[LETTERHEAD OF KPMG PEAT MARWICK LLP]
EXHIBIT 8.1
October 27, 1997
PRIVATE & CONFIDENTIAL
The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
Olympia, Washington
You have requested the opinions of KPMG Peat Marwick LLP ("KPMG") regarding
certain federal income tax consequences of two integrated transactions described
below. All section references herein are, unless otherwise specified, to the
Internal Revenue Code of 1986, as amended (the "Code").
In rendering the tax opinions contained herein, we have examined such corporate
records, certificates and other documents as we have considered necessary or
appropriate. In our examination, we have assumed the genuineness of all
signatures, the legal capacity of all natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such copies.
In order to facilitate a full and complete understanding of the FACTS AND
REPRESENTATIONS upon which our opinions would be based, prior to finalization of
this opinion, a draft dated October 15, 1997 was circulated for review and
concurrence by Heritage Financial Corporation, MHC. The opinions contained
herein are based solely upon the FACTS AND REPRESENTATIONS as contained herein.
If any of the FACTS or REPRESENTATIONS are not correct or complete it is
imperative that we be so informed in writing immediately as such could cause us
to change our opinions.
FACTS
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Heritage Financial Corporation, MHC (the "Mutual Holding Company") is a state-
chartered mutual holding company organized in the state of Washington. The
Mutual Holding Company maintains its books on the accrual method of accounting
and files a tax return on a June 30 year end basis. As a mutual holding
company, the Mutual Holding Company has no capital stock.
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
Heritage Savings Bank (the "Bank") is a state-chartered stock savings bank
organized in Washington. The Mutual Holding Company owns approximately 66.3
percent of the issued and outstanding stock of the Bank. The remaining 33.7
percent of the Bank's stock is held by the public.
The Mutual Holding Company and the Bank were organized on January 31, 1994 in
connection with the reorganization of Heritage Bank, a Mutual Savings Bank, (the
"Mutual Bank") from a state mutual savings bank into the Mutual Holding Company
(the "1994 Reorganization"). In June of 1993 the Bank received rulings from the
Internal Revenue Service (the "Service") holding that the 1994 Reorganization
constituted a tax-free transaction under Section 351 of the Code. The Bank
issued common stock to the Mutual Holding Company in exchange for substantially
all of the assets and all of the liabilities of the Mutual Bank. As part of the
1994 Reorganization, the Bank issued a portion of its stock to the public in
exchange for cash whereby immediately after the 1994 Reorganization the public
owned approximately 33.3 percent of the outstanding Bank Stock and the Mutual
Holding Company owned the remaining 66.7 percent.
The principal business of the Bank is the acceptance of savings deposits from
the general public and originating for sale or investment purposes first
mortgage loans on residential properties located in western Washington. The
Bank also makes residential construction loans, income property loans, business
loans, consumer loans and second mortgage loans. The Bank's income is derived
largely from interest and fees in connection with its lending activities. Its
principal expenses are interest paid on savings deposits and operating expenses.
Currently, the management of the Bank and the Mutual Holding Company believe it
would be in their best interest, as well as the best interest of their
stockholders and members (respectively) to operate in the corporate structure
specified below. The proposed transactions will result in the Bank being wholly
owned by Heritage Financial Corporation, a capital stock corporation organized
under the state law of Washington (the "Holding Company"), which is a more
common structure and form of ownership than a mutual holding company. The new
corporate structure would also provide greater organizational flexibility, and
enable the resulting institutions to increase their equity capital base
available for expansion of services, facilities, possible future acquisitions of
other financial institutions, possible diversification into other related
financial services activities, and enhance their ability to render services to
the public in a competitive manner. In addition, the proposed transactions will
result in the raising of additional
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
capital for the Bank and the Holding Company. As well, the proposed transactions
have been structured to re-unite the accumulated earnings and profits tax
attribute retained by the Mutual Holding Company with the retained earnings of
the Bank through a tax-free reorganization. This would increase the Bank's
ability to pay dividends in the future.
The Bank and the Mutual Holding Company have adopted the Amended and Restated
Plan of Conversion and Reorganization of Heritage Financial Corporation, MHC
referred to herein as the "Plan of Conversion". The Mutual Holding Company and
the Bank represent that the Plan of Conversion shall be submitted together with
all requisite material to the Washington Department of Financial Institutions,
Division of Banks (the "Division"), the Federal Deposit Insurance Corporation,
and the Board of Governors of the Federal Reserve System or the Federal Reserve
Bank of San Francisco.
