LETTERHEAD OF
BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, L.L.P.
April 15, 1999
Board of Directors
Community Savings Bank, SSB
708 South Church Street
P.O. Box 1837
Burlington, North Carolina 27216-1837
Re: Conversion of Community Savings Bank, SSB from a North Carolina-
chartered mutual savings bank to a North Carolina-chartered stock
savings bank and its simultaneous acquisition by First Community
Financial Corporation, a North Carolina savings bank holding company
Members of the Board:
You have requested our opinions regarding certain income tax consequences
in connection with the proposed conversion of Community Savings Bank, SSB
("Community Mutual") from a North Carolina-chartered mutual savings bank with
federally insured deposit accounts to Community Savings Bank, Inc., a North
Carolina-chartered stock savings bank with federally insured deposit accounts
("Community"), and the simultaneous acquisition of Community as a wholly-owned
subsidiary by First Community Financial Corporation, a savings bank holding
company organized under North Carolina law ("Holding Company"). This
reorganization and conversion of Community Mutual and acquisition of Community
by the Holding Company shall be referred to as the "Conversion". Terms not
otherwise defined in this letter shall have the meanings assigned to them in the
Amended and Restated Plan of Conversion adopted by the Board of Directors of
Community Mutual on January 7, 1999 (the "Plan").
In connection with our opinions, we have reviewed copies of applications
filed by Community Mutual and the Holding Company with the Administrator, North
Carolina Savings Institutions Division, to effect the Conversion (the
"Applications"), Chapters 54C and 105 of the North Carolina General Statutes,
and applicable federal laws, rules and regulations, including the Internal
Revenue Code of 1986, as amended ("Code"). We have examined the Plan, Community
Mutual's existing Certificate of Incorporation and Bylaws, the Second Amended
Certificate of Incorporation for Community, the Bylaws for Community, the
corporate minutes approving the Conversion and related records of Community
Mutual. We have also examined the Holding Company's Articles of Incorporation,
Bylaws, corporate minutes approving the Conversion and related records. In
addition, we have examined certificates of
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 2
officials of Community Mutual, Community and the Holding Company, the
Registration Statement of the Holding Company on Form SB-2, which the Holding
Company intends to file with the Securities and Exchange Commission on or about
January 15, 1999 (the "Registration Statement") containing a proposed Prospectus
(hereinafter referred to as the "Prospectus") and such other documents as we
have deemed necessary or appropriate for purposes of giving the opinions set
forth in this letter. We have assumed the authenticity of all documents
presented to us as originals, the conformity to the originals of all documents
presented to us as copies, and the genuineness of all signatures of individuals,
and we know of no reason such assumptions are unwarranted for purposes of the
opinions expressed herein. We have assumed that all statements made in the
above-described documents are accurate and complete, and will be accurate and
complete at all times from now through the consummation of the Conversion. We
have not independently verified any factual matter relating to the Conversion in
connection with the preparation of our opinions herein and, accordingly, such
opinions do not take into account any matters not set forth herein which might
have been disclosed by independent verification. We have further assumed that
the Conversion will be consummated pursuant to the terms of the Plan.
In issuing the opinions set forth below, we have also assumed the accuracy
of the following representations of Community Mutual:
1. The fair market value of the deposit accounts and the interest in the
Liquidation Account received by each Eligible Account Holder and
Supplemental Eligible Account Holder in Community pursuant to the
Conversion will, in each instance, be equal to the fair market value
of the deposit accounts and the proprietary interest of each such
Eligible Account Holder and Supplemental Eligible Account Holder in
Community Mutual surrendered in the Conversion. The aggregate fair
market value of the deposit accounts and interests in the Liquidation
Account held by Eligible Account Holders as of the close of business
on the Eligibility Record Date will equal or exceed 99% of the
aggregate fair market value of all deposit accounts in Community
Mutual (including accounts of less than $50) as of the close of
business on that date. The aggregate fair market value of the deposit
accounts and interests in the Liquidation Account held by Supplemental
Eligible Account Holders, officers and directors of Community Mutual
and their associates as of the close of business on the Supplemental
Eligibility Record Date will equal or exceed 99% of the aggregate fair
market value of all deposit accounts in Community Mutual (including
accounts of less than $50) as of the close of business on that date.
