List" or words of similar import, except for such Loans
that, individually or in the aggregate, would not reasonably be expected to
result in a Material Adverse Effect on Old Forge.
4.25.2. Each Loan (i) is evidenced by notes, agreements or other
evidences of indebtedness that are true, genuine and what they purport to be,
(ii) to the extent secured, has been secured by valid Liens in favor of Old
Forge that have been perfected and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms (except as may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting the rights of creditors generally and
subject to general principles of equity). All Loans originated by Old Forge,
and all such Loans purchased by Old Forge, were made or purchased in accordance
with customary lending standards. All such Loans (and any related guarantees)
and payments due thereunder are, and on the Closing Date will be, free and clear
of any Lien, and Old Forge has complied in all material respects, and on the
Closing Date will have complied in all material respects, with all laws and
regulations relating to such Loans.
4.25.3. Except as disclosed in the financial statements of Old Forge at
and for the ten-month period ended October 31, 2008 that have been provided to
Penseco, since December 31, 2007, Old Forge has not incurred any unusual or
extraordinary loan losses which are material to Old Forge; to Old Forge's
knowledge and in light of its historical loan loss experiences and its
managements' analyses of the quality and performance of its loan portfolios, as
of October 31, 2008, its reserves for loan losses are adequate to absorb
potential loan losses determined on the basis of management of Old Forge's
continuing review and evaluation of the loan portfolio and their judgment as to
the impact of economic conditions on the portfolio.
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Section 4.26 Internal Controls. The records, systems, controls, data
-----------------
and information of Old Forge are recorded, stored, maintained and operated under
means (including any electronic, mechanical or photographic process, whether
computerized or not) that are under the exclusive ownership and direct control
of Old Forge or accountants (including all means of access thereto and
therefrom). Since December 31, 2003, Old Forge has devised and maintained a
system of internal accounting controls sufficient to provide reasonable
assurances regarding the reliability of financial reporting and the preparation
of financial statements in accordance with GAAP. Old Forge (i) has designed
disclosure controls and procedures to ensure that material information relating
to Old Forge, including its consolidated Subsidiaries, is made known to the
management of Old Forge by others within the organization, and (ii) has
disclosed, based on its most recent evaluation prior to the date hereof, to Old
Forge's auditors and the audit committee of the Old Forge Board (x) any
significant deficiencies in the design or operation of internal controls which
could adversely affect in any material respect Old Forge's ability to record,
process, summarize and report financial data and have identified for Old Forge's
auditors any material weaknesses in internal controls and (y) any fraud, whether
or not material, that involves management or other employees who have a
significant role in Old Forge's internal controls. Old Forge has made available
to Penseco the disclosures made by management to Old Forge's auditors and audit
committee since January 1, 2005.
Section 4.27 Due Diligence. Old Forge acknowledges that Penseco and
-------------
Penn Security have permitted Old Forge to conduct, and Old Forge has conducted,
such due diligence and other investigation of Penseco and Penn Security as Old
Forge has deemed appropriate in connection with the transactions contemplated by
this Agreement. For avoidance of doubt, the foregoing shall not be deemed to be,
or construed as, a limitation or waiver of any rights or remedies which Old
Forge may have with respect to any breach of a representation or warranty made
by Penseco or Penn Security in this Agreement.
ARTICLE 5
Representations and Warranties of Penseco and Penn Security
Penseco and Penn Security have delivered a disclosure schedule (the
"PENSECO DISCLOSURE SCHEDULE") to Old Forge in connection with the execution of
this Agreement setting forth, among other things, items the disclosure of which
is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in this Article 5 or to one or more of
Penseco's covenants contained herein. Except as set forth on the Penseco
Disclosure Schedule, Penseco hereby represents and warrants to Old Forge as
follows:
Section 5.1 Corporate Organization.
----------------------
5.1.1. Penseco is a corporation duly incorporated, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania. Penseco
has the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted, and is duly
licensed or qualified to do business in each jurisdiction in which the nature of
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<Page>35
the business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
other than in such jurisdictions where to failure to be so licensed or
qualified, individually or in the aggregate, would not have a Material Adverse
Effect.
5.1.2. Penseco is duly registered as a bank holding company under the
BHC Act and is a financial holding company pursuant to Section 4(l) of the BHC
Act. True, complete and correct copies of the Articles of Incorporation of
Penseco, as amended (the "PENSECO ARTICLES") and Bylaws of Penseco (the "PENSECO
BYLAWS"), as in effect as of the date of this Agreement, have previously been
made available to Old Forge.
5.1.3. Each Penseco Subsidiary, including Penn Security, (i) is duly
incorporated or duly formed, as applicable to each such Subsidiary, and validly
existing under the laws of its jurisdiction of organization, (ii) is duly
qualified to do business and in good standing in all jurisdictions (whether
federal, state, local or foreign) where its ownership or leasing of property or
the conduct of its business requires it to be so qualified and (iii) has all
requisite corporate power or other power and authority to own or lease its
properties and assets and to carry on its business as now conducted. True,
complete and correct copies of the Articles of Incorporation of Penn Security,
as amended (the "PENN SECURITY ARTICLES") and Bylaws of Penn Security (the "PENN
SECURITY BYLAWS"), as in effect as of the date of this Agreement, have
previously been made available to Old Forge. As used in this Agreement, the word
"SUBSIDIARY," when used with respect to either party, means any bank,
corporation, partnership, limited liability company or other organization,
whether incorporated or unincorporated, that is consolidated with such party for
financial reporting purposes under U.S. generally accepted accounting principles
("GAAP"), and the terms "PENSECO SUBSIDIARY" shall mean any direct or indirect
Subsidiary of Penseco.
Section 5.2 Capitalization.
--------------
5.2.1. The authorized capital stock of Penseco consists of 15,000,000
shares of Penseco Common Stock, of which, as of the date of this Agreement (the
"PENSECO CAPITALIZATION DATE"), 2,148,000 shares were issued and outstanding. As
of the Penseco Capitalization Date, no shares of Penseco Common Stock were
reserved for issuance, provided, however, that 107,400 shares of Penseco Common
Stock were available for grant under the equity-based compensation plans of
Penseco or a Subsidiary of Penseco in effect as of the date of this Agreement
(the "PENSECO STOCK PLANS"), which shares may be authorized and unissued shares,
treasury shares held by Penseco or shares purchased or held by Penseco or a
Subsidiary of Penseco for purposes of the Penseco Stock Plans, or any
combination thereof. All of the issued and outstanding shares of Penseco Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. As of the date of this Agreement, no Voting
Debt of Penseco is issued or outstanding. As of the Penseco Capitalization Date,
except as disclosed in the Penseco SEC Reports and/or pursuant to this
Agreement, the Penseco Stock Plans, and stock repurchase plans entered into by
Penseco from time to time, Penseco does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, rights, commitments or
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<Page>36
agreements of any character calling for the purchase or issuance of any shares
of Penseco Common Stock, Voting Debt of Penseco or any other equity securities
of Penseco or any securities representing the right to purchase or otherwise
receive any shares of Penseco Common Stock, Voting Debt of Penseco or other
equity securities of Penseco. The shares of Penseco Common Stock to be issued
pursuant to the Merger will be duly authorized and validly issued and, at the
Effective Time, all such shares will be fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof.
5.2.2. The authorized capital stock of Penn Security consists of
3,500,000 shares of Penn Security Common Stock, of which, 537,000 shares are
issued and outstanding. No shares of Penn Security Common Stock are reserved
for issuance. All of the issued and outstanding shares of Penn Security Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. No Voting Debt of Penn Security is issued or
outstanding. Penn Security does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, rights, commitments or agreements of
any character calling for the purchase or issuance of any shares of Penn
Security Common Stock, Voting Debt of Penn Security or any other equity
securities of Penn Security or any securities representing the right to purchase
or otherwise receive any shares of Penn Security Common Stock, Voting Debt of
Penn Security or other equity securities of Penn Security.
5.2.3. All of the issued and outstanding shares of capital stock or
other equity ownership interests of each Subsidiary of Penseco are owned by
Penseco, directly or indirectly, free and clear of any Liens, and all of such
shares or equity ownership interests are duly authorized and validly issued and
are fully paid, nonassessable (subject to 12 U.S.C. ss. 55) and free of
preemptive rights.
Section 5.3 Authority; No Violation.
-----------------------
5.3.1. Each of Penseco and Penn Security has requisite power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the board of directors of Penseco and Penn Security, and by
Penseco as the sole shareholder of Penn Security, and no other corporate
proceedings on the part of Penseco or Penn Security are necessary to approve
this Agreement or to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by each of Penseco
and Penn Security and (assuming due authorization, execution and delivery by
Old Forge) constitutes the valid and binding obligations of each of Penseco and
Penn Security, enforceable against each of them in accordance with its terms
(except as may be limited by bankruptcy, insolvency, moratorium, reorganization
or similar laws affecting the rights of creditors generally and subject to
general principles of equity).
5.3.2. Neither the execution and delivery of this Agreement by Penseco
or Penn Security, nor the consummation by Penseco or Penn Security of the
transactions contemplated hereby, nor compliance by Penseco or Penn Security
with any of the terms or provisions of this Agreement, will (i) violate any
provision of the Penseco Articles, Penseco Bylaws, Penn Security Articles or
Penn Security Bylaws, or (ii) assuming that the consents, approvals and filings
referred to in Section 5.4 are duly obtained and/or made, (A) violate any
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statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
Injunction applicable to Penseco, any of its Subsidiaries or any of their
respective properties or assets or (B) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event that, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective properties or
assets of Penseco or any of its Subsidiaries under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Penseco or any of
its Subsidiaries is a party or by which any of them or any of their respective
properties or assets is bound.
Section 5.4 Consents and Approvals. Except for (a) the filing of
----------------------
applications and notices, as applicable, with the Federal Reserve Board under
the BHC Act and any applicable state regulatory agencies and approval of such
applications and notices, (b) the Other Regulatory Approvals, (c) the filing
with the SEC of the Proxy Statement-Prospectus and the filing and declaration of
effectiveness of the Form S-4, (d) the filing of the Articles of Merger with the
Secretary of State of the Commonwealth of Pennsylvania after approval by the
Pennsylvania Department of Banking pursuant to the Banking Code, (e) any
consents, authorizations, approvals, filings or exemptions in connection with
compliance with consumer finance, mortgage banking and other similar laws, (f)
notices or filings under the HSR Act, if any, and (g) such filings and approvals
as are required to be made or obtained under the securities or "Blue Sky" laws
of various states in connection with the issuance of the shares of Penseco
Common Stock pursuant to this Agreement, no consents or approvals of or filings
or registrations with any Governmental Entity are necessary in connection with
the consummation by Penseco or Penn Security of the Merger and the other
transactions contemplated by this Agreement. No consents or approvals of or
filings or registrations with any Governmental Entity are necessary in
connection with the execution and delivery by Penseco or Penn Security of this
Agreement.
Section 5.5 Reports; Regulatory Matters.
---------------------------
5.5.1. Penseco and each of its Subsidiaries have timely filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file since January 1,
2005 with the Regulatory Agencies and each other applicable Governmental Entity,
and all other reports and statements required to be filed by them since January
1, 2005, including any report or statement required to be filed pursuant to the
laws, rules or regulations of the United States, any state, any foreign entity
or any Regulatory Agency, and have paid all fees and assessments due and payable
in connection therewith. Except for normal examinations conducted by a
Regulatory Agency or Governmental Entity in the ordinary course of the business
of Penseco and its Subsidiaries, no Regulatory Agency or Governmental Entity has
initiated since January 1, 2005 or has pending any proceeding, enforcement
action or, to the knowledge of Penseco, investigation into the business,
disclosures or operations of Penseco or any of its Subsidiaries. Since January
1, 2005, no Regulatory Agency or Governmental Entity has resolved any
proceeding, enforcement action or, to the knowledge of Penseco, investigation
into the business, disclosures or operations of Penseco or any of its
Subsidiaries. There is no unresolved violation, criticism or exception by any
Regulatory Agency or Governmental Entity with respect to any report or statement
relating to any examinations or inspections of Penseco or any of its
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Subsidiaries. Since January 1, 2005, there has been no formal or informal
inquiries by, or disagreements or disputes with, any Regulatory Agency or
Governmental Entity with respect to the business, operations, policies or
procedures of Penseco or any of its Subsidiaries (other than normal examinations
conducted by a Regulatory Agency or Governmental Entity in Penseco's ordinary
course of business).
5.5.2. Neither Penseco nor any of its Subsidiaries is subject to any
cease-and-desist or other order or enforcement action issued by, or is a party
to any written agreement, consent agreement or memorandum of understanding with,
or is a party to any commitment letter or similar undertaking to, or is subject
to any order or directive by, or has been since January 1, 2005 a recipient of
any supervisory letter from, or has been ordered to pay any civil money penalty
by, or since January 1, 2005 has adopted any policies, procedures or board
resolutions at the request or suggestion of, any Regulatory Agency or other
Governmental Entity that currently restricts in any material respect the conduct
of its business or that in any material manner relates to its capital adequacy,
its ability to pay dividends, its credit, risk management or compliance
policies, its internal controls, its management or its business, other than
those of general application that apply to bank holding companies or their
Subsidiaries (each, a "PENSECO REGULATORY AGREEMENT"), nor has Penseco or any of
its Subsidiaries been advised since January 1, 2005 by any Regulatory Agency or
other Governmental Entity that it is considering issuing, initiating, ordering
or requesting any such Penseco Regulatory Agreement.