For valid business reasons, as described above and in the prospectus to be used
in the public offerings of Holding Company Stock described herein
("Prospectus"), the present corporate structure of the Mutual Holding Company
and the Bank will be changed pursuant to the following proposed transactions:
(1) The Bank will form the Holding Company as a new, wholly owned, first
tier subsidiary of the Bank.
(2) The Holding Company will form an interim corporation ("Interim Bank B")
as a new, wholly owned first tier subsidiary that is a state-chartered
stock bank.
(3) Pursuant to the Plan of Merger between the Mutual Holding Company and
the Bank, the Mutual Holding Company will convert from the mutual form
to a state interim stock bank ("Interim Bank A") and Interim Bank A will
immediately merge with and into the Bank with the Bank being the
surviving corporation ("Merger 1"). Pursuant to Merger 1, the common
stock of the Bank which was previously held by the Mutual Holding
Company will be canceled and eligible members of the Mutual Holding
Company will receive an interest in a liquidation account (the "Bank
Liquidation Interests") of the Bank in exchange for such member's
interest in the Mutual Holding Company.
The initial balance of the liquidation account will equal 66.31 percent
of the Bank's total shareholder equity as reflected in its June 30, 1997
statement of
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
financial condition, which is the latest statement of financial
condition expected to be contained in the Prospectus to be utilized in
the Mutual Holding Company's mutual-to-stock conversion (the
"Conversion") plus an amount equal to the aggregate amount of Bank
Common Stock dividends waived by the Mutual Holding Company since
January 1, 1994, when the Mutual Holding Company was formed, and the
amount of assets other than Bank Common Stock (approximately $120,000)
held by the Mutual Holding Company.
(4) Immediately following Merger 1, pursuant to the Plan of Reorganization
among the Bank, the Holding Company and Interim Bank B, Interim Bank B
will merge with and into the Bank, with the Bank surviving ("Merger 2").
Merger 2 will be completed in accordance with applicable federal and
state laws. The stock of the Bank held by the public, which then will
constitute all of the outstanding shares of the Bank, will automatically
be converted into common stock of the Holding Company ("Holding Company
Stock") based upon a exchange ratio which ensures that the public
shareholders will own, in the aggregate, approximately the same
percentage of stock of the Holding Company outstanding upon completion
of the Conversion as the percentage of the stock of the Bank owned by
them in the aggregate immediately prior to the consummation of the
Conversion, before giving effect to (a) cash paid in lieu of issuing
fractional shares of stock of the Holding Company, (b) an adjustment
downward to reflect the aggregate amount of Bank Common Stock dividends
waived by the Mutual Holding Company since January 1, 1994, when the
Mutual Holding Company was formed and the amount of assets other than
Bank Common Stock (approximately $120,000) held by the Mutual Holding
Company, and (c) any shares of stock of the Holding Company purchased by
such public stockholders in the offering described below.
(5) All of the shares of common stock of Interim Bank B held by the Holding
Company shall be converted into one share of common stock of the Bank
which will continue to be owned by the Holding Company. The shares of
Holding Company issued prior to the effective date of the conversion
shall be canceled.
(6) Simultaneously with the consummation of Merger 2, the Holding Company
will sell additional shares of Holding Company Stock, with priority
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
subscription rights granted to certain members of the Mutual Holding
Company at specified dates, and to tax qualified employee benefit plans,
directors, employees, the public stockholders of the Bank and members of
the public.
REPRESENTATIONS
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Representations related to the conversion of MHC into Interim Bank A:
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(1) The fair market value of the mutual interests in the Mutual Holding
Company will approximately equal the fair market value of the interest
in the liquidation account in Interim Bank A constructively received in
exchange therefor. All proprietary rights in the Mutual Holding Company
are being surrendered in the exchange.
(2) Immediately following such conversion, Interim Bank A will possess the
same assets and liabilities as the Mutual Holding Company held
immediately prior to the proposed transaction. Assets used to pay
expenses of the conversion and all distributions will in the aggregate
constitute less than one percent of the assets of the Mutual Holding
Company, net of liabilities associated with such assets. Following such
conversion, Interim Bank A will continue to engage in its business in
substantially the same manner as engaged in Mutual Holding Company prior
to such Conversion. Except for the Merger, as described above, Interim
Bank A has no plan or intention to sell or otherwise dispose of any of
its assets, except in the ordinary course of business.
