EXHIBIT 8.1
FEDERAL TAX OPINION OF PEABODY & BROWN
[PEABODY & BROWN LETTERHEAD]
October 31, 1997
Board of Directors
Ninth Ward Savings Bank, FSB
400 Delaware Avenue
Wilmington, Delaware 19801
Re: Certain Federal Income Tax Consequences Relating to Proposed
Conversion
Ladies and Gentlemen:
In accordance with your request, set forth hereinbelow is the opinion of
this firm relating to certain federal income tax consequences of the proposed
conversion of Ninth Ward Savings Bank (the "Bank") from a federally-chartered
mutual savings and loan bank to a federally-chartered stock savings and loan
bank (the "Converted Bank") and the concurrent acquisition of 100% of the
outstanding capital stock of the Converted Bank by Delaware First Financial
Corporation (the "Company"), a Delaware corporation formed at the direction of
the Board of Directors of the Bank to become the parent holding company of the
Converted Bank and, thereafter, the Bank.
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including but not limited
to the Plan of Conversion as adopted by the Board of Directors of the Bank on
June 30, 1997 (the "Plan") as amended on September 17, 1997; the federal mutual
charter and bylaws of the Bank; the articles of incorporation and bylaws of the
Company; the Affidavit of Representations dated October 31, 1997 provided to us
by the Bank (the "Affidavit"), and the Prospectus (the "Prospectus") included in
Effective Amendment No. 1 to the Registration Statement on Form SB-2 expected to
be filed with the Securities and Exchange Commission ("SEC") on October 31, 1997
(the "Registration Statement"). In such examination, we have assumed, and have
not independently verified, the genuineness of all signatures on original
documents where due execution and delivery are requirements to the effectiveness
thereof. Terms used but not defined herein, whether capitalized or not, shall
have the same meaning as defined in the Plan.
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 2
BACKGROUND
Based solely upon our review of such documents, and upon such information
as the Bank has provided to us (which we have not attempted to verify in any
respect), and in reliance upon such documents and information, we set forth
hereinbelow a general summary of the relevant facts and proposed transactions,
qualified in its entirety by reference to the documents cited above.
The Bank is a federally-chartered mutual savings and loan association with
its sole office located in Wilmington, Delaware, and which is in the process of
converting to a federally chartered stock savings and loan association. The Bank
was chartered by the State of Delaware in 1922 under the name Ninth Ward
Building and Loan Association. In 1992, the name was changed to Ninth Ward
Savings & Loan Association. In 1992, the Bank also adopted a federal charter as
well as its present name and received federal insurance of its deposit accounts.
It is currently a member of the Federal Home Loan Bank ("FHLB") System and its
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
the applicable limits. The Bank is subject to comprehensive regulation and
supervision by the FDIC and the Office of Thrift Supervision ("OTS"), and to
examination by the OTS. The Bank's sole office serves New Castle County,
Delaware.
The principal business of the Bank historically has consisted of attracting
deposits from the general public and investing these deposits in loans secured
by first mortgages on one-to four-family("single-family") residences in the
Bank's market area. The Bank derives its income principally from interest earned
on loans and, to a lesser extent, interest earned on mortgage-backed securities
and investment securities and noninterest income. Funds for these activities are
provided principally by operating revenues, deposits and repayments of
outstanding loans and investment securities and mortgage-backed securities. At
June 30, 1997, the Bank had total assets of $112.5 million, deposits of $78.3
million, and retained earnings of $6.0 million.
As a federally-chartered mutual savings and loan Bank, the Bank has no
authorized capital stock. Instead, the Bank, in mutual form, has a unique equity
structure. A savings depositor. of the Bank is entitled to payment of interest
on his account balance as declared and paid by the Bank, but has no right to a
distribution of any earnings of the Bank except for interest paid on his
deposit. Rather, such earnings become retained earnings of the Bank.
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 3
However, a savings depositor does have a right to share pro rata, with
respect to the withdrawal value of his respective savings account, in any
liquidation proceeds distributed if the Bank is ever liquidated. Further,
savings depositors and certain borrowers are members of the Bank and thereby
have voting rights in the Bank. Under the Bank's federal mutual charter and
bylaws, each savings depositor is entitled to cast one vote for each $100 or
fraction thereof held in a withdrawable deposit account of the Bank. Also under
such mutual charter, no member is entitled to cast more than 1,000 votes. All of
the interests held by a savings depositor in the Bank cease when such depositor
closes his accounts with the Bank.