5.5.3. Penseco has previously made available to Old Forge an accurate
and complete copy of each final registration statement, prospectus, report,
schedule and definitive proxy statement filed with or furnished to the SEC by
Penseco since January 1, 2008 pursuant to the Securities Act or the Exchange Act
and before the date of this Agreement (the "PENSECO SEC REPORTS"). No such
Penseco SEC Report or communication, at the time filed or furnished (and, in the
case of registration statements and proxy statements, on the dates of
effectiveness and the dates of the relevant meetings, respectively), contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances in which they were made, not misleading,
except that information as of a later date (but before the date of this
Agreement) shall be deemed to modify information as of an earlier date. As of
their respective dates, all Penseco SEC Reports complied as to form in all
material respects with the published rules and regulations of the SEC with
respect thereto. No executive officer of Penseco has failed in any respect to
make the certifications required of him or her under Section 302 or 906 of the
Sarbanes-Oxley Act.
Section 5.6 Financial Statements.
--------------------
5.6.1. The financial statements of Penseco and its Subsidiaries
included (or incorporated by reference) in the Penseco SEC Reports (including
the related notes, where applicable) (i) have been prepared from, and are in
accordance with, the books and records of Penseco and its Subsidiaries; (ii)
fairly present in all material respects the consolidated results of operations,
cash flows, changes in shareholders' equity and consolidated financial position
of Penseco and its Subsidiaries for the respective fiscal periods or as of the
respective dates therein set forth (subject in the case of unaudited statements
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to recurring year-end audit adjustments normal in nature and amount); (iii)
complied as to form, as of their respective dates of filing with the SEC, in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto; and (iv) have been
prepared in accordance with GAAP consistently applied during the periods
involved, except, in each case, as indicated in such statements or in the notes
thereto and except as contemplated by SEC Regulation G regarding the use of
non-GAAP financial measures. The books and records of Penseco and its
Subsidiaries have been, and are being, maintained in all material respects in
accordance with GAAP and any other applicable legal and accounting requirements
and reflect only actual transactions.
5.6.2. Neither Penseco nor any of its Subsidiaries has any material
liability of any nature whatsoever (whether absolute, accrued, contingent or
otherwise and whether due or to become due), except for those liabilities that
are reflected or reserved against on the consolidated balance sheet of Penseco
included in its Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2008 (including any notes thereto) and for liabilities incurred
in the ordinary course of business consistent with past practice since September
30, 2008 or in connection with this Agreement and the transactions contemplated
hereby.
5.6.3. Since December 31, 2007, (i) through the date hereof, neither
Penseco nor any of its Subsidiaries nor, to the knowledge of Penseco, any
director, officer, employee, auditor, accountant or representative of Penseco
or any of its Subsidiaries has received or otherwise had or obtained knowledge
of any material complaint, allegation, assertion or claim, whether written or
oral, regarding the accounting or auditing practices, procedures, methodologies
or methods of Penseco or any of its Subsidiaries or their respective internal
accounting controls, including any material complaint, allegation, assertion or
claim that Penseco or any of its Subsidiaries has engaged in questionable
accounting or auditing practices, and (ii) no attorney representing Penseco or
any of its Subsidiaries, whether or not employed by Penseco or any of its
Subsidiaries, has reported evidence of a material violation of securities laws,
breach of fiduciary duty or similar violation by Penseco or any of its officers,
directors, employees or agents to the board of directors of Penseco or any
committee thereof or to any director or officer of Penseco.
Section 5.7 Broker's Fees. Neither Penseco nor any Penseco Subsidiary
-------------
nor any of their respective officers or directors has employed any broker or
finder or incurred any liability for any broker's fees, commissions or finder's
fees in connection with the Merger or related transactions contemplated by this
Agreement, other than as set forth on Section 5.7 of the Penseco Disclosure
Schedule.
Section 5.8 Absence of Certain Changes or Events.
------------------------------------
5.8.1. Except as disclosed in the Penseco SEC Reports, since December
31, 2007, no event or events have occurred that have had or are reasonably
likely to have a Material Adverse Effect on Penseco.
5.8.2. Except as disclosed in the Penseco SEC Reports, since December
31, 2007 through and including the date of this Agreement, Penseco and its
Subsidiaries have carried on their respective businesses in all material
respects in the ordinary course of business consistent with their past practice.
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5.8.3. Except as disclosed in the Penseco SEC Reports, since December
31, 2007, neither Penseco nor Penn Security has (i) except for (A) normal
increases for employees (other than officers subject to the reporting
requirements of Section 16(a) of the Exchange Act) made in the ordinary course
of business consistent with past practice or (B) as required by applicable law
or pre-existing contractual obligations, increased the wages, salaries,
compensation, pension or other fringe benefits or perquisites payable to any
executive officer, employee or director from the amount thereof in effect as of
December 31, 2007, granted any severance or termination pay, entered into any
contract to make or grant any severance or termination pay (in each case, except
as required under the terms of agreements or severance plans as in effect as of
the date hereof), or paid any bonus other than the customary year-end bonuses in
amounts consistent with past practice, (ii) granted any stock appreciation
rights or options to purchase shares of Penseco Common Stock, any restricted
shares of Penseco Common Stock or any right to acquire any shares of its capital
stock to any executive officer, director or employee, (iii) changed any
accounting methods, principles or practices of Penseco affecting its assets,
liabilities or business, including any reserving, renewal or residual method,
practice or policy, (iv) suffered any strike, work stoppage, slow-down or other
labor disturbance, (v) declared, set aside or paid any dividend or other
distribution (whether in cash, stock or property) with respect to any Penseco
Common Stock, other than customary dividends, (vi) effected or authorized any
issuance, split, combination or reclassification of Penseco Common Stock, or
(vii) made any agreement or commitment (contingent or otherwise) to do any of
the foregoing.
Section 5.9 Legal Proceedings.
-----------------
5.9.1. Except as disclosed in the Penseco SEC Reports, none of Penseco
or any of its Subsidiaries is a party to any, and there are no pending or, to
the best of Penseco's knowledge, threatened, material legal, administrative,
arbitral or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Penseco or any of its Subsidiaries.
5.9.2. There is no Injunction, judgment or regulatory restriction (other
than those of general application that apply to similarly situated bank holding
companies or their Subsidiaries) imposed upon Penseco, any of its Subsidiaries
or the assets of Penseco or any of its Subsidiaries.
Section 5.10 Taxes and Tax Returns. Penseco and Penn Security have
---------------------
timely filed (including all applicable extensions) all material Tax Returns
required to be filed, and all such Tax Returns are correct and complete in all
material respects. Each of Penseco and Penn Security has paid all material Taxes
that are due and payable other than Taxes being contested in good faith. Except
as disclosed in the Penseco SEC Reports, there are no material disputes pending,
or claims asserted, for Taxes or assessments upon Penseco or Penn Security for
which Penseco does not have reserves that are adequate under GAAP.
Section 5.11 Compliance with Applicable Law. Penseco and each of its
------------------------------
Subsidiaries hold all material licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to each, and have complied in all respects with and are not in default
in any material respect under any, applicable law, statute, order, rule,
regulation, policy or guideline of any Governmental Entity relating to Penseco
or any of its Subsidiaries. Since the enactment of the Sarbanes-Oxley Act,
Penseco has been and is in compliance in all material respects with the
provisions of the Sarbanes-Oxley Act applicable to Penseco.
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Section 5.12 Reorganization; Approvals. Penseco (a) is not aware of any
-------------------------
fact or circumstance, and has not taken or agreed to take any actions, that
could reasonably be expected to prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code and (b) knows
of no reason why all regulatory approvals from any Governmental Entity required
for the consummation of the transactions contemplated by this Agreement should
not be obtained on a timely basis.
Section 5.13 Opinion. Before the execution of this Agreement, the
-------
Penseco board of directors has received an opinion from Keefe, Bruyette & Woods,
Inc. to the effect that as of the date thereof and based upon and subject to the
assumptions, qualifications and other matters set forth therein, the Merger
Consideration is fair to Penseco from a financial point of view. Such opinion
has not been amended or rescinded as of the date of this Agreement.
Section 5.14 Penseco Information. The information relating to Penseco
-------------------
and its Subsidiaries that is provided by Penseco or its representatives for
inclusion in the Proxy Statement-Prospectus and the Form S-4, or in any
application, notification or other document filed with any other Regulatory
Agency or other Governmental Entity in connection with the transactions
contemplated by this Agreement, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances in which they are made, not misleading.
The portions of the Proxy Statement-Prospectus relating to Penseco and other
portions within the reasonable control of Penseco will comply in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. The Form S-4 will comply in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
Section 5.15 Risk Management Instruments. All Derivative Transactions,
---------------------------
whether entered into for the account of Penseco or any of its Subsidiaries or
for the account of a customer of Penseco or any of its Subsidiaries, were
entered into in the ordinary course of business consistent with past practice
and in accordance with prudent banking practice and applicable laws, rules,
regulations and policies of any Regulatory Authority and in accordance with the
investment, securities, commodities, risk management and other policies,
practices and procedures employed by Penseco and its Subsidiaries, and with
counterparties believed at the time to be financially responsible and able to
understand (either alone or in consultation with their advisers) and to bear the
risks of such Derivative Transactions. All of such Derivative Transactions are
legal, valid and binding obligations of Penseco or one of its Subsidiaries
enforceable against it in accordance with their terms (except as may be limited
by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting
the rights of creditors generally and subject to general principles of equity),
and are in full force and effect. Penseco and its Subsidiaries have duly
performed their obligations under the Derivative Transactions to the extent that
such obligations to perform have accrued and, to Penseco's knowledge, there are
no breaches, violations or defaults or allegations or assertions of such by any
party thereunder.
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Section 5.16 Investment Securities and Commodities.
-------------------------------------
5.16.1. Except as would not reasonably be expected to have a Material
Adverse Effect on Penseco, each of Penseco and its Subsidiaries has good title
to all securities and commodities owned by it (except those sold under
repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Liens, except to the extent such securities or commodities are
pledged in the ordinary course of business to secure obligations of Penseco or
its Subsidiaries. Such securities and commodities are valued on the books of
Penseco in accordance with GAAP in all material respects.
5.16.2. Penseco and its Subsidiaries and their respective businesses
employ and have acted in compliance in all material respects with the Policies
and Procedures that Penseco believes are prudent and reasonable in the context
of such businesses.
Section 5.17 Property. Penseco or any Penseco Subsidiary (a) has fee
--------
simple title to all its Owned Properties, free and clear of all Liens of any
nature whatsoever, except Permitted Liens, and (b) is the lessee of all
leasehold estates reflected in the latest audited financial statements or
acquired after the date thereof (except for leases that have expired by their
terms since the date thereof) (the "LEASED PROPERTIES" and, collectively with
the Owned Properties, the "REAL PROPERTY"). Penseco's Real Property is in
material compliance with all applicable zoning laws and building codes, and the
buildings and improvements located on such Real Property are in good operating
condition and in a state of good working order, ordinary wear and tear and
casualty excepted. There are no pending or, to the knowledge of Penseco,
threatened condemnation proceedings against Penseco's Real Property. Penseco
and its Subsidiaries are in material compliance with all applicable health and
safety related requirements for Penseco's Real Property, including those under
the Americans with Disabilities Act of 1990 and the Occupational Health and
Safety Act of 1970. Penseco currently maintains (or causes to be maintained)
insurance on all its property, including its Real Property in amounts, scope and
coverage reasonably necessary for its operations. Penseco has not received any
written notice of termination, nonrenewal or premium adjustment for such
policies.
Section 5.18 Intellectual Property. Penseco and each of its
---------------------
Subsidiaries owns, or is licensed to use (in each case, free and clear of any
Liens), all Intellectual Property used in or necessary for the conduct of its
business as currently conducted. The use of any Intellectual Property by Penseco
and its Subsidiaries does not, to the knowledge of Penseco, infringe on or
otherwise violate the rights of any person and is in accordance with any
applicable license pursuant to which Penseco or any Subsidiary acquired the
right to use any Intellectual Property. To Penseco's knowledge, no person is
challenging, infringing on or otherwise violating any right of Penseco or any of
its Subsidiaries with respect to any Intellectual Property owned by and/or
licensed to Penseco or its Subsidiaries. Neither Penseco nor any of its
Subsidiaries has received any written notice of any pending claim with respect
to any Intellectual Property used by Penseco and its Subsidiaries and, to
Penseco's knowledge, no Intellectual Property owned and/or licensed by Penseco
or its Subsidiaries is being used or enforced in a manner that would result in
the abandonment, cancellation or unenforceability of such Intellectual Property.
Section 5.19 Environmental Liability. There are no legal,
-----------------------
administrative, arbitral or other proceedings, claims, actions, causes of action
or notices with respect to any environmental, health or safety matters or any
private or governmental environmental, health or safety investigations or
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remediation activities of any nature seeking to impose, or that are reasonably
likely to result in, any liability or obligation of Penseco or any of its
Subsidiaries arising under any Environmental Laws. To the knowledge of Penseco,
there is no reasonable basis for, or circumstances that are reasonably likely to
give rise to, any such proceeding, claim, action, investigation or remediation
by any Governmental Entity or any third party that would give rise to any
liability or obligation on the part of Penseco or any of its Subsidiaries.
Neither Penseco nor any of its Subsidiaries is subject to any agreement, order,
judgment, decree, letter or memorandum by or with any Governmental Entity or
third party imposing any liability or obligation with respect to any of the
foregoing. Each of Penseco and its Subsidiaries is and has been, and all
properties foreclosed upon by Penseco or any of its Subsidiaries are, in
compliance with all applicable Environmental Laws.
