(202) 274-2000
May 10, 2004
Board of Directors
Monadnock Community Bank
One Jaffrey Road
Peterborough, New Hampshire 03458
RE: MUTUAL HOLDING COMPANY FORMATION AND STOCK ISSUANCE
Gentlemen:
We have been requested as special counsel to Monadnock Community Bank
("Monadnock") to express our opinion concerning the Federal income tax
consequences relating to the proposed conversion of Monadnock Community Bank
from a federally chartered mutual savings bank (sometimes referred to herein as
"Mutual Bank") to a federally chartered stock savings bank (sometimes referred
to herein as "Stock Bank") and the formation of Monadnock Mutual Holding
Company, a federal mutual holding company, and Monadnock Community Bancorp,
Inc., a mid-tier federal holding company and the subsidiary of Monadnock Mutual
Holding Company. Monadnock Mutual Holding Company will acquire the outstanding
stock of Stock Bank and subsequently contribute Stock Bank's stock to Monadnock
Community Bancorp, Inc.
In connection therewith, we have examined Monadnock's Plan of Mutual
Holding Company Reorganization and Stock Issuance ("Plan of Reorganization") and
certain other documents of or relating to the reorganization of the bank into
the mutual holding company structure (the "Reorganization"), some of which are
described or referred to in the Plan of Reorganization and which we deemed
necessary to examine in order to issue the opinions set forth below. Unless
otherwise defined, all terms used herein have the meanings given to such terms
in the Plan of Reorganization.
In our examination, we have assumed the authenticity of original
documents, the accuracy of copies and the genuineness of signatures. We have
further assumed the absence of adverse facts not apparent from the face of the
instruments and documents we examined.
In issuing our opinions, we have assumed that the Plan of Reorganization
has been duly and validly authorized and has been approved and adopted by the
board of directors of Monadnock Community Bank at a meeting duly called and
held; that Monadnock Community Bank will comply with the terms and conditions of
the Plan of Reorganization, and that the various factual representations and
warranties which are provided to us are accurate, complete, true and correct.
Accordingly, we express no opinion concerning the effect, if any, of variations
from the foregoing. We specifically express no opinion concerning tax matters
relating to the Plan of Reorganization under state and local tax laws, except on
the basis of the documents and assumptions described above.
Board Of Directors
Monadnock Community Bank
May 10, 2004
Page 2
For purposes of this opinion, we are relying on the factual
representations provided to us by Monadnock Community Bank, which are
incorporated herein by reference.
In issuing the opinions set forth below, we have referred solely to
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury Regulations thereunder, current
administrative rulings, notices and procedures and court decisions. Such laws,
regulations, administrative rulings, notices and procedures, and court decisions
are subject to change at any time. Any such change could affect the continuing
validity of the opinions set forth below. This opinion is as of the date hereof,
and we assume no obligation to advise you of changes in law that may thereafter
be brought to our attention.
We emphasize that the outcome of litigation cannot be predicted with
certainty and, although we have attempted in good faith to opine as to the
probable outcome of the merits of each tax issue with respect to which an
opinion was requested, there can be no assurance that our conclusions are
correct or that they would be adopted by the IRS or a court.
SUMMARY OF OPINIONS
Based on the facts, representations and assumptions set forth herein, we
are of the opinion that:
WITH RESPECT TO THE EXCHANGE OF MONADNOCK COMMUNITY BANK'S CHARTER FOR A
STOCK CHARTER (THE "BANK CONVERSION"):
1. The conversion of Monadnock Community Bank's charter from a mutual
savings bank charter to a stock bank charter will qualify as a reorganization
within the meaning of Section 368(a)(1)(F) of the Code.
2. No gain or loss will be recognized by Monadnock Community Bank
upon the transfer of its assets to Stock Bank solely in exchange for shares of
Stock Bank stock and the assumption by Stock Bank of the liabilities of Mutual
Bank. (Code Sections 361(a) and 357(a)).
3 No gain or loss will be recognized by Stock Bank upon the receipt
of the assets of the Mutual Bank in exchange for shares of Stock Bank common
stock. (Code Section 1032(a)).
4. Stock Bank's holding period in the assets received from Monadnock
Community Bank will include the period during which such assets were held by
Mutual Bank. (Code Section 1223(2)).
5. Stock Bank's basis in the assets of Monadnock Community Bank will
be the same as the basis of such assets in the hands of Monadnock Community Bank
immediately prior to the reorganization. (Code Section 362(b)).
Board Of Directors
Monadnock Community Bank
May 10, 2004
Page 3
6. Mutual Bank members will recognize no gain or loss upon the
constructive receipt of solely Stock Bank common stock in exchange for their
membership interests in Mutual Bank. (Code Section 354(a)(1)).
7. Stock Bank will succeed to and take into account Monadnock
Community Bank's earnings and profits or deficit in earnings and profits, as of
the date of the reorganization. (Code Section 381).