(3) Compensation to be paid to the mutual owner-employees of Mutual Holding
Company will be commensurate with the amounts paid to third parties
bargaining at arm's length for similar services.
(4) The aggregate fair market value of the "qualifying deposits" entitled to
interests in the liquidation account to be established constructively by
Interim Bank A will equal or exceed 99 percent of the aggregate fair
market value of all savings accounts in Bank as of the close of business
on such date.
(5) No shares of Interim Bank A stock will be issued in the transaction.
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
(6) Holders of Mutual Holding Company equity interests will constructively
receive only interests in the liquidation account of Interim Bank A in
the conversion.
(7) Mutual Holding Company and Interim Bank A are corporations within the
meaning of Section 7701(a)(3) of the Code.
(8) Bank's savings depositors will pay expenses of the conversion solely
attributable to them, if any. Mutual Holding Company, the Stock
Association and the Association will pay their own expenses for the
transaction and will not pay any expenses solely attributable to the
savings depositors or to the Holding Company stockholders.
(9) The liabilities of Mutual Holding Company, if any, assumed by Interim
Bank A, plus the liabilities, if any, to which the transferred assets
are subject were incurred by Mutual Holding Company in the ordinary
course of its business.
(10) The Mutual Holding Company is not under the jurisdiction of a court in
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of
the Code.
(11) At the time of the proposed transaction, the fair market value of the
assets of Mutual Holding Company on a going concern basis will exceed
the amount of its liabilities plus the amount of liability to which its
assets are subject.
Representations related to Merger 1:
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(1) The fair market value of the Bank Liquidation Interests received by each
Mutual Holding Company member will approximately equal the fair market
value of the Mutual Holding Company liquidation interests surrendered in
Merger 1.
(2) To the best of the knowledge of management of the Mutual Holding
Company, there is no plan on the part of any members of the Mutual
Holding Company to reduce their ownership interest in the Bank
Liquidation Interests to an interest having a value, as of the date of
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
Merger 1, of less than 50 percent of the value of all of the formerly
outstanding liquidation interests of the Mutual Holding Company as of
the same date. For purposes of this representation, liquidation
interests of the Mutual Holding Company exchanged for cash or other
property, surrendered by dissenters or exchanged for cash in lieu of
fractional shares of Bank stock will be treated as outstanding Mutual
Holding Company liquidation interests on the date of Merger 1.
(3) The Bank has no plan or intention to reacquire any of the Bank
Liquidation Interests issued in Merger 1.
(4) The Bank has no plan or intention to sell or otherwise dispose of any of
the assets of the Mutual Holding Company acquired in the transaction,
except for the dispositions made in the ordinary course of business or
transfers described in Section 368(a)(2)(C) of the Code.
(5) The Liabilities of the Mutual Holding Company assumed by the Bank and
the liabilities to which the transferred assets of the Mutual Holding
Company are subject were incurred by the Mutual Holding Company in the
ordinary course of its business.
(6) Following the transaction the Bank will continue the historic business
of the Mutual Holding Company or use a significant portion of the Mutual
Holding Company's assets in a business and Bank will continue its
business in a significantly unchanged manner.
(7) The Bank, the Mutual Holding Company and the members of the Mutual
Holding Company will pay their respective expenses, if any, incurred in
connection with Merger 1.
(8) There is no intercorporate indebtedness existing between the Mutual
Holding Company and the Bank that was issued, acquired, or will be
settled at a discount.
(9) No two parties to Merger 1 are investment companies as defined in
Section 368(a)(2(F)(iii) and (iv) of the Code.
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
(10) The Mutual Holding Company is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of
the Code.
(11) The fair market value of the assets of the Mutual Holding Company
transferred to the Bank will equal or exceed the sum of the liabilities
assumed by the Bank plus the amount of liabilities, if any, to which the
transferred assets are subject.
Representations related to Merger 2:
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(1) The fair market value of the Holding Company Stock received by the Bank
shareholders will approximately equal the fair market value of the Bank
stock surrendered in Merger 2.