Section 5.20 Loan Portfolio. Except as disclosed in the financial
--------------
statements of Penseco and its Subsidiaries at and for the nine month period
ended September 30, 2008, since December 31, 2007, neither Penseco nor any of
its Subsidiaries has incurred any unusual or extraordinary loan losses which are
material to Penseco and its Subsidiaries on a consolidated basis; to Penseco's
knowledge and in light of their historical loan loss experiences and their
managements' analyses of the quality and performance of their loan portfolios,
as of September 30, 2008, their reserves for loan losses are adequate to absorb
potential loan losses determined on the basis of management of Penseco and its
Subsidiaries' continuing review and evaluation of the loan portfolio and their
judgment as to the impact of economic conditions on the portfolio.
Section 5.21 Internal Controls. Since December 31, 2003, Penseco and
-----------------
its Subsidiaries have devised and maintained a system of internal accounting
controls sufficient to provide reasonable assurances regarding the reliability
of financial reporting and the preparation of financial statements in accordance
with GAAP. Penseco (i) has designed disclosure controls and procedures to ensure
that material information relating to Penseco, including its consolidated
Subsidiaries, is made known to the management of Penseco by others within the
organization, and (ii) has disclosed, based on its most recent evaluation prior
to the date hereof, to Penseco's auditors and the audit committee of Penseco's
board of directors (x) any significant deficiencies in the design or operation
of internal controls which could adversely affect in any material respect
Penseco's ability to record, process, summarize and report financial data and
have identified for Penseco's auditors any material weaknesses in internal
controls and (y) any fraud, whether or not material, that involves management or
other employees who have a significant role in Penseco's internal controls.
Section 5.22 Certain Contracts.
-----------------
5.22.1. Except as disclosed in the Penseco SEC Reports or on Section
5.22.1 of the Penseco Disclosure Schedule, neither Penseco nor Penn Security is
a party to or bound by any contract, arrangement, commitment or understanding
(whether written or oral) (i) with respect to the employment of any directors,
officers, employees or consultants, other than in the ordinary course of
business consistent with past practice, (ii) that, upon execution of this
Agreement or consummation or shareholder approval of the transactions
contemplated by this Agreement, will (either alone or upon the occurrence of any
additional acts or events) result in any payment or benefits (whether of
severance pay or otherwise) becoming due from Penseco, Old Forge, the Surviving
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Corporation, or any of their respective Subsidiaries to any officer or employee
thereof, (iii) that materially restricts the conduct of any line of business by
Penseco or, to the knowledge of Penseco, upon consummation of the Merger will
materially restrict the ability of the Surviving Corporation to engage in any
line of business in which a bank holding company may lawfully engage, (iv) with
or to a labor union or guild (including any collective bargaining agreement),
(v) including any stock option plan, stock appreciation rights plan, restricted
stock plan, stock purchase plan or benefits plan in which any of the benefits of
which will be increased, or the vesting of the benefits of which will be
accelerated, by the execution of this Agreement, the occurrence of any
shareholder approval or the consummation of any of the transactions contemplated
by this Agreement, or the value of any of the benefits of which will be
calculated on the basis of or affected by any of the transactions contemplated
by this Agreement, or (vi) which is otherwise material. Each contract,
arrangement, commitment or understanding of the type described in this Section
5.22.1, whether or not set forth in the Penseco Disclosure Schedule, is referred
to as an "PENSECO CONTRACT," and Penseco does not know of, and has not received
notice of, any material violation of any Penseco Contract by any of the other
parties thereto.
5.22.2. (i) Each Penseco Contract is valid and binding on Penseco and
is in full force and effect, (ii) Penseco has in all material respects performed
all obligations required to be performed by it to date under each Penseco
Contract and (iii) except as set forth on Section 5.22.2 of the Penseco
Disclosure Schedule, no event or condition exists that constitutes or, after
notice or lapse of time or both, will constitute, a material default on the part
of Penseco under any such Penseco Contract.
Section 5.23 Due Diligence. Penseco and Penn Security acknowledge that
-------------
Old Forge has permitted Penseco and Penn Security to conduct, and Penseco and
Penn Security have conducted, such due diligence and other investigation of Old
Forge as Penseco and Penn Security have deemed appropriate in connection with
the transactions contemplated by this Agreement. For avoidance of doubt, the
foregoing shall not be deemed to be, or construed as, a limitation or waiver of
any rights or remedies which Penseco and Penn Security may have with respect to
any breach of a representation or warranty made by Old Forge in this Agreement.
Section 5.24 Operations of Merger Sub. Merger Sub was formed solely for
------------------------
the purpose of engaging in the transactions contemplated hereby. All of the
outstanding capital stock of Merger Sub is owned, beneficially and of record, by
Penseco. Except for obligations or liabilities incurred in connection with its
incorporation or organization and the transactions contemplated hereby, Merger
Sub has not and will not have incurred, directly or indirectly through any
affiliate, any obligations or liabilities or engaged in any business activities
of any type or kind whatsoever or entered into any agreements or arrangements
with any person.
ARTICLE 6
Covenants Relating to Conduct of Business
Section 6.1 Conduct of Old Forge's Business Before the Effective Time.
---------------------------------------------------------
Except as expressly contemplated by or permitted by this Agreement or with the
prior written consent of Penseco, during the period from the date of this
Agreement to the Effective Time, Old Forge shall:
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6.1.1. Conduct its business in the ordinary course in all material
respects;
6.1.2. use reasonable best efforts to maintain and preserve intact its
business organization and advantageous business relationships and retain the
services of its key officers and key employees; and
6.1.3. take no action that is intended to or would reasonably be
expected to adversely affect or materially delay the ability of either Old Forge
or Penseco to obtain any necessary approvals of any Regulatory Agency or other
Governmental Entity required for the transactions contemplated hereby or to
perform its covenants and agreements under this Agreement or to consummate the
transactions contemplated hereby.
Section 6.2 Old Forge Forbearances. During the period from the date of
----------------------
this Agreement to the Effective Time, except as set forth in Section 6.2 of the
Old Forge Disclosure Schedule and except as expressly contemplated or permitted
by this Agreement, Old Forge shall not, without the prior written consent of
Penseco:
6.2.1. other than in the ordinary course of business consistent with
past practice, incur any indebtedness for borrowed money, assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations
of any other individual, corporation or other entity, or make any loan or
advance or capital contribution to, or investment in, any person (it being
understood and agreed that incurrence of indebtedness in the ordinary course
of business consistent with past practice shall include the creation of deposit
liabilities, purchases of federal funds, borrowings from the Federal Home Loan
Bank, purchases of brokered certificates of deposit, sales of certificates of
deposit and entering into repurchase agreements);
6.2.2. (i) adjust, split, combine or reclassify any of its capital
stock; (ii) except for the declaration of cash dividends not to exceed $1.75 per
share of Old Forge Common Stock during the fourth quarter of 2008 and cash
dividends not to exceed $0.35 per share of Old Forge Common Stock during each of
the first and second quarters of 2009, and the payment of such dividends, make,
declare or pay any dividend, or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible (whether currently
convertible or convertible only after the passage of time or the occurrence of
certain events) into or exchangeable for any shares of its capital stock; (iii)
grant any stock options, restricted shares or other equity-based award with
respect to shares of Old Forge Common Stock or grant any individual, corporation
or other entity any right to acquire any shares of its capital stock; or (iv)
issue any additional shares of capital stock or other securities;
6.2.3. except (A) as required by applicable law (including, without
limitation, Section 409A of the Code), (B) the terms of any Old Forge Plan as in
effect on the date of this Agreement, or (C) as described on Section 6.2.3 of
the Old Forge Disclosure Schedule (i) increase the wages, salaries, incentive
compensation or incentive compensation opportunities of any officer, director or
employee of Old Forge, or pay or provide, or increase or accelerate the accrual
rate, vesting or timing of payment or funding of, any compensation, benefits or
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other rights of any officer, director or employee of Old Forge, excepting (only
with respect to employees who are not executive officers or directors) normal
increases made in the ordinary course of business consistent with past
practices; (ii) pay any bonus other than bonuses to employees who are not
executive officers or directors made in the ordinary course of business and
consistent with past practices or (iii) establish, adopt or become a party to
any new employee benefit or compensation plan, program, commitment or agreement
or amend any Old Forge Plan;
6.2.4. sell, transfer, mortgage, encumber or otherwise dispose of any
material amount of its properties or assets to any person other than in the
ordinary course of business consistent with past practice, or cancel, release,
assign or enter into a forbearance agreement with respect to any amount of
indebtedness in excess of $250,000;
6.2.5. enter into any new line of business or change in any material
respect its lending, investment, underwriting, risk and asset liability
management and other banking, operating and servicing policies, except as
required by applicable law, regulation or policies imposed by any Governmental
Entity;
6.2.6. (i) acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business or corporation,
partnership, association or other business organization or division thereof or
otherwise acquire any assets or make any investments which would be material,
individually or in the aggregate, to Old Forge, other than in connection with
foreclosures and settlements in lieu of foreclosure in the ordinary course of
business consistent with prudent banking practices or (ii) open, close, sell or
acquire any branches;
6.2.7. take any action, or knowingly fail to take any action, which
action or failure to act could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code;
6.2.8. amend the Old Forge Articles or Old Forge Bylaws, or otherwise
take any action to exempt any person (other than Penseco or its Subsidiaries) or
any action taken by any person from any takeover statute or similarly
restrictive provisions of its organizational documents or terminate, amend or
waive any provisions of any confidentiality or standstill agreements in place
with any third parties;
6.2.9. restructure or materially change its investment securities
portfolio or its gap position, through purchases, sales or otherwise, or the
manner in which the portfolio is classified or reported;
6.2.10. except (i) in accordance with commitments issued prior to the
date hereof which have not expired, which commitments are described in Section
6.2.10 of the Old Forge Disclosure Schedule, or (ii) with prior written notice
to Penseco, renew any existing loan or credit facility, or extend any new loan
or credit facility, in an amount in excess of $500,000;
6.2.11. except (i) in furtherance of loan collection efforts in the
ordinary course, or (ii) with prior written notice to Penseco, commence or
settle any claim, action or proceeding where the amount in dispute is in excess
of $250,000 or subjecting Old Forge to any material restrictions on its current
or future business or operations (including the future business and operations
of the Surviving Corporation);
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6.2.12. take any action or fail to take any action that is intended or
may reasonably be expected to result in any of its representations or warranties
set forth in this Agreement being or becoming untrue in any material respect at
any time prior to the Effective Time, or in any of the conditions to the Merger
set forth in Article 8 not being satisfied or in a violation of any provision of
this Agreement;
6.2.13. implement or adopt any change in its Tax accounting or financial
accounting principles, practices or methods, other than as may be required by
applicable law, GAAP or regulatory guidelines;
6.2.14. (i) file any Tax Return other than in the ordinary course of
business, amend any Tax Return, make any change in any method of Tax or
financial accounting (other than as may be required by applicable law, GAAP or
regulatory guidelines), make, revoke or change any Tax election, enter into any
closing agreements, settle or compromise any Tax liability, (ii) surrender any
right to claim a refund of Taxes, consent to any extension or waiver of the
imitation period applicable to any Tax claim or assessment relating to Old
Forge, or (iii) take any other action, if such action would have the effect of
increasing the Tax liability of Old Forge, Penseco, Penn Security, the Surviving
Corporation or any of their Subsidiaries for any period ending after the
Effective Time or decreasing any Tax attribute of Old Forge existing at the
Effective Time;
6.2.15. except for transactions in the ordinary course of business
consistent with past practice, terminate, or waive any material provision of any
Old Forge Contract or make any change in any instrument or agreement governing
the terms of any of its securities, or material lease or contract, other than
normal renewals of contracts and leases without material adverse changes of
terms;
6.2.16. take any action that would reasonably be expected to prevent,
materially impede, materially impact or materially delay the ability of the
parties to obtain any necessary approvals of any Regulatory Agency or
Governmental Entity required for the transaction, contemplated hereby;
6.2.17. fail to comply with the terms of any regulatory orders issued by
any Governmental Entity;
6.2.18. make capital expenditures other than in the ordinary and usual
course of business consistent with past practice, but in no event in excess of
$100,000;
6.2.19. file any application to establish, or relocate or terminate the
operations of, any banking office of Old Forge; or
6.2.20. agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this Section 6.2.
Section 6.3 Penseco Covenants. Except as expressly permitted by this
-----------------
Agreement or with the prior written consent of Old Forge, during the period from
the date of this Agreement to the Effective Time, Penseco shall not, and shall
not permit any of its Subsidiaries to, (i) amend, repeal or otherwise modify any
provision of the Penseco Articles, Penseco Bylaws, Penn Security Articles, or
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Penn Security Bylaws in a manner that would adversely effect, the shareholders
of Old Forge or the transactions contemplated by this Agreement; (ii) take any
action, or knowingly fail to take any action, which action or failure to act
could reasonably be expected to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code; (iii) take any
action that is intended or may reasonably be expected to result in any of the
conditions to the Merger set forth in Article 8 not being satisfied; (iv) take
any action that would be reasonably expected to prevent, materially impede,
materially impact or materially delay the ability of the parties to obtain any
necessary approvals of any Regulatory Agency or any Governmental Entity required
for the consummation of the transactions contemplated hereby; (v) take any
action or fail to take any action that is intended or may reasonably be expected
to result in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect; or (vi) agree to
take, make any commitment to take, or adopt any resolutions of its board of
directors in support of, any of the actions prohibited by this Section 6.3.
ARTICLE 7
Additional Agreements
Section 7.1 Form S-4; Proxy Statement-Prospectus.