The Company was incorporated in September 1997 under the laws of the State
of Delaware to act as the savings and loan holding company of the Converted Bank
upon consummation of the Stock Conversion. Prior to consummation of the Stock
Conversion, the Company has not engaged and is not expected to engage in any
material operations. After the Conversion, the Company's principal business will
be overseeing the business of the Bank and investing the portion of the net
Stock Conversion proceeds retained by it. The Company has filed an application
with the OTS to register as a savings and loan holding company.
PROPOSED TRANSACTION
The Board of Directors of the Bank has decided that in order to increase
the Bank's net worth, support future savings growth, increase the amount of
funds available for lending and investment, provide greater resources for the
expansion of customer services, and facilitate future expansion, especially
commercial loans and home equity loans, it would be advantageous for the Bank to
convert from a federally-chartered mutual savings and loan association to a
federally-chartered stock savings and loan association. In addition the Board of
Directors intends to implement stock option plans and other stock benefit plans
following the Conversion in order to better attract and retain qualified
directors and officers. The purpose of the Stock Conversion is to provide the
Bank with additional operating flexibility and enhance its ability to provide a
full range of banking products and services to its community. It is the further
desire of the Board of Directors to reorganize the Converted Bank as the wholly
owned subsidiary of the Company to enhance flexibility of operations,
diversification of business opportunities and financial capability for business
and regulatory purposes and to enable the Bank to compete more effectively with
other financial service organizations.
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 4
Accordingly, pursuant to the Plan, the Bank will undergo the Stock
Conversion whereby it will be converted from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings and loan
association. As part of the Stock Conversion, the Bank will amend its existing
mutual savings and loan Bank charter and bylaws to read in the form of a Federal
Stock Charter and Bylaws. The Converted Bank will then issue to the Company
200,000 shares of the Converted Bank s common stock, representing all of the
shares of capital stock to be issued by the Converted Bank in the Conversion, in
exchange for payment by the Company of the amount of the net proceeds realized
by the Company from the sale of the Common Stock under the Plan as is necessary
to increase the Converted Bank's regulatory tangible capital to at least 10% of
the Converted Bank's adjusted total assets or such other portion of the
aggregate net proceeds as may be authorized or required by the OTS.
Also pursuant to the Plan, the Company will offer its shares of Common
Stock for sale in a Subscription Offering. Shares of Common Stock remaining, if
any, may then be offered to the general public in a Community Offering. Shares
of the Common Stock not otherwise subscribed for in the Subscription and
Community Offerings may be offered at the discretion of the Company to certain
members of the general public as part of a community offering on a best efforts
basis by a selling group of selected broker-dealers.
The purchase price per share will be $10 and the total number of shares of
Common Stock to be offered and sold pursuant to the Plan will be up to
1,006,000. The aggregate purchase price for the all the shares will be equal to
an amount that is within a Valuation Range which will vary from 15% below to 15%
above the estimated pro forma market value and which may also be in the range
that is 15% above the high end of the Valuation Range. Pursuant to the Plan, all
such shares of Common Stock will be issued and sold at a uniform price per
share. The Stock Conversion, including the sale of newly issued shares of the
stock of the Converted Bank to the Company, will be deemed effective
concurrently with the closing of the sale of the Common Stock.
Under the Plan and in accordance with regulations of the OTS, the shares of
Common Stock will first be offered through the Subscription Offering pursuant to
non-transferable subscription rights on the basis of preference categories in
the following order of priority:
(1) Eligible Account Holders;
(2) Tax-Qualified Employee Stock Benefit Plans;
(3) Supplemental Eligible Account Holders; and
(4) Other Members.
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 5
However, any shares of Common Stock sold in excess of the maximum of the
Valuation Range may be first sold to Tax-Qualified Employee Stock Benefit Plans
set forth in category (2) above.
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered in the Community Offering in the following order of priority:
(a) Natural persons and trusts of natural persons who are permanent
Residents of the Bank's Local Community; and
(b) The general public.
Shares not sold in the Subscription Offering and the Community Offering, if any,
may thereafter be offered for sale to certain members of the general public as
part of a community offering on a best efforts basis by a selling group of
selected broker-dealers. The sale of such shares in the Subscription Offering,
Community Offering, and as sold through the selected broker-dealers would be
consummated at the same time.