(2) To the best of the knowledge of management of the Bank, there is no plan
on the part of any Bank stockholders to reduce their ownership interest
in the Holding Company Stock to an interest having a value, as of the
date of Merger 2, of less than 50 percent of the value of all of the
formerly outstanding stock of the Bank as of the same date. For
purposes of this representation, stock of the Bank exchanged for cash or
other property, surrendered by dissenters or exchanged for cash in lieu
of fractional shares of Holding Company stock will be treated as
outstanding Bank stock on the date of Merger 2. Moreover, shares of the
Bank stock and shares of Holding Company Stock held by Bank shareholders
and otherwise sold, redeemed, or disposed of prior or subsequent to
Merger 2 will be considered in making this representation
(3) Following Merger 2, the Bank will hold at least 90 percent of the fair
market value of its net assets and at least 70 percent of the fair
market value of its gross assets and at least 90 percent of the fair
market value of Interim Bank B's net assets and at least 70 percent of
the fair market value of Interim Bank B's gross assets held immediately
prior to Merger. For purposes of this representation, amounts paid by
the Bank or Interim Bank B to dissenters, amounts paid by the Bank or
Interim Bank B to shareholders who receive cash or other property,
amount used by the Bank or Interim Bank B to pay reorganization
expenses, and all redemptions and distributions (except for regular,
normal dividends) made by the Bank will be included as
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
assets of the Bank or Interim Bank B, respectively, immediately prior to
the transaction.
(4) Prior to Merger 2, the Holding Company will be in control of Interim
Bank B within the meaning of Section 368(c) of the Code.
(5) The Bank has no plan or intention to issue additional shares of its
stock that would result in the Holding Company losing control of the
Bank within the meaning of Section 368(c) of the Code.
(6) The Holding Company has no plan or intention to reacquire any of its
stock issued in Merger 2.
(7) The Holding Company has no plan or intention to liquidate the Bank: to
merge the Bank with or into another corporation; to sell or otherwise
dispose of the Bank stock except for transfers of stock to a corporation
controlled by the Holding Company; or to cause the Bank to sell or
otherwise dispose of any of its assets or any of the assets acquired
form Interim Bank B, except for dispositions made in the ordinary course
of business or transfers of assets to a corporation controlled by the
Bank.
(8) Interim Bank B will have no liabilities assumed by the Bank, and will
not transfer to the Bank any assets subject to liabilities, in Merger 2.
(9) Following Merger 2, the Bank will continue its historic business or use
a significant portion of its historic assets in a business.
(10) The Holding Company, Interim Bank B, Bank and the shareholders of the
Bank will pay their respective expenses, if any, incurred in connection
with Merger 2.
(11) There is no intercorporate indebtedness existing between the Holding
Company and the Bank or between the Interim Bank B and that was issued,
acquired, or will be settled at a discount.
(12) In Merger 2, shares of the Bank stock representing control of the Bank,
as defined in Section 368(c) of the Code, will be exchanged solely for
voting stock of the Holding Company. For purposes of this
representation, shares
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
of Bank stock exchanged for cash or other property originating with the
Holding Company will be treated as outstanding Bank stock on the date of
Merger 2.
(13) At the time of Merger 2, the Bank will not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire stock in the Bank, if
exercised or converted would affect the Holding Company's acquisition or
retention of control of the Bank, as defined in Section 368(c) of the
Code.
(14) The Holding Company does not own, nor has it owned during the past five
years, any shares of the Bank stock.
(15) No two parties to Merger 2 are investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(16) On the date of Merger 2, the fair market value of the assets of the Bank
will exceed the sum of its liabilities, plus the amount of liabilities,
if any, to which the assets are subject.
(17) The Bank is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
ANALYSIS
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Momentary existence of Interim Bank A
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A question can be raised whether the brief existence of Stock Interim should be
respected. If the existence is not respected, Bank could be treated as
acquiring the Mutual Holding Company assets directly from MHC. However, because
the form of the state law mergers will be (a) merger of Mutual Holding Company
into Interim Bank A and (b) Interim Bank A into Bank, the acquisition may not
qualify under section 368(a)(1)(A) if there is no state law merger of Mutual
Holding Company directly into Bank.