------------------------------------
7.1.1. For the purposes (x) of registering the Penseco Common Stock to
be offered to holders of Old Forge Common Stock in connection with the Merger
with the SEC under the Securities Act and (y) of holding the Old Forge
Shareholder Meeting, Penseco and Old Forge shall jointly draft and prepare the
Form S-4, including a proxy statement of Old Forge and prospectus of Penseco
satisfying all applicable requirements of applicable state securities and
banking laws, and of the Securities Act and the Exchange Act, and the rules and
regulations thereunder (such proxy statement/prospectus in the form mailed to
the Old Forge shareholders, together with any and all amendments or supplements
thereto, being herein referred to as the "PROXY STATEMENT-PROSPECTUS"). The
parties shall use their reasonable best efforts to file the Form S-4, including
the Proxy Statement-Prospectus, with the SEC within 60 days after the date
hereof. Each of Penseco and Old Forge shall use their reasonable best efforts to
have the Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing, and Old Forge shall thereafter promptly mail the
Proxy Statement-Prospectus to its shareholders. Penseco shall also use its
reasonable best efforts to obtain all necessary state securities law or "Blue
Sky" permits and approvals required to carry out the transactions contemplated
by this Agreement, and Old Forge shall furnish all information concerning Old
Forge and the holders of Old Forge Common Stock as may be reasonably requested
in connection with any such action.
7.1.2. Each party shall provide the other with any information
concerning itself that the other may reasonably request in connection with the
drafting and preparation of the Proxy Statement-Prospectus, and each party shall
notify the other promptly of the receipt of any comments of the SEC with respect
to the Proxy Statement-Prospectus and of any requests by the SEC for any
amendment or supplement thereto or for additional information and shall provide
to the other promptly copies of all correspondence between such party or any of
their representatives and the SEC. No filing of the Form S-4, including any
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amendment thereto shall be made without the parties each having the opportunity
to review, comment on and revise the Form S-4. Each of Penseco and Old Forge
agrees to use all reasonable best efforts, after consultation with the other
party hereto, to respond promptly to all such comments of and requests by the
SEC and to cause the Proxy Statement-Prospectus and all required amendments and
supplements thereto to be mailed to the holders of Old Forge Common Stock
entitled to vote at the Old Forge Shareholder Meeting hereof at the earliest
practicable time.
7.1.3. Penseco and Old Forge shall promptly notify the other party if at
any time it becomes aware that the Proxy Statement-Prospectus or the Form S-4
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading. In such event, Old Forge shall cooperate with Penseco in the
preparation of a supplement or amendment to such Proxy Statement-Prospectus that
corrects such misstatement or omission, and Penseco shall file an amended Form
S-4 with the SEC, and Old Forge shall mail an amended Proxy Statement-Prospectus
to the Old Forge shareholders.
Section 7.2 Regulatory Approvals. The parties shall cooperate with each
other and use their respective reasonable best efforts to promptly prepare and
file all necessary documentation, to effect all applications, notices, petitions
and filings, to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all third parties and Governmental Entities that
are necessary or advisable to consummate the transactions contemplated by this
Agreement (including the Merger), and to comply with the terms and conditions of
all such permits, consents, approvals and authorizations of all such third
parties or Governmental Entities. Each of Old Forge and Penseco, upon request,
shall furnish to the other all information concerning itself, its Subsidiaries,
directors, officers and shareholders, and such other matters as may be
reasonably necessary or advisable in connection with any applications, notices,
petitions and filings made by Penseco, Old Forge or any of their Subsidiaries
with any Governmental Entity in connection with the Merger and the other
transactions contemplated by this Agreement. Old Forge and Penseco shall have
the right to review in advance, and, to the extent practicable, each will
consult the other on, in each case subject to applicable laws relating to the
confidentiality of information, all the information relating to Old Forge or
Penseco, as the case may be, and any of their respective Subsidiaries, that
appears in any filing made with, or written materials submitted to, any third
party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties shall act reasonably and as promptly as practicable. The parties shall
consult with each other with respect to the obtaining of all permits, consents,
approvals and authorizations of all third parties and Governmental Entities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other apprised of the status of matters
relating to completion of the transactions contemplated by this Agreement.
Notwithstanding the foregoing, nothing contained herein shall be deemed to
require Penseco or Old Forge to take any action, or commit to take any action,
or agree to any condition or restriction, in connection with obtaining the
foregoing permits, consents, approvals and authorizations of third parties or
Governmental Entities, that would reasonably be expected to have a Material
Adverse Effect on Penseco, a Material Adverse Effect on Old Forge or a Material
Adverse Effect on the Surviving Corporation (measured in the case of Old Forge
or the Surviving Corporation with respect to the business, results of operations
or financial condition of Old Forge only and not any other businesses, results
of operations or financial conditions of the Surviving Corporation) (any of
which, a "MATERIALLY BURDENSOME REGULATORY CONDITION").
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Section 7.3 Access to Information; Confidentiality.
--------------------------------------
7.3.1. Upon reasonable notice and subject to applicable laws relating to
the confidentiality of information, each of Old Forge and Penseco shall, and
shall cause each of its Subsidiaries to, afford to the officers, employees,
accountants, counsel, advisors, agents and other representatives of the other
party, reasonable access, during normal business hours during the period before
the Effective Time, to all its properties, books, contracts, commitments and
records, and, during such period, such party shall, and shall cause its
Subsidiaries to, make available to the other party (i) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of federal securities laws or
federal or state banking or insurance laws (other than reports or documents that
such party is not permitted to disclose under applicable law) and (ii) all other
information concerning its business, properties and personnel as the other party
may reasonably request (in the case of a request by Old Forge, information
concerning Penseco that is reasonably related to the prospective value of
Penseco Common Stock or to Penseco's ability to consummate the transactions
contemplated hereby), including, without limitation, any material developments
relating to threatened or pending legal proceedings. Neither Old Forge nor
Penseco, nor any of their Subsidiaries, shall be required to provide access to
or to disclose information where such access or disclosure would jeopardize the
attorney-client privilege of such party or its Subsidiaries or contravene any
law, rule, regulation, order, judgment, decree, fiduciary duty or binding
agreement entered into before the date of this Agreement. The parties shall make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
7.3.2. Notwithstanding the generality of Section 7.3.1, on or about the
date which is five (5) business days prior to the Effective Time, Old Forge
shall permit Penseco and its accountants and auditors to review the books and
records of Old Forge for the primary purpose, among others, of determining the
ratio of Tier 1 capital to average assets, as determined under applicable
banking laws and regulations, which the Surviving Corporation reasonably would
be expected to have immediately after the Effective Time.
7.3.3. All information and materials exchanged by the parties pursuant
to this Agreement shall be subject to the provisions of the Confidentiality
Agreement entered into between Penseco and Old Forge dated November 19, 2008
(the "CONFIDENTIALITY AGREEMENT").
Section 7.4 Shareholder Approval.
--------------------
7.4.1. Subject to the effectiveness of the Form S-4, Old Forge shall
call a meeting of its shareholders (the "OLD FORGE SHAREHOLDER MEETING") to be
held as soon as reasonably practicable after the date hereof for the purpose of
obtaining the requisite shareholder approval required in connection with the
Merger, on substantially the terms and conditions set forth in this Agreement,
and shall use its reasonable best efforts to cause such meeting to occur as soon
as reasonably practicable. The Old Forge Board shall use its reasonable best
efforts to obtain from its shareholders the shareholder vote approving the
Merger, on substantially the terms and conditions set forth in this Agreement,
required to consummate the transactions contemplated by this Agreement. The Old
Forge Board shall, subject to the provisions of Section 7.9.3, affirmatively
recommend that the Old Forge shareholders vote in favor of and adopt this
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Agreement (the "APPROVAL RECOMMENDATION"), and submit this Agreement to its
shareholders at the Old Forge Shareholder Meeting. The Old Forge Board has
adopted resolutions approving the Merger, on substantially the terms and
conditions set forth in this Agreement, and directing that the Merger, on such
terms and conditions, be submitted to Old Forge's shareholders for their
consideration.
7.4.2. Each of Penseco and Old Forge shall, and shall cause its
respective Subsidiaries to, use their reasonable best efforts (i) to take, or
cause to be taken, all actions necessary, proper or advisable to comply promptly
with all legal requirements that may be imposed on such party or its
Subsidiaries with respect to the Merger and, subject to the conditions set forth
in Article 8 hereof, to consummate the transactions contemplated by this
Agreement, and (ii) to obtain (and to cooperate with the other party to obtain)
any material consent, authorization, order or approval of, or any exemption by,
any Governmental Entity and any other third party that is required to be
obtained by Old Forge or Penseco or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement.
Section 7.5 Employee Benefit Plans; Existing Agreements.
-------------------------------------------
7.5.1. Those individuals actively employed by, or on an authorized
leave of absence from, Old Forge as of the Effective Time, who continue their
employment with Penseco or one of its Subsidiaries after the Effective Time (the
"COVERED EMPLOYEES") shall be eligible to participate in those Penseco Plans in
which similarly situated employees of Penseco or its Subsidiaries participate,
to the same extent that similarly situated employees of Penseco or its
Subsidiaries participate. From and after the Effective Time, Penseco may elect
not to provide to the Covered Employees any benefits which are not then provided
by Penseco and its Subsidiaries to their employees notwithstanding that such
benefits were provided by Penseco and its Subsidiaries to their employees
immediately prior to the Effective Time. In the case of benefits which are
provided at the Effective Time by Penseco to employees of Penseco and its
Subsidiaries but are not then provided by Old Forge to its employees, Penseco
will as soon as possible after the Effective Time include the Covered Employees
in the Penseco Plans under which such benefits are made available.
7.5.2. With respect to each Penseco Plan for which length of service is
taken into account for any purpose, service with Old Forge (or predecessor
employers to the extent Old Forge provides past service credit) shall be treated
as service with Penseco for purposes of determining eligibility to participate,
vesting, and entitlement to benefits, including for vacation entitlement;
provided, however, that such service shall not be recognized to the extent that
- -------- -------
such recognition would result in a duplication of benefits. Such service also
shall apply for purposes of satisfying any waiting periods, evidence of
insurability requirements, or the application of any preexisting condition
limitations. Each Penseco Plan shall waive pre-existing condition limitations to
the same extent waived under the applicable Old Forge Plan, and Covered
Employees shall be given credit for amounts paid under a corresponding benefit
plan during the same period for purposes of applying deductibles, copayments and
out-of-pocket maximums as though such amounts had been paid in accordance with
the terms and conditions of the Penseco Plan.
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7.5.3. Penseco shall use its commercially reasonable efforts to offer
employment with the Surviving Corporation to each individual who is an employee
of Old Forge immediately prior to the Effective Time (an "OLD FORGE EMPLOYEE")
in a position with a salary at least equal to such Old Forge Employee's salary
immediately prior to the Effective Time, provided, however, that such position
need not be the same as, or have the same duties or responsibilities as, the Old
Forge Employee's position with Old Forge. Each Old Forge Employee who is not
offered a position with a salary at least equal to such Old Forge Employee's
salary immediately prior to the Effective Time shall be entitled to receive
severance compensation in an amount up to such Old Forge Employee's annual
salary at the Effective Time, depending on such Old Forge Employee's term of
service with Old Forge. Any Old Forge Employee who is offered a position with a
salary at least equal to such Old Forge Employee's salary immediately prior to
the Effective Time, but does not accept such position, will not be entitled to
any severance compensation. All accrued benefits of participants under the Old
Forge 401(k) Profit Sharing Plan, to the extent consistent with applicable law,
will be automatically vested as of the Effective Time.
Section 7.6 Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
7.6.1. In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative (a
"CLAIM"), including any such Claim in which any individual who is now, or has
been at any time before the date of this Agreement, a director or officer of Old
Forge or who is or was serving at the request of Old Forge as a director or
officer of another person (the "INDEMNIFIED PARTIES"), is, or is threatened to
be, made a party based in whole or in part on, or arising in whole or in part
out of, or pertaining to (i) the fact that he or she is or was a director or
officer of Old Forge before the Effective Time or (ii) this Agreement or any of
the transactions contemplated by this Agreement, whether asserted or arising
before or after the Effective Time, the parties shall cooperate and use their
best efforts to defend against and respond thereto. All rights to
indemnification and exculpation from liabilities for acts or omissions occurring
at or before the Effective Time now existing in favor of any Indemnified Party
as provided in the Old Forge Articles or Old Forge Bylaws shall survive the
Merger and shall continue in full force and effect in accordance with their
terms, and shall not be amended, repealed or otherwise modified after the
Effective Time in any manner that would adversely affect the rights thereunder
of such individuals for acts or omissions occurring at or before the Effective
Time or taken at the request of Penseco, it being understood that nothing in
this sentence shall require any amendment to the articles of incorporation or
bylaws of the Surviving Corporation.
7.6.2. Penseco shall cause the individuals serving as officers and
directors of Old Forge immediately before the Effective Time to be covered for a
period of six years after the Effective Time by the directors' and officers'
liability insurance policy maintained by Old Forge (provided that Penseco may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions that are not less advantageous than such policy)
with respect to acts or omissions occurring before the Effective Time that were
committed by such officers and directors in their capacity as such; provided
that in no event shall Penseco be required to expend annually in the aggregate
an amount in excess of 200% of the annual premiums currently paid by Old Forge
for such insurance (the "INSURANCE AMOUNT"), and provided further that if
Penseco is unable to maintain such policy (or such substitute policy) as a
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result of the preceding proviso, Penseco shall obtain as much comparable
insurance as is available for the Insurance Amount. Old Forge represents and
warrants to Penseco and Penn Security that the total amount of the current
prepaid premium for directors' and officers' liability insurance for the
coverage period commencing on May 6, 2008 and ending on May 6, 2009 is
approximately $10,000.00.
7.6.3. The provisions of this Section 7.6 shall survive the Effective
Time and are intended to be for the benefit of, and shall be enforceable by,
each Indemnified Party and his or her heirs and representatives.
Section 7.7 Additional Agreements.