The Plan also provides for the establishment of a Liquidation Account by
the Converted Bank for the benefit of all Eligible Account Holders and
Supplemental Eligible Account Holders in an amount equal to the net worth of the
Bank as of the date of the latest statement of financial condition contained in
the final prospectus issued in connection with the Conversion. The establishment
of the Liquidation Account will not operate to restrict the use or application
of any of the net worth accounts of the Converted Bank, except that the
Converted Bank may not declare or pay cash dividends on or repurchase any of its
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 6
stock if the result thereof would be to reduce its net worth below the amount
required to maintain the Liquidation Account. All such account holders will have
an inchoate interest in a proportionate amount of the Liquidation Account with
respect to each savings account held and will be paid by the Converted Bank in
event of liquidation prior to any liquidating distribution being made with
respect to capital stock. Under the Plan, the Bank's Conversion shall not be
deemed to be a liquidation of the Converted Bank for purposes of distribution of
the Liquidation Account. Instead, upon consummation of the Bank Conversion, the
Liquidation Account, together with the related rights and obligations of the
Converted Bank, shall be assumed by the Bank.
The Stock Conversion will not interrupt the business of the Bank. The
Converted Bank will, after the Conversion, engage in the same business as that
of the Bank immediately prior to the Stock Conversion, and will continue to be
subject to regulation and supervision by the OTS and the FDIC. Further, the
deposits of the Converted Bank will continue to be insured by the FDIC. Each
depositor will retain a withdrawable savings account or accounts equal in dollar
amount to, and on the same terms and conditions as, the withdrawable account or
accounts at the time of Stock Conversion except to the extent funds on deposit
are used to pay for Common Stock purchased in connection with the Stock
Conversion. All loans of the Bank will remain unchanged and retain their same
characteristics in the Converted Bank immediately following the Stock
Conversion.
Following the Stock Conversion, voting rights in the Converted Bank will
rest exclusively with the sole holder of stock in the Converted Bank, which will
be the Company. Following the Bank Conversion, voting rights in the Bank will
similarly be vested in the Company. Voting rights in the Company, both after the
Stock Conversion and after the Bank Conversion, will be vested in the holders of
the Common Stock.
The Plan must be approved by the OTS and by an affirmative vote of at least
a majority of the total votes eligible to be cast at a meeting of the Bank's
members called to vote on the Plan.
Immediately prior to the Conversion, the Bank will have a positive net
worth determined in accordance with generally accepted accounting principles.
OPINION '
Based on the foregoing and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed transaction.
1. The Stock Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986,
as amended (the "Code"), and no gain or loss will be recognized to
either the Bank or the Converted Bank as a result of the Stock
Conversion (see Rev. Rul. 80-105, 1980-1 C.B. 78).
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 7
2. The assets of the Bank will have the same basis in the hands of the
Converted Bank as in the hands of the Bank immediately prior to the
Stock Conversion (Section 362(b) of the Code).
3. The holding period of the assets of the Bank to be received by the
Converted Bank will include the period during which the assets were
held by the Bank prior to the Stock Conversion (Section 1223(2) of the
Code).
4. No gain or loss will be recognized by the Converted Bank upon its
receipt of money from the Company in exchange for shares of common
stock of the Converted Bank (Section 1032(a) of the Code). The Company
will be transferring solely cash to the Converted Bank in exchange for
all the outstanding capital stock of the Converted Bank and therefore
will not recognize any gain or loss upon such transfer. (Section
351(a) of the Code; see Rev. Rul. 69-357, 1969-1 C.B. 101).
5. No gain or loss will be recognized by the Company upon its receipt of
money in exchange for shares of the Common Stock (Section 1032(a) of
the Code).
6. No gain or loss will be recognized by the Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members of the Bank
upon the issuance to them of deposit accounts in the Converted Bank in
the same dollar amount and on the same terms and conditions in
exchange for their deposit accounts in the Bank held immediately prior
to the Stock Conversion. (Section 1001(a) of the Code; Treas.
Reg.ss.1.1001 - 1 (a)).
7. The tax basis of the savings accounts of the Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members in the
Converted Bank received as part of the Stock Conversion will equal the
tax basis of such account holders' corresponding deposit accounts in
the Bank surrendered in exchange therefor (Section 1012 of the Code).
8. Each depositor of the Bank will recognize gain upon the receipt of his
or her respective interest in the Liquidation Account established by
the Converted Bank pursuant to the Plan and the receipt of his or her
subscription rights deemed to have been received for federal income
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 8
tax purposes, but only to the extent of the excess of the combined
fair market value of a depositor's interest in such Liquidation
Account and subscription rights over the depositor's basis in the
former interests in the Bank other than deposit accounts. Persons who
subscribe in the Stock Conversion but who are not depositors of the
Bank will recognize gain upon the receipt of subscription rights
deemed to have been received for federal income tax purposes, but only
to the extent of the excess of the fair market value of such
subscription rights over such person's former interests in the Bank,
if any. Any such gain realized in the Stock Conversion would be
subject to immediate recognition.