Generally, a mere change in form that qualifies as a reorganization described by
section 368(a)(1)(F) will be treated separately from its surrounding steps. For
example, in Rev. Rul. 69-516, 1969-2 C.B. 66, a corporation changed its state of
incorporation and then
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Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
transferred its assets to an other corporation solely for stock of the acquiring
corporation. The ruling respected the change of the state of incorporation of
the target corporation, notwithstanding the fact that the target immediately
transferred all of its assets to the acquiring corporation. Specifically, the
ruling holds that the change of the state of incorporation will be a
reorganization within the meaning of section 368(a)(1)(F) and the asset
acquisition by the second corporation will qualify under section 368(a)(1)(C).
Similarly, Rev. Rul. 96-29, 1996-1 C.B. 72, emphasizes that a section
368(a)(1)(F) reorganization will generally be viewed as separate from
surrounding transactions.
Accordingly, KPMG believes that the conversion of Mutual Holding Company into
Interim Bank A should be viewed separately from the merger of Interim Bank A
into Bank, notwithstanding the brief existence of Interim Bank A. Under this
analysis, the conversion shall be analyzed under section 368(a)(1)(F) and the
downstream merger of Interim Bank A into Bank should be respected as a statutory
merger for purposes of section 368(a)(1)(A).
Rev. Proc. 94-76
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Historically, a downstream merger of a parent into its subsidiary could qualify
as a reorganization. See, e.g., Anna Gilmore v. Commissioner, 44 B.T.A. 881
(1941), acq. 1942-2 C.B. 2; George v. Commissioner, 26 T.C. 396 (1956) acq.
1956-2 C.B. 5; Rev. Rul. 78-47, 1978 C.B. 113; Rev. Rul 70-223, 190-1 C.B. 79;
and Rev. Rul. 85-197, 1985-2 C.B. 120; cf, G.C.M. 39404 (Apr. 15, 1982) (Service
permitted upstream merger of less than 80 percent owned subsidiary); see also
PLR 9506036 (Nov. 15, 1994).
However, the Service announced in Rev. Proc. 94-76, 1994-2 C.B. 825, that it
would not issue advance rulings in cases involving a combination by
reorganization of a parent and its less than 80 percent owned subsidiary. The
revenue procedure explained that such cases were under extensive study by the
Service. Following the Tax Reform Act of 1986, there was concern that the
disappearance of the parent's gain in its subsidiary stock may be inconsistent
with the repeal of the General Utilities doctrine (which generally requires a
corporation to recognize gain on a disposition of its assets). The study
project considered whether the Service should address the disappearance of the
stock gain with regulations under section 337(d). In Notice 96-6, 1996-5 I.R.B.
27, the Service announced that combining transactions were no longer an area
under extensive study by the Service. However, the Service still refuses to
issue advance rulings in the area. See section 3.01(23) of Rev. Proc. 97-3
I.R.B. 84, 88.
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Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
Given the issuance of Rev. Proc. 94-76, a question may be raised whether the
downstream merger of Interim Bank A into Bank can qualify as a reorganization
because Interim Bank A owns less than 80 percent of Bank. However, as evidenced
by the citations above, both the courts and the Service have agreed for over
half a century that downstream reorganizations such as Merger 1 can be bona fide
tax-free reorganizations. Any change would present a change to an extremely
long standing principle of tax law.
It is noteworthy that Rev. Proc. 94-76 does not indicate any potential effective
date should the IRS decide to change this long standing tax principle.
Normally, when the IRS believes that change to a tax policy is required, it
announces an effective date to notify taxpayers that transactions after such
date may well suffer adverse tax consequences. See, e.g., Notice 94-76, Notice
94-73, and Notice-87-14. The Service could argue that because section 337(d)
grants the Service extremely broad authority to issue regulations to enforce
General Utilities repeal, it clearly has the authority to change the long
standing tax policy on downstream mergers. It is also noteworthy that in over
ten years, the Service has not issued any regulation under section 337(d) that
would adversely impact the second merger.
Therefore, while the matter is not free from doubt, it is the professional
judgment of KPMG that because:
(1) Downstream mergers such as Merger 1 have been bona fide tax-free
reorganizations for over 50 years;
(2) Rev. Proc. 94-76 merely announced a study project which was formally
closed without any conclusion about a change in tax policy; and
(3) Rev. Proc. 94-76 does not announce any date regarding any potential
change of tax policy;
any adverse change in tax policy regarding transactions such as the merger
occasioned by Rev. Proc. 94-76 will be prospective in effect.