8. For purposes of Section 381, Stock Bank will be treated the same
as Mutual Bank, and therefore, Mutual Bank's tax year will not end merely as a
result of the conversion of Monadnock Community Bank to stock form and Stock
Bank will not be required to obtain a new employee identification number.
(Treas. Reg. Section 1.381(b)-2 and Rev. Rul. 73-526, 1973-2 CB. 404).
9. No gain or loss shall be recognized by Eligible Account Holders
and Supplemental Eligible Account Holders of Mutual Bank on the issuance to them
of withdrawable deposit accounts in Stock Bank plus liquidation rights with
respect to Monadnock Mutual Holding Company, in exchange for their deposit
accounts in the Mutual Bank or to the other depositors on the issuance to them
of withdrawable deposit accounts. (Code Section 354(a)).
10. It is more likely than not that the fair market value of the
subscription rights to purchase Common Stock is zero. Accordingly, no gain or
loss will be recognized by Eligible Account Holders and Supplemental Eligible
Account Holders upon the distribution to them of the nontransferable
subscription rights to purchase shares of stock in the Monadnock Community
Bancorp, Inc. Gain realized, if any, by the Eligible Account Holders and
Supplemental Eligible Account Holders on the distribution to them of
nontransferable subscription rights to purchase shares of Common Stock will be
recognized but only in an amount not in excess of the fair market value of such
subscription rights. (Code Section 356(a)). Eligible Account Holders and
Supplemental Eligible Account Holders will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription rights (Rev.
Rul. 56-572, 1956-2 C.B. 182).
11. The basis of the deposit accounts in the Stock Bank to be received
by the Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members of the Mutual Bank will be the same as the basis of their deposit
accounts in Mutual Bank surrendered in exchange therefor. (Code Section
358(a)(1)). The basis of the interests in the liquidation rights in Monadnock
Mutual Holding Company to be received by the Eligible Account Holders and
Supplemental Eligible Account Holders of Mutual Bank shall be zero. (Rev. Rul.
71-233, 1971-1 C.B. 113).
WITH RESPECT TO THE TRANSFER OF STOCK BANK STOCK TO MONADNOCK MUTUAL
HOLDING COMPANY, FOR MEMBERSHIP INTERESTS (THE "351 TRANSACTION"):
12. The exchange of Stock Bank common stock constructively received by
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members in exchange for
Board Of Directors
Monadnock Community Bank
May 10, 2004
Page 4
membership interests in Monadnock Mutual Holding Company will constitute a
tax-free exchange of property solely for "stock" pursuant to Section 351 of the
Code.
13. Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members will recognize no gain or loss upon the transfer of Stock Bank
common stock they constructively received in the Bank Conversion to Monadnock
Mutual Holding Company solely in exchange for membership interests in Monadnock
Mutual Holding Company. (Code Section 351).
14. Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members basis in the Monadnock Mutual Holding Company membership
interests received in the transaction (which basis is -0-) will be the same as
the basis of the property transferred in exchange therefor. (Code Section
358(a)(1)).
15. Monadnock Mutual Holding Company will recognize no gain or loss
upon the receipt of property from Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members in exchange for membership interests
in Monadnock Mutual Holding Company. (Code Section 1032(a)).
16. Monadnock Mutual Holding Company's basis in the property received
from Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members (which basis is -0-) will be the same as the basis of such property in
the hands of Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members immediately prior to the transaction. (Code Section 362(a)).
17. Monadnock Mutual Holding Company's holding period for the property
received from Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members will include the period during which such property was held by
such persons. (Code Section 1223(2)).
WITH RESPECT TO THE TRANSFERS TO MONADNOCK COMMUNITY BANCORP, INC. IN
EXCHANGE FOR COMMON STOCK IN MONADNOCK COMMUNITY BANCORP, INC. (THE "SECONDARY
351 TRANSACTION"):
18. Monadnock Mutual Holding Company and the persons who purchased
Common Stock of Monadnock Community Bancorp, Inc. in the Subscription and
Community Offering ("Minority Stockholders") will recognize no gain or loss upon
the transfer of Stock Bank stock and cash, respectively, to Monadnock Community
Bancorp, Inc. in exchange for stock in Monadnock Community Bancorp, Inc. (Code
Section 351(a)).
19. Monadnock Community Bancorp, Inc. will recognize no gain or loss
on its receipt of Stock Bank stock and cash in exchange for Monadnock Community
Bancorp, Inc. Common Stock. (Code Section 1032(a)).
20. Monadnock Mutual Holding Company's basis in the Monadnock
Community Bancorp, Inc. Common Stock received in the Secondary 351 Transaction
will be the same as its basis in the Stock Bank stock transferred. (Code Section
358(a)(1)).
Board Of Directors
Monadnock Community Bank
May 10, 2004
Page 5
21. Monadnock Mutual Holding Company's holding period in the Monadnock
Community Bancorp, Inc. Common Stock received will include the period during
which it held the Stock Bank common stock, provided that such property was a
capital asset on the date of the exchange. (Code Section 1223(1)).