2. The Subscription Rights to purchase Conversion Stock received in the
Conversion by each recipient have no fair market value. This
assumption is based upon your representation and the opinion of
Ferguson & Company that such Subscription Rights
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 3
have no fair market value because they will be acquired by recipients
without cost, are nontransferable and afford the recipients the right
only to purchase Conversion Stock at a price equal to its estimated
fair market value as of the date such rights are issued, which will be
the same price paid by all purchasers in the Conversion.
3. Immediately following the Conversion, the Eligible Account Holders and
Supplemental Eligible Account Holders will own all of the outstanding
interests in the Liquidation Account and will own such interests
solely by reason of their ownership of deposits and proprietary
interests in Community Mutual on the Eligibility Record Date and
Supplemental Eligibility Record Date, respectively. Pursuant to the
Plan, no additional interests in the Liquidation Account shall be
issued following the Conversion.
4. Immediately following the consummation of the Conversion, Community
will possess the same assets and liabilities as Community Mutual held
immediately before the Conversion, plus proceeds from the sale of
Conversion Stock less proceeds retained by the Holding Company, less
assets used to pay expenses incurred in the Conversion. Assets of
Community Mutual used to pay expenses of the Conversion and all
distributions (except for regular, normal interest payments made by
Community Mutual immediately before the Conversion) in the aggregate
will constitute less than 1% of the net assets of Community Mutual.
5. Except for Community Mutual's agreement to sell all of Community's
issued and outstanding common stock to the Holding Company in the
Conversion, at the time of the Conversion, Community Mutual will not
have outstanding any warrants, options, convertible securities, or any
other type of right pursuant to which any person could acquire stock
in Community Mutual.
6. Community has no plan or intention to reacquire any of its common
stock issued to the Holding Company in the Conversion. Community has
no plan or intention to issue additional shares of its common stock
following the Conversion. The common stock of Community issued to the
Holding Company in the Conversion will not be callable or subject to a
put option.
7. Community has no plan or intention to sell or otherwise dispose of any
of the assets of Community Mutual acquired in the Conversion, except
for dispositions made in the ordinary course of business.
8. The liabilities of Community Mutual assumed by Community and the
liabilities, if any, to which the transferred assets are subject were
incurred by Community Mutual in the ordinary course of its business
and are associated with the assets transferred.
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 4
9. Following the Conversion, Community will continue the historic
business of Community Mutual, will use a significant portion of
Community Mutual's historic business assets in Community's business,
and will continue to engage in the same business in substantially the
same manner as engaged in by Community Mutual before the Conversion.
10. Community Mutual and Community (treated as one entity for purposes of
this representation) and the Holding Company will each pay their own
expenses attributable to the Conversion.
11. Community Mutual is not under the jurisdiction of a court as a debtor
in (i) a bankruptcy proceeding or (ii) a receivership, foreclosure, or
similar proceeding in a federal or state court.
12. None of the compensation received by an employee of Community Mutual
or Community who is also an Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member will be separate consideration
for, or allocable to, his or her status as an Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member. None of the
interests in the Liquidation Account of Community received by an
employee of Community Mutual or Community who is an Eligible Account
Holder or Supplemental Eligible Account Holder will be separate
consideration for, or allocable to, any employment agreement or
arrangement. All compensation paid to Eligible Account Holders and
Supplemental Eligible Account Holders who are also employees of
Community Mutual or Community will be for services actually rendered
and commensurate with amounts paid to third parties bargaining at
arm's-length for similar services. Officers, directors and other
employees may in the future be issued restricted common stock of the
Holding Company and options to purchase shares of the Common Stock of
the Holding Company in exchange for future services pursuant to the
proposed Management Recognition Plan and Stock Option Plan described
in the Prospectus.
13. No Eligible Account Holder or Supplemental Eligible Account Holder
will be excluded from participating in the Liquidation Account.