Liquidation accounts as a class of stock
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In order to qualify under section 368(a)(2)(E), Bank shareholders must receive
solely voting stock in Holding Company in exchange for an amount of Bank stock
constituting control of Bank. Section 368(a)(2)(E)(ii). Section 368(c) defines
control as 80 percent of stock possessing at least 80 percent of the total
combined voting power of all classes of stock entitled to vote and at least 80
percent of the total number of shares of all other
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Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
classes of stock of the corporation. Liquidation accounts of Bank will remain
outstanding after the acquisition of Bank by Holding Company. Accordingly, if
the liquidation accounts are treated as a class of non-voting stock of Bank, the
section 368(a)(2)(E)(ii) control requirement will not be satisfied in the
acquisition.
The Service has held that liquidation accounts can be treated as equity for
purposes of the continuity of proprietary interest requirement for corporate
reorganizations. See Rev. Rul. 80-105, 80-1 C.B. 78. Also, mutual interests
have been treated as stock in the context of a corporate acquisition. See Rev.
Rul. 69-3, 1969-1 C.B. 1969-1 C.B. 103 (section 354 applies to the exchange of a
mutual interest in one corporation for a mutual interest in another). While
acknowledging the role of a liquidation account as equity (Rev. Rul. 80-105),
the Service historically has not accorded liquidation accounts the status of
stock.
For example, in PLR 9510044 (March 10, 1995), a mutual holding company merged
downstream into its subsidiary bank. The mutual owners received liquidation
accounts in the bank. The newly formed holding company then acquired the bank
stock in a reverse triangular reorganization purporting to qualify under section
368(a)(2)(E). The Service specifically held that it would disregard the
liquidation accounts in the bank for purposes of applying the control
requirement under section 368(a)(2)(E)(ii). While a PLR may not be used or
cited as precedent pursuant to section 6110(j)(3) of the Code, it illustrates
the Service's analysis and position on this issue.
If Merger 1 and Merger 2 are consummated as described herein, based solely upon
information contained in the documents reviewed by us, and the FACTS and
REPRESENTATIONS above, KPMG renders the following opinions with respect to the
proposed transactions:
Conversion of Mutual Holding Company to Interim Bank A
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(1) The conversion of Mutual Holding Company from a state mutual holding
company to Interim Bank A, a state stock savings, as described above,
should constitute a reorganization within the meaning of Section
368(a)(1)(F) of the Code, and no gain or loss will be recognized to
either the Mutual Holding Company or to Interim Bank A as a result of
such conversion (Revenue Ruling 80-105, 1980-1 C.B. 78). The Mutual
Holding Company and Interim Bank A will each be a party to a
reorganization within
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Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
the meaning of Section 368(b) of the Code (Revenue Ruling 72-206, 1972-1
C.B. 104).
(2) Interim Bank A's basis of the assets received from the Mutual Holding
Company will equal the basis of such assets in the hands of Mutual
Holding Company immediately before the conversion (Section 362(b) of the
Code).
(3) Interim Bank A's holding period of the assets received from Mutual
Holding Company include the period during which Mutual Holding Company
held such assets prior to the Conversion (Section 1223(2) of the Code).
(4) Owners of mutual interests in Mutual Holding Company will recognize no
gain or loss on their constructive exchange of their mutual interests
for liquidation accounts in Interim Bank A (Rev. Rul. 69-3 and Rev. Rul.
69-646).
(5) The part of the taxable year of Mutual Holding Company before the
conversion and the part of the taxable year of Interim Bank A after the
conversion will constitute a single taxable year of Interim Bank A. (See
Revenue Ruling 57-276, 1957-1 C.B. 126). Consequently, the Mutual
Holding Company will not be required to file a federal income tax return
for any portion of such taxable year (Section 1.381(b)-1(a)(2) of the
Treasury Regulations).
(6) As provided by Section 381(c)(2) of the Code and Section 1.381(c)(2)-1
of the Treasury Regulations, Interim Bank A will succeed to and take
into account the earnings and profits or deficit in earnings and profits
of Mutual Holding Company.
(7) For purposes of Section 381 of the Code, the Interim Bank A will be
treated the same as the Mutual Holding Company would have been had there
been no reorganization. Accordingly, the taxable year of the Mutual
Holding Company will not end on the effective date of the proposed
transaction merely because of the transfer of assets of the Mutual
Holding Company to the Interim Bank A and the tax attributes of Mutual
Holding Company enumerated in Section 381(c) will be taken into account
by Interim Bank A as if there had been no reorganization (Section
1.381(b)-1(a)(2)) of the Treasury Regulations).