---------------------
7.7.1. Subject to the terms and conditions of this Agreement, each of
Penseco, Penn Security and Old Forge agrees to cooperate fully with each other
and to use reasonable best efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective, at the time and in the manner contemplated by
this Agreement, the Merger, including using reasonable best efforts to lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the Merger.
7.7.2. In case at any time after the Effective Time any further action
is necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of any of the parties to the Merger, the
proper officers and directors of each party to this Agreement and their
respective Subsidiaries shall take all such necessary action as may be
reasonably requested by Penseco.
7.7.3. Penseco, Penn Security and Old Forge shall use commercially
reasonable efforts to cause the Merger to qualify as a reorganization within the
meaning of Section 368(a) of the Code.
Section 7.8 Advise of Changes. Each of Penseco and Old Forge shall
-----------------
promptly advise the other of any change or event (a) having or reasonably likely
to have a Material Adverse Effect on it or (b) that it believes would or would
be reasonably likely to cause or constitute a material breach of any of its
representations, warranties or covenants contained in this Agreement; provided,
however, that no such notification shall affect the representations, warranties,
covenants or agreements of the parties (or remedies with respect thereto) or the
conditions to the obligations of the parties under this Agreement; provided
further that a failure to comply with this Section 7.8 shall not constitute a
breach of this Agreement or the failure of any condition set forth in Article 8
to be satisfied unless the underlying Material Adverse Effect or material breach
would independently result in the failure of a condition set forth in Article 8
to be satisfied.
Section 7.9 No Solicitation.
---------------
7.9.1. None of Old Forge or any officer, director, employee, agent or
representative (including any investment banker, financial advisor, attorney,
accountant or other retained representative) of Old Forge shall directly or
indirectly (i) solicit, initiate, encourage, or (subject to Section 7.9.3)
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facilitate (including by way of furnishing information) or take any other action
designed to facilitate any inquiries or proposals regarding any merger, share
exchange, consolidation, sale of assets, sale of shares of capital stock
(including by way of a tender offer) or similar transactions involving Old Forge
that, if consummated, would constitute an Alternative Transaction (any of the
foregoing inquiries or proposals being referred to herein as an "ALTERNATIVE
PROPOSAL"), (ii) subject to Section 7.9.3, participate in any discussions or
negotiations regarding an Alternative Transaction; or (iii) enter into any
agreement regarding any Alternative Transaction. As used in this Agreement,
"ALTERNATIVE TRANSACTION" means any of (w) a transaction pursuant to which any
person (or group of persons) (other than Penseco or its affiliates), directly or
indirectly, acquires or would acquire more than 25% of the outstanding shares of
Old Forge Common Stock or outstanding voting power or of any new series or new
class of preferred stock that would be entitled to a class or series vote with
respect to the Merger, whether from Old Forge or pursuant to a tender offer or
exchange offer or otherwise, (x) a merger, share exchange, consolidation or
other business combination involving Old Forge (other than the Merger), (y) any
transaction pursuant to which any person (or group of persons) (other than
Penseco or its affiliates) acquires or would acquire control of assets
(including for this purpose the outstanding equity securities of Old Forge and
securities of the entity surviving any merger or business combination) of Old
Forge representing more than 25% of the fair market value of all the assets, net
revenues or net income of Old Forge, taken as a whole, immediately before such
transaction, or (z) any other consolidation, business combination,
recapitalization or similar transaction involving Old Forge, other than the
transactions contemplated by this Agreement, as a result of which the holders of
shares of Old Forge immediately before such transactions do not, in the
aggregate, own at least 75% of the outstanding shares of common stock and the
outstanding voting power of the surviving or resulting entity in such
transaction immediately after the consummation thereof in substantially the same
proportion as such holders held the shares of Old Forge Common Stock immediately
before the consummation thereof.
7.9.2. Old Forge shall immediately cease and cause to be terminated any
existing discussions or negotiations with any persons (other than Penseco)
conducted heretofore with respect to any of the foregoing. Old Forge agrees not
to release any third party from the confidentiality and standstill provisions
of any agreement to which Old Forge is or may become a party. Old Forge has not
entered into any agreement authorizing any person to make an Alternative
Proposal.
7.9.3. Notwithstanding anything herein to the contrary, at any time
prior to obtaining the approval of this Agreement by Old Forge's shareholders,
Old Forge and its board of directors shall be permitted (i) to comply with Rule
14d-9 and Rule 14e-2 promulgated under the Exchange Act, provided that the Old
Forge Board shall not withdraw or modify in a manner adverse to Penseco its
Approval Recommendation except as set forth in subsection (iii) below; (ii) to
engage in any discussions or negotiations with, and provide any information to,
any person in response to a Superior Proposal by any such person, if and only to
the extent that (x) the Old Forge Board concludes in good faith, after
consulting with outside legal counsel, that failure to do so would cause it to
breach its fiduciary duties to Old Forge's shareholders under applicable law,
(y) prior to providing any information or data to any person in connection with
a Superior Proposal by any such person, the Old Forge Board receives from such
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person an executed confidentiality agreement, which confidentiality terms shall
be no less favorable to Old Forge than those contained in the Confidentiality
Agreement between Old Forge and Penseco, a copy of which executed
confidentiality agreement shall have been provided to Penseco for informational
purposes and (z) at least 72 hours prior to providing any information or data to
any person or entering into discussions or negotiations with any person, Old
Forge promptly notifies Penseco in writing of the name of such person and the
material terms and conditions of any such Superior Proposal, and (iii) to
withdraw, modify, qualify in a manner adverse to Penseco, condition or refuse to
make its Approval Recommendation if the Old Forge Board concludes in good faith,
after consultation with outside counsel and financial advisors, that such
Alternative Proposal constitutes a Superior Proposal and that failure to do so
would cause it to breach its fiduciary duties to Old Forge's shareholders under
applicable law, provided, that the Old Forge Board may not effect a withdrawal
of its Approval Recommendation pursuant to this clause (iii) unless: (x) Old
Forge shall have provided prior written notice to Penseco, at least five
business days in advance ("NOTICE PERIOD"), of its intention to effect a
withdrawal of its Approval Recommendation in response to such Superior Proposal,
which notice shall specify the material terms and conditions of any such
Superior Proposal (including the identity of the party making such Superior
Proposal), and shall have contemporaneously provided a copy of the relevant
proposed transaction agreements with the party making such Superior Proposal and
other material documents and (y) prior to effecting a withdrawal of its Approval
Recommendation, Old Forge shall, and shall cause its financial and legal
advisors to, during the Notice Period, negotiate with Penseco in good faith (to
the extent Penseco desires to negotiate) to make such adjustments in the terms
and conditions of this Agreement so that such Alternative Proposal ceases to
constitute a Superior Proposal.
7.9.4. Old Forge shall notify Penseco promptly (but in no event later
than 24 hours) after receipt of any Alternative Proposal, or any material
modification of or material amendment to any Alternative Proposal, or any
request for nonpublic information relating to Old Forge or for access to the
properties, books or records of Old Forge by any person that informs the Old
Forge Board that it is considering making, or has made, an Alternative Proposal.
Such notice to Penseco shall be made orally and in writing, and shall indicate
the identity of the person making the Alternative Proposal or intending to make
or considering making an Alternative Proposal or requesting nonpublic
information or access to the books and records of Old Forge, and the material
terms of any such Alternative Proposal or modification or amendment to an
Alternative Proposal. Old Forge shall keep Penseco fully informed, on a current
basis, of any material changes in the status and any material changes or
modifications in the terms of any such Alternative Proposal, indication or
request. Old Forge shall also promptly, and in any event within 24 hours, notify
Penseco, orally and in writing, if it enters into discussions or negotiations
concerning any Alternative Proposal in accordance with this Section 7.9.
7.9.5. For purposes of this Agreement, "SUPERIOR PROPOSAL" means any
bona fide, unsolicited written Alternative Proposal made by any person or
entity, other than Penseco that is on terms that the Old Forge Board in good
faith concludes, after consultation with its financial advisors (who shall be
a nationally recognized investment banking firm) and legal counsel (with the
advice of outside counsel), taking into account, among other things, all legal,
financial, regulatory and other aspects of the proposal and the person making
the proposal, including any break-up fees, expense reimbursement provisions and
conditions to consummation, (A) is on terms that the Old Forge Board in its good
faith judgment believes to be more favorable from a financial point of view to
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its shareholders than the Merger; (B) for which financing, to the extent
required, is then fully committed or reasonably determined to be available by
the Old Forge Board and (C) is reasonably capable of being completed; provided
that for purposes of the definition of "Superior Proposal", the references to
"25%" in the definition of Alternative Transaction shall be deemed to be
references to "a majority."
7.9.6. Old Forge shall ensure that the officers, directors and all
employees, agents and representatives (including any investment bankers,
financial advisors, attorneys, accountants or other retained representatives) of
Old Forge are aware of the restrictions described in this Section 7.9 as
reasonably necessary to avoid violations thereof. It is understood that any
violation of the restrictions set forth in this Section 7.9 by any officer,
director, employee, agent or representative (including any investment banker,
financial advisor, attorney, accountant or other retained representative) of Old
Forge, at the direction or with the consent of Old Forge, shall be deemed to be
a breach of this Section 7.9 by Old Forge.
Section 7.10 Employment Agreements. Prior to the Effective Time, each
---------------------
of the individuals listed on Schedule B attached hereto shall have executed an
----------
employment protection agreement in the respective forms attached hereto as
Exhibit B.
- ---------
Section 7.11 Appointment of Old Forge Directors. Penn Security shall
----------------------------------
cause the number of directors constituting its entire board of directors
immediately after the Effective Time to be increased to sixteen (16) members,
and shall take all actions necessary to cause three (3) Old Forge Directors
(as defined below) to be appointed to fill the vacancies on the Penn Security
board of directors created by such increase, each such Old Forge Director to
hold office until his/her successor is elected and qualified or otherwise in
accordance with applicable law, the articles of incorporation and bylaws of the
Surviving Corporation. Penseco shall cause the number of directors constituting
its entire board of directors immediately after the Effective Time to be
increased to fifteen (15) members, and shall take all actions necessary to cause
two of the three (3) Old Forge Directors to be appointed to fill the vacancies
on the Penseco board of directors created by such increase, each such Old Forge
Director to hold office until his/her successor is elected and qualified or
otherwise in accordance with applicable law, the Penseco Articles and Penseco
Bylaws. At the 2009 annual meeting of its shareholders, Penseco shall submit to
a vote of its shareholders, together with the favorable recommendation of the
Penseco board of directors, a proposal to amend the Penseco Bylaws to permit the
Penseco board of directors to be comprised of more than fifteen directors. If
such amendment is approved by the Penseco shareholders, Penseco shall cause the
number of directors constituting its entire board of directors to be increased
to sixteen (16) members, and shall take all actions necessary to cause the one
Old Forge Director not previously appointed to the Penseco board of directors to
be nominated for election by the shareholders at the 2009 annual meeting to fill
the vacancy created by such increase. If such amendment is not approved by the
Penseco shareholders, Penseco shall use its good faith, best efforts to
otherwise appoint the one Old Forge Director not previously appointed to the
Penseco board of directors. Each Old Forge Director shall be nominated for
election at the 2009 annual shareholders meeting to hold office until his/her
successor is elected and qualified or otherwise in accordance with applicable
law, the Penseco Articles and Penseco Bylaws. From and after the Effective Time
until the 2013 annual meeting of Penseco's shareholders, each Old Forge Director
shall receive compensation for services in amounts equal to compensation for
services on the Penseco and Penn Security boards of directors in accordance with
the existing general director compensation policies of Penseco and Penn
Security, whether or not such Old Forge Director is serving as a director of
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Penseco or Penn Security at any time during such period. The term "OLD FORGE
DIRECTORS" shall mean three (3) individuals who shall be selected by Old Forge
and be acceptable to Penseco (determined in accordance with Penseco's corporate
governance principles and practices relating to director nominations prior to
the Effective Time), from the individuals serving as directors of Old Forge on
the date hereof, to become members of the board of directors of Penseco and Penn
Security after the Effective Time pursuant to this Section 7.11.
Section 7.12 Director Agreements. Prior to the Effective Time, each
-------------------
individual who is a director of Old Forge on the date of this Agreement and who
will not be appointed to the board of directors of Penn Security pursuant to
Section 7.11 shall have executed a nonsolicitation and standstill agreement in a
form acceptable to Penseco and Penn Security, which agreement shall provide for
the payment of consideration to such individual in an amount equal to $150,000,
payable in a lump sum or installments, as specified in such agreement; provided,
however, that the amount of such payment shall be paid without regard to whether
some portion or all of that payment (alone or in connection with other payments)
is subject to the parachute payment provisions of Section 280G and Section 4999
of the Code (the "Noncontinuing Director Payments"). To the extent that an
excise tax (pursuant to Section 280G and/or Section 4999 of the Code) is payable
by one or more of such individuals in connection with some portion or all of the
Noncontinuing Director Payment or any other payment, each such individual shall
be responsible for satisfying such excise tax and shall not be entitled to any
gross-up payment from Old Forge or Penn Security.
Section 7.13 Branding. Following the Effective Time, for a period to be
--------
determined by the board of directors of the Surviving Corporation, but in any
event no less than one year, the Surviving Corporation shall leave the "Old
Forge Bank" name on the present Old Forge and Duryea offices of Old Forge,
although "Old Forge Bank" may also be identified as a division of Penn Security.