9. The basis of each account holder's interest in the Liquidation Account
received in the Stock Conversion and to be established by the
Converted Bank pursuant to the Stock Conversion will be equal to the
value, if any, of that interest.
10. No gain or loss will be recognized upon the exercise of a subscription
right in the Stock Conversion. (Rev. Rul. 56-572, 1956-2 C. B. 182).
11. The basis of the shares of Common Stock acquired in the Stock
Conversion will be equal to the purchase price of such shares,
increased, in the case of such shares acquired pursuant to the
exercise of subscription rights, by the fair market value, if any, of
the subscription rights exercised (Section 1012 of the Code).
12. The holding period of the Common Stock acquired in the Stock
Conversion pursuant to the exercise of subscription rights will
commence on the date on which the subscription rights are exercised
(Section 1223 (6) of the Code). The holding period of the Common Stock
acquired in the Community Offering will commence on the date following
the date on which such stock is purchased (Rev. Rul. 70- 598, 1970-2
C.B. 168; Rev. Rul. 66-97, 1966-1 C.B. 190).
13. The Bank, after Conversion, will succeed to and take into account the
earnings and profits or deficit in earnings and profits of the Bank
prior to the Conversion as of the date of Conversion (Section 381 of
the Code).
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 9
14. Immediately after the Conversion, the Bank will succeed to the bad
reserve accounts of the Bank prior to the Conversion and the bad debt
reserves will have the same character in the Bank's hands after
Conversion as if no distribution or transfer had occurred. (Section
381 of the Code).
15. The creation of the liquidation account will have no effect on the
Bank's taxable income, deductions or addition to reserve for bad
debts.
SCOPE OF OPINION
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any state,
local, foreign or other federal tax considerations. If any of the information
upon which we have relied is incorrect, or if changes in the relevant facts
occur after the date hereof, our opinion could be affected thereby. Moreover,
our opinion is based on the case law, Code, Treasury Regulations thereunder and
Internal Revenue Service rulings as they now exist. These authorities are all
subject to change, and such change may be made with retroactive effect. We can
give no assurance that, after such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion subsequent to
consummation of the Stock Conversion. Prior to that time, we undertake to update
or supplement our opinion in the event of a material change in the federal
income tax consequences set forth above and to file such revised opinion as an
exhibit to the Registration Statement and the Bank's Application for Conversion
on Form AC ("Form AC"). This opinion is not binding on the Internal Revenue
Service and there can be no assurance, and none is hereby given, that the
Internal Revenue Service will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service.
Our opinion is based in part on the assumption that the exercise price of
the subscription rights to purchase Common Stock will be approximately equal to
the fair market value of those shares of Common Stock at the time of the
completion of the proposed Stock Conversion. With respect to the subscription
rights, the Bank has received an opinion of FinPro, Inc. which, based on certain
assumptions, concludes that the subscription rights to be received by Eligible
Account Holders of the Bank and other eligible subscribers do not have any
Board of Directors
Ninth Ward Savings Bank, FSB
October 31, 1997
Page 10
economic value at the time of distribution or at the time the subscription
rights are exercised, whether or not a public offering takes place. Such opinion
is based on the fact that such rights are: (i) acquired by the recipients
without payment therefor, (ii) non-transferable, (iii) of short duration, and
(iv) afford the recipients the right only to purchase shares at a price equal to
their estimated fair market value, which will be the same price at which shares
of Common Stock for which no subscription right is received in the Subscription
Offering will be offered in the Community Offering. If the subscription rights
granted to Eligible Account Holders or other eligible subscribers are deemed to
have an ascertainable value, receipt of such rights would be taxable only to
those Eligible Account Holders of the Bank or other eligible subscribers who
exercise the subscription rights in an amount equal to such value (either as a
capital gain or ordinary income), and the Bank could recognize gain on such
distribution.
CONSENTS
We hereby consent to the filing of this opinion with the OTS as an exhibit
to the Application H-(e)1-S filed by the Company with the OTS in connection with
the Conversion and the reference to our firm in the Application H-(e)l-S under
Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and the
OTS as exhibits to the Registration Statement and Form AC, respectively, and the
reference to our firm in the Prospectus, which is a part of both the
Registration Statement and the Form AC, under the headings "The Conversion --
Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank --
Tax Effects" and "Tax Opinion."
Very truly yours,
/s/ Peabody & Brown