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Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
Downstream merger of Interim Bank A into Bank and Holding Company formation
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(1) Merger 1 should qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code. Therefore, both Interim Bank A and the
Bank will be a party to a "reorganization" as defined in Section 368(b)
of the Code.
(2) Interim Bank A will recognize no gain or loss pursuant to Merger 1.
(3) Bank will recognize no gain or loss upon the receipt of the assets of
Interim Bank A in Merger 1.
(4) Merger 2 will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the Code,
Merger 2 is not disqualified from qualifying as a reorganization within
the meaning of Section 368(a)(1)(A) because Holding Company Stock will
be conveyed to the Bank's public stockholders in exchange for their Bank
Stock. Therefore, the Bank, the Holding Company, and Interim Bank B will
each be a party to a reorganization as defined in Section 368(b) of the
Code.
(5) Interim Bank B will recognize no gain or loss upon the transfer of its
assets to the Bank pursuant to Merger 2.
(6) Bank will recognize no gain or loss upon the receipt of the assets of
Interim Bank B.
(7) Holding Company will recognize no gain or loss upon the receipt of Bank
Stock solely in exchange for Holding Company Stock.
(8) Bank's public shareholders will recognize no gain or loss upon their
receipt of Holding Company Stock solely in exchange for their shares of
Bank Stock.
(9) A Bank public shareholder's basis of the Holding Company Stock received
in exchange for its Bank stock will equal the basis of the Bank stock
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
surrendered in exchange therefor, before giving effect to any payment of
cash in lieu of fraction shares.
(10) A Bank public shareholder's holding period of the Holding Company Stock
received in exchange for its Bank stock will include the Holding period
of the Bank Stock, provided that the Bank Stock was held as a capital
asset on the date of the exchange.
(11) Holding Company will recognize no gain or loss upon the sale of Holding
Company Stock to investors.
(12) The Eligible Account Holders, Supplemental Eligible Account Holders, and
Other Members (as such terms are defined in the Plan of Conversion) will
recognize gain, if any, upon the issuance to them of: (i) withdrawable
savings accounts in the Bank following the Conversion, (ii) Bank
Liquidation Interest, and (iii) nontransferable subscription rights to
purchase Holding Company Stock but only to the extent of the value, if
any, of the subscription rights.
(13) The tax basis to the holders of Holding Company Stock purchased in the
public stock offerings will be the amount paid therefor, and the holding
period for such shares will begin on the date of consummation of such
offerings if purchased through the exercise of subscription rights.
SCOPE OF OPINION
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The opinions expressed above are rendered only with respect to the specific
matters discussed herein and we express no opinion with respect to any other
federal or state income tax or legal aspect of the offering. If any of the
above stated facts, circumstances, or assumptions are not entirely complete or
accurate, it is imperative that we be informed immediately because the
inaccuracy of incompleteness could have a material effect on our conclusions.
In rendering our opinions, we are relying upon the relevant provisions of the
Code, the regulations thereunder, and judicial and administrative
interpretations thereof, which are subject to change or modification by
subsequent legislative, regulatory, administrative, or judicial decisions. Any
such changes also could have an effect on the validity of our opinions. Unless
you specifically request otherwise, we will not update these opinions for
subsequent changes or modifications to the law and regulations or to the
judicial and administrative interpretations thereof. The opinions contained
herein are not binding upon the Internal
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The Boards of Directors
Heritage Financial Corporation, MHC
Heritage Savings Bank
October 27, 1997
Revenue Service, any other tax authority, or any court and no assurance can be
given that a position contrary to that expressed herein will not be asserted by
a tax authority and ultimately sustained by a court.
USE OF OPINION
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This opinion is solely for the information and use of the Bank and the Mutual
Holding Company in connection with Merger 1 and Merger 2, and may not be used or
relied upon for any other purpose and may not be circulated, quoted, or
otherwise referred to, nor is it to be filed with any governmental agency or
other person without our express written consent.
CONSENT
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We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 ("Form S-1O") to be filed by the Holding
Company with the Securities and Exchange Commission, to the Mutual Holding
Company's Application for Conversion as filed with the Division and the FDIC.
/s/ KPMG Peat Marwick LLP