14. The Holding Company has no plan or intention to redeem or otherwise
acquire any of the Conversion Stock to be issued pursuant to the
Conversion, except as disclosed in the Prospectus regarding possible
purchases to fund the ESOP, MRP and stock option plans. The Holding
Company has no plan or intention to sell or otherwise dispose of the
common stock of Community received by it in the Conversion. The
Conversion Stock issued in the Conversion will not be callable or
subject to a put option.
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 5
15. At the time of Conversion, the fair market value of the assets of
Community Mutual on a going-concern basis will equal or exceed the
amount of its liabilities plus the amount of liabilities to which its
assets are subject. Immediately before the Conversion, Community
Mutual will have a positive net worth.
16. No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders or any other grantee of
Subscription Rights in lieu of (i) Subscription Rights for Conversion
Stock, or (ii) an interest in the Liquidation Account of Community.
17. There is no plan or intention for Community to be liquidated or merged
with another corporation following the Conversion.
18. The Conversion described herein is motivated by valid business
purposes and not by tax avoidance purposes.
19. After the Conversion, Community will continue the corporate existence
and business of Community Mutual with only the following changes:
(i) An amended and restated Certificate of Incorporation to allow for
the issuance of capital stock of Community, and
(ii) New corporate Bylaws.
20. There exists no intercorporate indebtedness between Community Mutual
and Community (treated as one entity for purposes of this
representation) and the Holding Company, that was issued, acquired, or
will be settled at a discount.
21. In the Conversion, the Holding Company will acquire 100% of the issued
and outstanding common stock of Community.
22. Neither Community Mutual and Community (treated as one entity for
purposes of this representation) nor the Holding Company is a
regulated investment company, a real estate investment trust or a
corporation 50% or more of the value of whose assets are stock and
securities and 80% or more of the value of whose total assets are held
for investment. In making the 50-percent and 80-percent determinations
under the preceding sentence, stock and securities in any subsidiary
corporation shall be disregarded and the parent corporation shall be
deemed to own its ratable share of the subsidiary's assets, and a
corporation shall be considered a subsidiary if the parent owns
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 6
50 percent or more of the combined voting power of all classes of
stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of stock outstanding. In determining total
assets there shall be excluded cash and cash items (including
receivables) and Government securities.
Based upon the foregoing assumptions, our opinions with respect to the
federal and North Carolina income tax consequences of the Conversion are as
follows (for purposes of the opinions set forth below, Eligible Account Holders
shall include, if applicable pursuant to the Plan, Supplemental Eligible Account
Holders):
1. The Conversion of Community Mutual from a North Carolina-chartered
mutual savings bank to a North Carolina-chartered stock savings bank
will qualify as a reorganization within the meaning of Section 368(a)
of the Code, and neither Community Mutual nor Community will recognize
any gain or loss as a result of such reorganization. Revenue Ruling
80-105, 1980-1 C.B. 78. Community Mutual in its form as a North
Carolina-chartered mutual savings bank and Community in its form as a
North Carolina-chartered stock savings bank will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
2. Community's basis in each of Community Mutual's assets will be the
same as Community Mutual's basis immediately prior to the Conversion.
Section 362(b) of the Code.
3. No gain or loss will be recognized by the Holding Company upon receipt
of money in exchange for the shares of the Conversion Stock issued
pursuant to the exercise of the Subscription Rights issued therefor.
Section 1032(a) of the Code.
4. No gain or loss will be recognized by Community upon receipt of money
from the Holding Company in exchange for the shares of its common
stock to be issued to the Holding Company in the Conversion. Section
1032(a) of the Code.
5. The holding period of the Community assets after the Conversion will
include the period during which the assets were held by Community
Mutual prior to the Conversion. Section 1223(2) of the Code.