Section 7.14 Dividends. After the date of this Agreement, each of
---------
Penseco and Old Forge shall coordinate with the other the declaration of any
dividends in respect of Penseco Common Stock and Old Forge Common Stock and the
record dates and payment dates relating thereto, it being the intention of the
parties that holders of Old Forge Common Stock shall not receive two dividends,
or fail to receive one dividend, for any quarter with respect to their shares of
Old Forge Common Stock and any shares of Penseco Common Stock any such holder
receives in exchange therefor in the Merger.
Section 7.15 Formation of Merger Sub. Penseco shall use commercially
-----------------------
reasonable efforts to organize Merger Sub as a Pennsylvania commercial bank.
ARTICLE 8
Conditions Precedent
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger.
----------------------------------------------------------
The respective obligations of the parties to effect the Merger shall be
subject to the satisfaction at or before the Effective Time of the following
conditions:
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8.1.1. Shareholder Approval. The Merger, on substantially the terms and
--------------------
conditions set forth in this Agreement, shall have been approved by the
requisite affirmative vote of the holders of Old Forge Common Stock entitled to
vote thereon.
8.1.2. Form S-4. The Form S-4 shall have become effective under the
--------
Securities Act, no stop order suspending the effectiveness of the Form S-4 shall
have been issued and no proceedings for that purpose shall have been initiated
or threatened by the SEC.
8.1.3. No Injunctions or Restraints; Illegality. No order, injunction or
----------------------------------------
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "INJUNCTION") preventing the consummation of the
Merger or any of the other transactions contemplated by this Agreement shall be
in effect, and no such Injunction shall be threatened by or before any
Governmental Entity which represents a reasonable probability of preventing the
consummation of the Merger or any of the other transactions contemplated by this
Agreement or imposing damages that would reasonably be expected to have a
Material Adverse Effect on Penseco or Penn Security, a Material Adverse Effect
on Old Forge or a Material Adverse Effect on the Surviving Corporation (measured
in the case of Old Forge or the Surviving Corporation with respect to the
business, results of operations or financial condition of Old Forge only and not
any other business, results of operations or financial conditions of the
Surviving Corporation). No statute, rule, regulation, order, Injunction or
decree shall have been enacted, entered, promulgated or enforced by any
Governmental Entity that prohibits or makes illegal consummation of the Merger.
Section 8.2 Conditions to Obligations of Penseco and Penn Security. The
------------------------------------------------------
obligation of Penseco and Penn Security to effect the Merger is also subject to
the satisfaction, or waiver by Penseco and Penn Security, at or before the
Effective Time, of the following conditions:
8.2.1. Representations and Warranties. Subject to the standard set forth
------------------------------
in Section 10.2, the representations and warranties of Old Forge set forth in
this Agreement shall be true and correct as of the date of this Agreement and
as of the Effective Time as though made on and as of the Effective Time (except
that representations and warranties that by their terms speak specifically as of
the date of this Agreement or another date shall be true and correct as of such
date), and Penseco shall have received a certificate signed on behalf of Old
Forge by the Board Chair and Chief Financial Officer of Old Forge to the
foregoing effect.
8.2.2. Performance of Obligations of Old Forge. Old Forge shall have
---------------------------------------
performed in all material respects all obligations required to be performed by
it under this Agreement at or before the Effective Time; and Penseco shall have
received a certificate signed on behalf of Old Forge by the Board Chair of Old
Forge to such effect.
8.2.3. Regulatory Approvals. All regulatory approvals set forth in
--------------------
Section 5.4 required to consummate the transactions contemplated by this
Agreement, including the Merger, shall have been obtained and shall remain in
full force and effect and all statutory waiting periods in respect thereof
shall have expired (all such approvals and the expiration of all such waiting
periods being referred as the "PENSECO REQUISITE REGULATORY APPROVALS"), and no
such regulatory approval shall have resulted in the imposition of any Materially
Burdensome Regulatory Condition.
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8.2.4. Dissenting Shares. The Dissenting Shares, if any, shall not
-----------------
include greater than 1% of the shares of Old Forge Common Stock outstanding
immediately prior to the Effective Time.
8.2.5. Federal Tax Opinion. Penseco shall have received the opinion of
-------------------
Penseco's counsel, dated as of the Second-Step Effective Time, in form and
substance reasonably satisfactory to Penseco, substantially to the effect that,
on the basis of facts, representations and assumptions set forth in such
opinion, the Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code. In rendering such opinion, Penseco's counsel may
require and rely upon customary representations contained in certificates of
officers of Old Forge, Penseco, Penn Security and Merger Sub, reasonably
satisfactory in form and substance to such counsel.
8.2.6. FIRPTA Certificate. On the Closing Date, Penseco shall have
------------------
received from Old Forge, a certificate, in form and substance reasonably
acceptable to Penseco, for purposes of satisfying Penseco's obligations under
Treasury Regulation Section 1.1445-2(c)(3).
8.2.7. Regulatory Capital. Penseco shall have determined, based on its
------------------
review of the books and records of Old Forge pursuant to Section 7.3.2, that
the Surviving Corporation reasonably would be expected to have, immediately
after the Effective Time, a ratio of Tier 1 capital to average assets, as
determined under applicable banking laws and regulations, greater than 9%.
8.2.8. Merger Sub. Penseco shall have received all requisite approvals
----------
to organize, and shall have organized, Merger Sub as a Pennsylvania commercial
bank.
Section 8.3 Conditions to Obligations of Old Forge. The obligation of
--------------------------------------
Old Forge to effect the Merger is also subject to the satisfaction or waiver by
Old Forge at or before the Effective Time of the following conditions:
8.3.1. Representations and Warranties. Subject to the standard set forth
------------------------------
in Section 10.2, the representations and warranties of Penseco and Penn Security
set forth in this Agreement shall be true and correct as of the date of this
Agreement and as of the Effective Time as though made on and as of the Effective
Time (except that representations and warranties that by their terms speak
specifically as of the date of this Agreement or another date shall be true and
correct as of such date), and Old Forge shall have received a certificate signed
on behalf of Penseco and Penn Security by the Chief Executive Officer and the
Chief Financial Officer of Penseco and Penn Security to the foregoing effect.
8.3.2. Performance of Obligations of Penseco. Penseco and Penn Security
-------------------------------------
shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or before the Effective Time, and Old
Forge shall have received a certificate signed on behalf of Penseco and Penn
Security by the Chief Executive Officer or the Chief Financial Officer of
Penseco and Penn Security to such effect.
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8.3.3. Regulatory Approvals. All regulatory approvals set forth in
--------------------
Section 4.4 required to consummate the transactions contemplated by this
Agreement, including the Merger, shall have been obtained and shall remain in
full force and effect and all statutory waiting periods in respect thereof shall
have expired (all such approvals and the expiration of all such waiting periods
being referred as the "OLD FORGE REQUISITE REGULATORY APPROVALS").
8.3.4. Federal Tax Opinion. Old Forge shall have received the opinion of
-------------------
Old Forge's counsel, dated as of the Second-Step Effective Time, in form and
substance reasonably satisfactory to Old Forge, substantially to the effect
that, on the basis of facts, representations and assumptions set forth in such
opinion, the Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code. In rendering such opinion, Old Forge's counsel may
require and rely upon customary representations contained in certificates of
officers of Old Forge, Penseco, Penn Security and Merger Sub, reasonably
satisfactory in form and substance to such counsel.
ARTICLE 9
Termination and Amendment
Section 9.1 Termination. This Agreement may be terminated at any time
-----------
before the Effective Time, whether before or after approval of the matters
presented in connection with the Merger by the shareholders of Old Forge:
9.1.1. Consent of the Parties. By consent of Old Forge and Penseco in a
----------------------
written instrument, if the board of directors of each of Old Forge and Penseco
so determines by a vote of the majority of the members of its entire board of
directors;
9.1.2. Approvals. By either Old Forge or Penseco, if
---------
(a) any Governmental Entity that must grant a Penseco Requisite
Regulatory Approval or a Old Forge Requisite Regulatory Approval has denied
approval of the Merger and such denial has become final and nonappealable or
any Governmental Entity of competent jurisdiction shall have issued a final and
nonappealable order permanently enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement;
(b) the holders of the Old Forge Common Stock entitled to vote thereon
do not approve the Merger, on substantially the terms and conditions set forth
in this Agreement, by the requisite affirmative vote at the Old Forge
Shareholder Meeting or any similar meeting of the shareholders of Old Forge;
9.1.3. Delay. By either Old Forge or Penseco, if the Merger shall not
-----
have been consummated on or before September 30, 2009, unless the failure of the
Closing to occur by such date shall be due to the failure of the party seeking
to terminate this Agreement to perform or observe the covenants and agreements
of such party set forth in this Agreement;
9.1.4. Material Breach of Representation, Warranty or Covenant. By
-------------------------------------------------------
either Penseco or Old Forge (provided that the terminating party is not then in
breach of any representation, warranty, covenant or other agreement contained in
this Agreement), if there shall have been a breach of any of the covenants or
agreements or any of the representations or warranties set forth in this
Agreement on the part of Old Forge, in the case of a termination by Penseco, or
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Penseco or Penn Security in the case of a termination by Old Forge, which
breach, either individually or in the aggregate, would result in, if occurring
or continuing on the Closing Date, the failure of any of the conditions set
forth in Section 8.2 or Section 8.3, as the case may be, and which is not cured
within 45 days following written notice to the party committing such breach or
by its nature or timing cannot be cured within such time period; or
9.1.5. Failure to Recommend. By Penseco, if the Old Forge Board shall
--------------------
have (i) failed to recommend in the Proxy Statement-Prospectus the approval and
adoption of this Agreement or (ii) in a manner adverse to Penseco,
(A) withdrawn, modified or qualified, or proposed to withdraw, modify or
qualify, the recommendation by the Old Forge Board of this Agreement and/or the
Merger to Old Forge's shareholders, (B) taken any public action or made any
public statement in connection with the Old Forge Shareholder Meeting
inconsistent with such recommendation (including not taking action to convene
the Old Forge Shareholder Meeting) or (C) recommended any Alternative Proposal
(or, in the case of clause (ii), resolved to take any such action), whether or
not permitted by the terms hereof.
9.1.6. Penseco Price Protection. By Penseco during the three day period
------------------------
commencing with (and including) the Determination Date, if the Penseco Closing
Price shall be greater than one hundred twenty percent (120%) of the Starting
Price, as appropriately adjusted for any Penseco stock dividend,
reclassification, recapitalization, split-up, combination, exchange of shares or
similar transaction between the date of this Agreement and the Determination
Date.
9.1.7. Old Forge Price Protection. By Old Forge during the three day
--------------------------
period commencing with (and including) the Determination Date if both: (i) the
Penseco Closing Price shall be less than eighty percent (80%) of the Starting
Price; and (ii) the difference of the Index Ratio minus the Penseco Ratio shall
be .20 or more; provided, however, that if Old Forge notifies Penseco of its
intent to terminate this Agreement pursuant to this Section 9.1.7, then Penseco
shall have the option of increasing the Share Ratio in a manner such, and to the
extent required, so that either (A) the Per Share Amount (calculated by using
the Penseco Closing Price) after such increase is not less than eighty percent
(80%) of the Per Share Amount calculated by using the Starting Price in lieu of
the Penseco Closing Price, or (B) the Penseco Ratio, if increased by the same
proportion as the Share Ratio, would be less than 0.20 less than the Index
Ratio. If Penseco elects to increase the Share Ratio, it shall give prompt
written notice to Old Forge of such election and the revised Share Ratio,
whereupon no termination shall occur pursuant to this Section 9.1.7 and this
Agreement shall remain in effect in accordance with its terms (except as the
Share Ratio shall have been so modified), and any references in this Agreement
to "Share Ratio" shall thereafter be deemed to refer to the Share Ratio after
giving effect to any adjustment made pursuant to this Section 9.1.7. "PENSECO
RATIO" means the number obtained by dividing the Penseco Closing Price by the
Starting Price. "INDEX RATIO" means the number obtained by dividing the Index
Price on the Determination Date by the Index Price for the trading day
immediately preceding the day on which the parties publicly announce the signing
of this Agreement. "INDEX PRICE" on a given date means the closing price of the
NASDAQ Bank Index.
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9.1.8. Material Adverse Effect as to Old Forge. By Penseco, if there
---------------------------------------
shall have been a Material Adverse Effect on Old Forge after the date of this
Agreement.
9.1.9. Material Adverse Effect as to Penseco. By Old Forge, if there
-------------------------------------
shall have been a Material Adverse Effect on Penseco after the date of this
Agreement.
9.1.10. Superior Proposal. By Old Forge at any time prior to the date
-----------------
of mailing of the Prospectus/Proxy Statement to Old Forge shareholders, in order
to enter concurrently into a Superior Proposal; provided, however, that this
Agreement may be terminated by Old Forge pursuant to this Section 9.1.10 only
after the fifth business day following Old Forge's provision of written notice
to Penseco (which notice shall specify the material terms and conditions of any
such Superior Proposal, including the identity of the party making such Superior
Proposal, and such notice shall also include a copy of the relevant proposed
transaction agreements with the party making such Superior Proposal and other
material documents) advising Penseco that the Old Forge Board is prepared to
accept such Superior Proposal (it being agreed that the delivery of such notice
shall not entitle Penseco to terminate this Agreement pursuant to Section 9.1.5
or any other provision of this Agreement) and only if (i) during such five
business day period, Old Forge has caused its financial and legal advisors to
negotiate with Penseco in good faith (to the extent Penseco chooses to
negotiate) to make such adjustments in the terms and conditions of this
Agreement such that such Alternative Proposal would no longer constitute a
Superior Proposal, and (ii) the Old Forge Board has considered such adjustments
in the terms and conditions of this Agreement resulting from such negotiations
and has concluded in good faith, based upon consultation with its financial and
legal advisers, that such Alternative Proposal remains a Superior Proposal even
after giving effect to the adjustments proposed by Penseco and further provided
that such termination shall not be effective until Old Forge has paid the
Termination Fee to Penseco.