6. Gain or loss, if any, will be realized by an Eligible Account Holder
on the exchange of such person's deposit account and proprietary
interest in Community Mutual for (i) a withdrawable deposit account in
Community in the same dollar amount as such person's deposit account
in Community Mutual immediately prior to the Conversion, (ii) such
person's interest in the Liquidation Account of Community, and (iii)
Subscription Rights
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 7
to purchase the Conversion Stock. Such gain, if any, will be
recognized by an Eligible Account Holder only to the extent of the
fair market value of such person's interest in the Subscription Rights
received. Section 1001 of the Code. You have represented to us that
the Subscription Rights to purchase Conversion Stock have no fair
market value. Accordingly, gain recognized by an Eligible Account
Holder as a result of the Conversion is limited to an amount not in
excess of the fair market value of such person's interest in the
Subscription Rights received in the Conversion. Paulsen v.
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Commissioner, 469 U.S. 131, 139 (1985), quoting Society for Savings v.
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Bowers, 349 U.S. 143, 150 (1955).
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7. The basis of the deposit account in Community received by an Eligible
Account Holder will be the cost of such deposit account. The cost
basis of such deposit account in Community (i) will be equal to the
fair market value of such deposit account in Community and (ii) will
be equal to such person's basis in his or her deposit account in
Community Mutual exchanged therefor. Section 1012 of the Code.
8. The basis of the interest in the Liquidation Account received by an
Eligible Account Holder will be equal to the cost of such interest.
The cost of the Liquidation Account will be the fair market value of
the proprietary interest in Community Mutual given for the Liquidation
Account. Section 1012 of the Code. An interest in the Liquidation
Account will be deemed to have no value, or nominal, if any, fair
market value. Paulsen v. Commissioner, 469 U.S. 131, 139 (1985)
-----------------------
(quoting Society for Savings v. Bowers, 349 U.S. 143, 150 (1955)).
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9. The basis of Subscription Rights received by an Eligible Account
Holder will be zero, increased by the gain, if any, recognized on
their receipt. Section 1012 of the Code. Gain is recognized only to
the extent of the fair market value of the Subscription Rights. You
have represented to us that the Subscription Rights to purchase
Conversion Stock have no fair market value. Accordingly, the basis of
the Subscription Rights received by an Eligible Account Holder will be
zero.
10. The basis of the Conversion Stock purchased pursuant to the exercise
of Subscription Rights will be the purchase price thereof. Section
1012 of the Code.
11. The holding period of the Conversion Stock acquired through the
exercise of Subscription Rights will commence upon the date of such
exercise. Section 1223(6) of the Code.
12. For purposes of Section 381 of the Code, Community will be treated
just as Community Mutual would have been treated had there been no
reorganization of Community Mutual
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 8
from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank. Accordingly, and with regard
only to the reorganization of Community Mutual into Community, the tax
attributes of Community Mutual enumerated in Section 381(c) of the
Code shall be taken into account by Community as if there had been no
reorganization. Treasury Regulation (S)1.381(b)(1)(a)(2).
13. For North Carolina income tax purposes, the Conversion will be treated
in a manner identical to the way the Conversion is treated pursuant to
the Code. Sections 105-130.3, 105-130.5, 105-134.5, and 105-134.6 of
the North Carolina General Statutes.
No opinion is expressed with regard to the following:
1. The tax treatment of any aspect of the Conversion that is not
specifically set forth and addressed in the foregoing opinions.
2. The status, including without limitation, the tax treatment, of
Community Mutual's and Community's bad-debt reserves before or after
the Conversion.
3. For purposes of Section 381 of the Code, the effect upon Community
Mutual and Community of the acquisition of all of the common stock of
Community by the Holding Company in the Conversion.
The opinions herein expressed represent only our best judgments with
respect to the interpretation of published material and are not binding upon the
Internal Revenue Service or the courts. Our opinions are limited to matters of
North Carolina and federal law.
The opinions contained herein are rendered solely for your benefit and for
the benefit of purchasers of Conversion Stock and may not be used for any other
purpose whatsoever or relied upon by, published or communicated to any other
party without our prior written consent in each instance. We hereby consent to
the inclusion of this letter as an exhibit to the Applications being filed by
Community Mutual with the Administrator and as an exhibit to the Registration
Statement.
Sincerely,
BROOKS, PIERCE, McLENDON
HUMPHREY & LEONARD, L.L.P.
By: /s/ Howard L. Williams
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Howard L. Williams