The party desiring to terminate this Agreement pursuant to any clause of this
Section 9.1 (other than Section 9.1.1) shall give written notice of such
termination to the other party in accordance with Section 10.4, specifying the
provision or provisions hereof pursuant to which such termination is effected.
Section 9.2 Effect of Termination. If either Old Forge or Penseco
---------------------
terminates this Agreement as provided in Section 9.1, this Agreement shall
forthwith become void and have no effect, and none of Old Forge, Penseco, any of
their respective Subsidiaries or any of the officers or directors of any of them
shall have any liability of any nature whatsoever under this Agreement, or in
connection with the transactions contemplated by this Agreement, except that (i)
Sections 7.3.3, 9.2, 9.3, 10.4, 10.5, 10.8, 10.10 and 10.12 shall survive any
termination of this Agreement and (ii) neither Old Forge nor Penseco shall be
relieved or released from any liabilities or damages arising out of its breach
of any provision of this Agreement.
Section 9.3 Fees and Expenses.
-----------------
9.3.1. Except as set forth in Section 9.3.2, and except with respect to
costs and expenses of printing and mailing the Proxy Statement-Prospectus and
all filing and other fees paid to the SEC in connection with the Merger, which
shall be borne equally by Old Forge and Penseco, all fees and expenses incurred
in connection with the Merger, this Agreement and the transactions contemplated
by this Agreement shall be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated.
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9.3.2. Old Forge shall pay to Penseco, by wire transfer of immediately
available funds, a termination fee in the amount of $1,856,000 (the
"TERMINATION FEE") and/or expense reimbursement on the following terms:
(a) If this Agreement is terminated by Penseco pursuant to
Section 9.1.5, then Old Forge shall pay the Termination Fee within ten (10)
business days following such termination;
(b) If this Agreement is terminated by Old Forge pursuant to
Section 9.1.10, then Old Forge shall pay the Termination Fee within ten (10)
business days following such termination;
(c) If (A) either party shall terminate this Agreement pursuant
to Section 9.1.2(b), then Old Forge shall within ten (10) business days after
being notified by Penseco, pay Penseco all of the out-of-pocket expenses
incurred by Penseco relating to or arising out of this Agreement or the
transactions contemplated hereby (including the negotiation hereof and thereof
and fees and expenses of attorneys and other advisors) in an amount not to
exceed $575,000 (the "EXPENSE REIMBURSEMENT"), and if within 12 months of the
date of such termination, Old Forge enters into any definitive agreement with
respect to, or consummates, any Alternative Transaction, then Old Forge shall
pay the Termination Fee, less the Expense Reimbursement, on the date of such
execution or consummation;
(d) If (A) either party shall terminate this Agreement pursuant
to Section 9.1.3 and (B) at any time after the date of this Agreement and before
such termination, an Alternative Proposal shall have been publicly announced or
otherwise communicated to the Old Forge Board and shall not have been rejected
by the Old Forge Board prior to such termination, then Old Forge shall pay
one-third of the Termination Fee within ten (10) business days following such
termination and, if within 12 months of the date of termination, Old Forge
executes any definitive agreement with respect to, or consummates, any
Alternative Transaction, then Old Forge shall pay the remaining two-thirds of
the Termination Fee upon the date of such execution or consummation.
Upon payment of all applicable fees and expenses in accordance with this Section
9.3, Old Forge shall have no further liability to Penseco at law or in equity
with respect to such termination, or with respect to Old Forge Board's failure
to take action to convene the Old Forge Shareholder Meeting and/or recommend
that Old Forge shareholders adopt this Agreement.
9.3.3. Old Forge acknowledges that the agreements contained in this
Section 9.3 are an integral part of the transactions contemplated by this
Agreement and that, without these agreements, Penseco would not enter into this
Agreement. Accordingly, if Old Forge fails to pay timely any amount due pursuant
to this Section 9.3 and, in order to obtain such payment, Penseco commences a
suit that results in a judgment against Old Forge for the amount payable to
Penseco pursuant to this Section 9.3, Old Forge shall pay to Penseco its
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reasonable, out-of-pocket costs and expenses (including attorneys' fees and
expenses) in connection with such suit, together with interest on the amount so
payable at the prime lending rate prevailing at such time, as published in The
Wall Street Journal, from the date such amounts were required to be paid until
the date actually received by Penseco.
Section 9.4. Amendment. This Agreement may, to the extent legally
---------
allowed, be amended by the parties, by action taken or authorized by their
respective boards of directors, at any time before or after approval of the
matters presented in connection with the Merger by the shareholders of Old
Forge; provided, however, that after any approval of the transactions
contemplated by this Agreement by the shareholders of Old Forge, there may not
be, without further approval of such shareholders, any amendment of this
Agreement that (a) alters or changes the amount or the form of the consideration
to be delivered under this Agreement to the holders of Old Forge Common Stock,
if such alteration or change would adversely affect the holders of any security
of Old Forge, (b) alters or changes any term of the articles of incorporation of
the Surviving Corporation if such alteration or change would adversely affect
the holders of any securities of Old Forge, or (c) alters or changes any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any securities of Old Forge, in each case other
than as contemplated by this Agreement. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.
Section 9.5 Extension; Waiver. At any time before the Effective Time,
-----------------
the parties, by action taken or authorized by their respective boards of
directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other party, (b)
waive any inaccuracies in the representations and warranties contained in this
Agreement or (c) waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party, but such extension or waiver or failure to
insist on strict compliance with an obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent
or other failure.
ARTICLE 10
General Provisions
Section 10.1 Closing. On the terms and subject to conditions set forth
-------
in this Agreement, the closing of the Merger (the "CLOSING") shall take place at
10:00 a.m. on a date and at a place to be specified by the parties, which date
shall be no later than five business days after the satisfaction or waiver
(subject to applicable law) of the latest to occur of the conditions set forth
in Article 8 (other than those conditions that by their nature are to be
satisfied or waived at the Closing), unless extended by mutual agreement of the
parties (the "CLOSING DATE"). If the conditions set forth in Article 8 are
satisfied or waived during the two weeks immediately before the end of a fiscal
quarter of Penseco, then Penseco may postpone the Closing until the first full
week after the end of that fiscal quarter.
Section 10.2 Standard. No representation or warranty of Old Forge
--------
contained in Article 4 or of Penseco or Penn Security contained in Article 5
shall be deemed untrue or incorrect for any purpose under this Agreement, and no
party hereto shall be deemed to have breached a representation or warranty for
any purpose under this Agreement, in any case as a consequence of the existence
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or absence of any fact, circumstance or event unless such fact, circumstance or
event, individually or when taken together with all other facts, circumstances
or events inconsistent with any representations or warranties contained in
Article 4, in the case of Old Forge, or Article 5, in the case of Penseco and
Penn Security, has had or would be reasonably likely to have a Material Adverse
Effect with respect to Old Forge or Penseco or Penn Security, respectively
(disregarding for purposes of this Section 10.2 any materiality or Material
Adverse Effect qualification contained in any representations or warranties).
Notwithstanding the immediately preceding sentence, the representations and
warranties contained in (a) Sections 4.1.1, 4.2, 4.3, 4.7 and 4.10 in the case
of Old Forge, and Sections 5.1.1, 5.1.3, 5.2.1, 5.2.2, 5.3 and 5.7 in the case
of Penseco or Penn Security, shall be deemed untrue and incorrect if not true
and correct in all material respects, and (b) Section 4.8.1 in the case of Old
Forge and Section 5.8.1 in the case of Penseco or Penn Security, shall be deemed
untrue and incorrect if not true and correct in all respects.
Section 10.3 Nonsurvival of Representations, Warranties and Agreements.
---------------------------------------------------------
None of the representations, warranties, covenants and agreements set forth in
this Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for Section 7.6 and for those other covenants
and agreements contained in this Agreement that by their terms apply or are to
be performed in whole or in part after the Effective Time.
Section 10.4 Notices. All notices and other communications in
-------
connection with this Agreement shall be in writing and shall be deemed given if
delivered personally, sent via facsimile (with confirmation), mailed by
registered or certified mail (return receipt requested) or delivered by an
express courier (with confirmation) to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
if to Old Forge, to:
Old Forge Bank
216 South Main Street
Old Forge, PA 18518
Attn: Michelene Pagnotti Kennedy, Board Chair
Facsimile: 570.819.3392
with a copy to:
Stradley Ronon Stevens & Young, LLP
30 Valley Stream Parkway
Malvern, PA 19355-1481
Attn: David F. Scranton, Esquire
Facsimile: 610.640.1965
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if to Penseco or Penn Security, to:
Penseco Financial Services Corporation
150 N. Washington Avenue
Scranton, PA 18503
Attn: President and Chief Executive Officer
Facsimile: 570.961.3768
with a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
Attn: Cary S. Levinson, Esquire
Facsimile: 215.689.4484
Section 10.5 Interpretation. When a reference is made in this Agreement
--------------
to Articles, Sections, Exhibits or Schedules, such reference shall be to an
Article or Section of or Exhibit or Schedule to this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." The Old Forge Disclosure Schedule and the
Penseco Disclosure Schedule, as well as all other schedules and all exhibits
hereto, shall be deemed part of this Agreement and included in any reference to
this Agreement. This Agreement shall not be interpreted or construed to require
any person to take any action, or fail to take any action, if to do so would
violate any applicable law. For purposes of this Agreement, (a) "person" means
an individual, corporation, partnership, limited liability company, joint
venture, association, trust, unincorporated organization or other entity
(including its permitted successors and assigns) and (b) "knowledge" of any
person that is not an individual means the knowledge of such person's directors
and senior executive officers.
Section 10.6 Counterparts. This Agreement may be executed in two or
------------
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each of the
parties and delivered to the other parties, it being understood that each party
need not sign the same counterpart.
Section 10.7 Entire Agreement. This Agreement (including the
----------------
Disclosure Schedules and Exhibits hereto and the other documents and the
instruments referred to in this Agreement), together with the Confidentiality
Agreement, constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter of this Agreement, other than the Confidentiality Agreement.
Section 10.8 Governing Law; Jurisdiction. This Agreement shall be
---------------------------
governed and construed in accordance with the internal laws of the Commonwealth
of Pennsylvania applicable to contracts made and wholly performed within such
state, without regard to any applicable conflicts-of-law principles. The parties
agree that any suit, action or proceeding brought by either party to enforce any
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provision of, or based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated hereby shall be brought in any
federal court located in the Commonwealth of Pennsylvania having jurisdiction
over the matter; provided, however, that if such a federal court does not have
jurisdiction over the matter, any aforementioned suit, action or proceeding
shall be brought in a state court located in the Commonwealth of Pennsylvania
having jurisdiction over the matter. Each of the parties submits to the
jurisdiction of any such court in any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of, or in
connection with, this Agreement or the transactions contemplated hereby and
hereby irrevocably waives the benefit of jurisdiction derived from present or
future domicile or otherwise in such action or proceeding. Each party
irrevocably waives, to the fullest extent permitted by law, any objection that
it may now or hereafter have to the laying of the venue of any such suit, action
or proceeding in any such court or that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
Section 10.9 Publicity. Neither Old Forge nor Penseco shall, and
---------
neither Old Forge nor Penseco shall permit any of its Subsidiaries or agents to,
issue or cause the publication of any press release or other public announcement
with respect to the transactions contemplated by this Agreement without the
prior consent (which consent shall not be unreasonably withheld) of Penseco, in
the case of a proposed announcement by Old Forge, or Old Forge, in the case of a
proposed announcement by Penseco or any of its Subsidiaries; provided, however,
that any party may, without the prior consent of the other parties (but after
prior consultation with the other parties to the extent practicable under the
circumstances) issue or cause the publication of any press release or other
public announcement to the extent required by law or by the rules and
regulations of any applicable securities exchange.
Section 10.10 Assignment; Third-Party Beneficiaries. Neither this
-------------------------------------
Agreement nor any of the rights, interests or obligations under this Agreement
shall be assigned by either of the parties (whether by operation of law or
otherwise) without the prior written consent of the other party. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by each of the parties and their respective successors and
assigns. Except as otherwise specifically provided in Section 7.6, this
Agreement (including the documents and instruments referred to in this
Agreement) is not intended to and does not confer upon any person other than the
parties hereto any rights or remedies under this Agreement.
Section 10.11 Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity.
Section 10.12 Severability. Any term or provision of this Agreement
------------
that is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
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any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only as broad as is enforceable.
[Signature Page Follows.]
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<Page> 69
IN WITNESS WHEREOF, the parties have caused this Agreement and
Plan of Merger to be executed by their respective officers thereunto duly
authorized as of the date first above written.
Old Forge Bank
By: /s/ Michelene Kennedy
----------------------------------
Name: Michelene Kennedy
Title: Chairperson
Penseco Financial Services Corporation
By: /s/ Craig W. Best
----------------------------------
Name: Craig W. Best
Title: President & CEO
Penn Security Bank and Trust Company
By: /s/ Craig W. Best
----------------------------------
Name: Craig W. Best
Title: President & CEO
Signature Page to Agreement and Plan of Merger
<Page>70
Schedule A
List of Individuals for Voting Agreements
Joseph G. Cesare
Mark H. DeStefano
Michelene Pagnotti Kennedy
Robert S. Mellow
Raymond C. Rinaldi
Jerry J. Weinberger
Lackawanna Casualty Company
A-1
<Page>71
Schedule B
List of Individuals for Employment Protection Agreements
Vincent O'Bell
Michael Jake
B-1
<Page>72
Exhibit A
December 5, 2008
Penseco Financial Services Corporation
150 N. Washington Avenue
Scranton, PA 18503
Attn: President and Chief Executive Officer
Ladies and Gentlemen:
Penseco Financial Services Corporation, a Pennsylvania corporation
("Penseco"), its wholly-owned subsidiary, Penn Security Bank and Trust Company,
a Pennsylvania commercial bank and trust company ("Penn Security") and Old Forge
Bank, a Pennsylvania commercial bank ("Old Forge") have entered into an
Agreement and Plan of Merger dated as of December 5, 2008 (the "Merger
Agreement"), pursuant to which, subject to the terms and conditions set forth
therein, Old Forge, in a two-step transaction, will merge with and into Penn
Security (the "Merger"). Penseco has requested, as a condition to its execution
and delivery of the Merger Agreement, that the undersigned, a shareholder of Old
Forge, execute and deliver to Penseco this Letter Agreement.
The undersigned, solely in his, her or its capacity as a shareholder
of Old Forge, in order to induce Penseco to execute and deliver the Merger
Agreement, and intending to be legally bound, hereby irrevocably:
(a) Agrees to be present (in person or by proxy) at all meetings of
shareholders of Old Forge called to vote for approval of the Merger so that all
shares of common stock of Old Forge which are owned by the undersigned and/or
his or her spouse, or over which the undersigned and/or his or her spouse have
actual voting control (collectively, the "Covered Shares") will be counted
present thereat for the purpose of determining the presence of a quorum at such
meetings and to vote the Covered Shares, or cause the Covered Shares to be
voted, in person or by proxy, in favor of approval and adoption of the Merger
Agreement and the transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the board of directors of Old
Forge and any other action of Old Forge's shareholders requested in furtherance
thereof). The term "Covered Shares" shall include any shares of common stock of
Old Forge acquired after the date hereof;
(b) Agrees not to vote the Covered Shares, or cause the Covered
Shares not to be voted, to rescind or amend in any manner any prior vote
approving or adopting the Merger Agreement;
(c) Agrees to vote the Covered Shares, or cause the Covered Shares
to be voted, against, as a shareholder of Old Forge, (i) any (A) extraordinary
corporate transaction, such as a merger, consolidation or other business
combination involving Old Forge, including an Alternative Proposal (as defined
Ex. A-1
<Page>73
in the Merger Agreement), (B) sale, lease, sublease, license, sublicense or
transfer of a material portion of the rights or other assets of Old Forge, (C)
change in a majority of the board of directors of Old Forge, (D) amendment to
Old Forge's articles of incorporation or bylaws, (E) material change in the
capitalization of Old Forge or Old Forge's corporate structure, or (F) any other
action which is intended, or could reasonably be expected, to impede, interfere
with, delay, postpone, discourage or adversely affect the Merger or any of the
other transactions contemplated by the Merger Agreement or this Letter
Agreement, and (ii) any action or agreement that would result in a breach of any
representation, warranty, covenant or agreement of Old Forge contained in the
Merger Agreement or that would result in any of the conditions to the
obligations of Old Forge under the Merger Agreement not being fulfilled;
(d) (i) Hereby revokes any and all previous proxies granted with
respect to the Covered Shares and grants to the president of Penseco a proxy to
vote the Covered Shares (in the event the undersigned fails to vote the Covered
Shares in accordance with this Letter Agreement) as indicated in Sections (b)
and (c) above (which proxy shall be limited to the matters set forth in Sections
(b) and (c)); (ii) intends that such proxy will be irrevocable and coupled with
an interest, and shall not be terminated by any act of the undersigned or by
operation of law, and (iii) agrees to take such further action or execute such
other instruments as may be necessary to effectuate the intent of this proxy;
provided that such proxy will expire automatically and without further action by
the parties upon termination of the Merger Agreement or this Letter Agreement;
(e) Agrees not to sell, transfer or otherwise dispose or limit its
right to vote in any manner any of the Covered Shares, or grant any proxy to
vote the Covered Shares otherwise than in accordance with this Letter Agreement,
unless otherwise agreed to in writing by Penseco;
(f) Subject to paragraph (k) below, agrees not to, directly or
indirectly, through any officer, director, employee, investment banker,
financial advisor, attorney, accountant or other representative of any of them
or otherwise, initiate, solicit or encourage, including by way of furnishing
non-public information or assistance, or participate in any discussion or
negotiations of any type, directly or indirectly, or enter into a
confidentiality agreement, letter of intent or purchase agreement, merger
agreement or other similar agreement with any Person (as defined in the Merger
Agreement) other than Penseco and Penn Security with respect to the Merger
Agreement and the transactions contemplated thereby. The undersigned and his,
her or its representatives immediately shall cease and cause to be terminated
any existing activities, discussions or negotiations with any parties other than
Penseco and Penn Security with respect to the Merger Agreement and the
transactions contemplated thereby;
(g) Represents that the undersigned has the capacity to enter into
this Letter Agreement and that it is a valid and binding obligation enforceable
against the undersigned in accordance with its terms, subject to bankruptcy,
insolvency and other laws affecting creditors' rights and general equitable
principles;
(h) Agrees that irreparable damage would occur in the event that any
of the provisions of this Letter Agreement were not performed in accordance with
their specific terms and agrees that Penseco is entitled to an injunction or
injunctions to prevent breaches of this Letter Agreement by the undersigned to
enforce specifically the terms and provisions hereof, this being in addition to
any other available remedy;
Ex. A-2
<Page>74
(i) Agrees to execute and deliver all such further documents,
certificates and instruments and take all such further reasonable action
necessary or appropriate to effectuate the intent of this Letter Agreement;
(j) Agrees that this Letter Agreement may not be amended except by
an instrument in writing signed by each of the undersigned and Penseco. Neither
this Letter Agreement nor any of the rights, interests or obligations of the
undersigned hereunder shall be assigned by the undersigned without the prior
written consent of Penseco;
(k) Nothing herein shall impose any obligation on the undersigned to
take any action nor omit to take action that would prevent the undersigned, if
applicable, from discharging his or her fiduciary duties as a member of the
board of directors or as an officer of Old Forge;
(l) Agrees that, in addition to any restrictions under applicable
law, during the twelve-month period from and after the effective time of the
Merger, the shares of Penseco common stock sold by or for the account of the
undersigned, together with all sales of shares of Penseco common stock sold by
or for the account of the undersigned within the three months preceding any such
sale, shall not exceed one percent of the shares of Penseco common stock
outstanding as shown by the most recent report or statement published by
Penseco;
(m) Agrees that this Letter Agreement shall be construed in
accordance with and governed by the laws of the Commonwealth of Pennsylvania
without regard to any applicable principles of conflict of law; and
(n) Nothing herein shall be deemed to vest in Penseco any direct or
indirect ownership or incidence of ownership of or with respect to any shares of
common stock of Old Forge held by the undersigned.
The obligations set forth herein shall terminate concurrently with
the earlier of (i) any termination of the Merger Agreement, (ii) the completion
of the Merger, or (iii) the withdrawal by the board of directors of Old Forge,
consistent with the terms of the Merger Agreement, of its recommendation that
its shareholders approve the Merger; provided, however, that the obligations set
forth in paragraph (l) shall survive the Merger. Upon such termination, except
as set forth in paragraph (l), no party shall have any further obligations or
liabilities hereunder; provided, however, such termination shall not relieve any
party from liability for any willful breach of this Agreement prior to such
termination.
Ex. A-3
<Page>75
This Letter Agreement may be executed in two or more counterparts,
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same Letter Agreement.
Very truly yours,
Acknowledged and agreed to this ___ day of December, 2008.
Penseco Financial Services Corporation
By: __________________________
Name:
Title:
Ex. A-4
<Page>76
Exhibit B
FORM OF EMPLOYMENT PROTECTION AGREEMENT
[Penn Security Bank and Trust Company Letterhead]
__________, 2008
[name and address]
Dear [ ]:
On behalf of Penn Security Bank and Trust Company (the "Company"), this
-------
letter memorializes our agreement to provide you with certain salary
continuation benefits if your service to the Company ceases under specified
circumstances. Your employment is "at will" employment, terminable by either you
or the Company at any time, upon not less than 60 days written notice; provided
that the Company may terminate your employment without notice at any time, if
the termination is for Cause.
1. Definitions. As used herein, the following terms have the following
-----------
meanings:
"Cause" means the occurrence of any of the following, as determined in
-----
good faith by the Board of Directors of the Company: (i) any physical or
mental condition reasonably expected to or which does prevent you from
performing any essential element of your job for more than 90 days; (ii)
alcohol abuse or use of controlled drugs by you (other than in accordance
with a physician's prescription); (iii) illegal conduct or gross
misconduct by you which is materially and demonstrably injurious to the
Company, its affiliates or subsidiaries including, without limitation,
fraud, embezzlement, theft or proven dishonesty in the course of your
employment; (iv) conviction of a misdemeanor involving moral turpitude or
a felony; (v) the entry of a guilty or nolo contendere plea to a
---- ----------
misdemeanor involving moral turpitude or a felony, (vi) material breach of
any agreement with, or duty owed to, the Company, or (vii) your failure,
refusal or inability to perform, in any material respect, your duties to
the Company, which failure continues for more than thirty (30) days after
written notice thereof from the Company.
"Good Reason" means a material reduction by the Company in your annual
-----------
salary, provided that if the salaries of substantially all of the
Company's senior executive officers (including the Company's President and
CEO) are contemporaneously and proportionately reduced, a reduction in
your salary will not constitute "Good Reason" hereunder. The foregoing
will constitute Good Reason, however, only if you provide the Company with
written objection to the event or condition within 30 days following the
occurrence thereof, the Company does not reverse or otherwise cure the
event or condition within 30 days of receiving that written objection, and
you resign your employment within 30 days following the expiration of that
cure period.
Ex. B-1
<Page>77
2. Salary and Benefits Continuation. In recognition of your continued
--------------------------------
employment, if your service to the Company ceases at any time hereafter due to a
termination by the Company without Cause or due to a resignation by you for Good
Reason, you will be entitled to: (i) separation payments in the form of salary
continuation (less applicable withholding) for a period ending on the date that
is twelve months after the last day of your employment with the Company, and
(ii) if you elect to receive continuation coverage under the Company's group
health plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA"), for the twelve (12) month period immediately following the last
day of your employment with the Company, waiver of the applicable premium
otherwise payable for COBRA continuation coverage for you to the extent such
premium exceeds the monthly amount charged to active similarly-situated
employees of the Company for the same coverage. The separation payments
described above will be paid at the base salary rate in effect as of the date of
your separation from the Company and will be payable in accordance with the
Company's normal payroll practices.
3. Treasury Regulation; Release of Claims.
--------------------------------------
(a) If the cessation giving rise to the payments described in Section 2 is
---------
not a "Separation from Service" within the meaning of Treas. Reg. ss.
1.409A-1(h)(1) (or any successor provision), then the amounts otherwise payable
pursuant to that section will instead be deferred without interest and will not
be paid until you experience a Separation from Service. In addition, to the
extent compliance with the requirements of Treas. Reg. ss. 1.409A-3(i)(2) (or
any successor provision) is necessary to avoid the application of an additional
tax under Section 409A of the Internal Revenue Code to payments due to you upon
or following your Separation from Service, then notwithstanding any other
provision of this Agreement (or any otherwise applicable plan, policy, agreement
or arrangement), any such payments that are otherwise due within six months
following your Separation from Service (taking into account the preceding
sentence of this paragraph) will be deferred without interest and paid to you in
a lump sum immediately following that six month period. This paragraph should
not be construed to prevent the application of Treas. Reg. ss.ss. 1.409A-1(b)(4)
or (9)(or any successor provisions) to amounts payable hereunder. For purposes
of the application of Treas. Reg. ss. 1.409A-1(b)(4), each payment described in
Section 2(a) will constitute a separate payment.
(b) Moreover, notwithstanding any other provision of this letter, no
payment or obligation will be owed by the Company hereunder, unless: (i) you
execute and deliver to the Company a general release of claims against the
Company and its affiliates in a form reasonably prescribed by the Company within
30 days (or 45 days, if required to comply with the Age Discrimination in
Employment Act of 1967, as amended) following your cessation of employment, and
(ii) that release becomes irrevocable.
4. No Liability of Officers and Directors. You acknowledge that any
--------------------------------------
compensation payable to you in respect of your service to the Company (including
any amount payable pursuant to this letter) is solely an obligation of the
Company and not its officers or directors, even in the event of the Company's
insolvency. Accordingly, intending to be legally bound, you hereby waive and
release all claims for payment of compensation from officers or directors of the
Company.
Ex. B-2
<Page>78
5. Miscellaneous Provisions. The salary continuation benefits described in
this letter will be paid in lieu of, and not in addition to, benefits payable
pursuant to any other salary continuation, severance, termination or similar
arrangement maintained by the Company or its affiliates. For avoidance of doubt,
a cessation of your service as a result of your death or a mental or physical
condition entitling you to benefits under the Social Security Act or under any
disability plan or arrangement maintained or funded by the Company will not
constitute a termination without Cause. This letter represents our entire
agreement regarding your salary continuation benefits and merges and supersedes
all prior or contemporaneous discussions, agreements and understandings between
us relating to that topic. This letter may not be changed or modified, except by
an agreement in writing signed by you and an authorized representative of the
Company. This letter will be governed by, and enforced in accordance with, the
laws of the Commonwealth of Pennsylvania without regard to the application of
the principles of conflicts or choice of laws.
To acknowledge your agreement to all of the foregoing, please execute this
letter in the space provided below and return the executed copy to me.
Sincerely,
Penn Security Bank and Trust Company
By
-----------------------------------------
Acknowledged and agreed on
2008:
- -------- ---,
- ---------------------------
Ex. B-3