22. Monadnock Community Bancorp, Inc.'s basis in the Stock Bank stock
received from Monadnock Mutual Holding Company will be the same as the basis of
such property in the hands of Monadnock Mutual Holding Company. (Code Section
362(a)).
23. Monadnock Community Bancorp, Inc.'s holding period for the Stock
Bank stock received from Monadnock Mutual Holding Company will include the
period during which such property was held by Monadnock Mutual Holding Company.
(Code Section 1223(2)).
24. It is more likely than not that the basis of the Monadnock
Community Bancorp, Inc. Common Stock to its stockholders will be the purchase
price thereof. (Code Section 1012). The holding period of the Common Stock
purchased pursuant to the exercise of subscription rights shall commence on the
date on which the right to acquire such stock was exercised. (Code Section
1223(6)).
PROPOSED TRANSACTION
On March 11, 2004, the board of directors of Monadnock Community Bank
adopted the Plan of Reorganization. For what are represented to be valid
business purposes, Monadnock Community Bank's board of directors has decided to
convert to a mutual holding company structure pursuant to statutes. The
following steps are proposed:
(i) Monadnock Community Bank will organize an interim stock savings
bank (Interim One) as its wholly owned subsidiary;
(ii) Interim One will organize an interim stock savings bank as its
wholly owned subsidiary (Interim Two); and
(iii) Interim One will also organize a federal mid-tier holding company
as its wholly owned subsidiary (Monadnock Community Bancorp,
Inc.).
The following transactions will occur simultaneously:
(iv) Monadnock Community Bank will exchange its charter for a federal
stock savings bank charter (Stock Bank) and will constructively
issue its common stock to members of Monadnock Community Bank;
(v) Interim One will cancel its outstanding stock and exchange its
charter for a federal mutual Monadnock Community Bancorp, Inc.
charter and thereby become Monadnock Mutual Holding Company;
Board Of Directors
Monadnock Community Bank
May 10, 2004
Page 6
(vi) Interim Two will merge with and into Stock Bank, with Stock Bank
as the surviving entity, and the former members of Mutual Bank who
constructively hold common stock in Stock Bank will exchange their
common stock in Stock Bank for membership interests in Monadnock
Community Bancorp, Inc; and
(vii) Monadnock Mutual Holding Company will contribute Stock Bank's
common stock to Monadnock Community Bancorp, Inc., a wholly owned
subsidiary of Monadnock Mutual Holding Company, for additional
shares of Monadnock Community Bancorp, Inc. stock.
(viii) Contemporaneously, with the contribution set forth in "(vii)",
Monadnock Community Bancorp, Inc. will offer to sell an amount
less than 50% of its Common Stock in the Subscription Offering
and, if applicable, the Community Offering.
These transactions are referred to herein collectively as the
"Reorganization."
Those persons who, as of the date of the Reorganization (the "Effective
Date"), hold depository rights with respect to Mutual Bank will thereafter have
such rights solely with respect to Stock Bank. Each deposit account with Mutual
Bank at the time of the exchange will become a deposit account in Stock Bank in
the same amount and upon the same terms and conditions. Following the completion
of the Reorganization, all depositors and borrowers who had membership rights
with respect to Mutual Bank immediately prior to the Reorganization will
continue to have such rights solely with respect to Monadnock Mutual Holding
Company so long as they continue to hold deposit accounts or borrowings with
Stock Bank. All new depositors of Stock Bank after the completion of the
Reorganization will have ownership rights solely with respect to Monadnock
Mutual Holding Company so long as they continue to hold deposit accounts with
Stock Bank.
The shares of Interim Two common stock owned by Monadnock Mutual Holding
Company prior to the Reorganization shall be converted into and become shares of
common stock of Stock Bank on the Effective Date. The shares of Stock Bank
common stock constructively received by Stock Bank stockholders (formerly the
members holding liquidation rights of Mutual Bank) will be transferred to
Monadnock Mutual Holding Company by such persons in exchange for membership
interests in Monadnock Mutual Holding Company.
Monadnock Community Bancorp, Inc. will have the power to issue shares of
capital stock (including common and preferred stock) to persons other than
Monadnock Mutual Holding Company. So long as Monadnock Mutual Holding Company is
in existence, however, it must own a majority of the voting stock of Monadnock
Community Bancorp, Inc.. Monadnock Community Bancorp, Inc. may issue any amount
of non-voting stock to persons other than Monadnock Mutual Holding Company. No
such non-voting stock will be issued as of the date of the Reorganization.
The opinions set forth above represent our conclusions as to the
application of existing Federal income tax law to the facts of the instant
transaction, and we can give no assurance that changes in such law, or in the
interpretation thereof, will not affect the opinions expressed by us.
Board Of Directors
Monadnock Community Bank
May 10, 2004
Page 7
Moreover, there can be no assurance that contrary positions may not be taken by
the IRS, or that a court considering the issues would not hold contrary to such
opinions.
Our opinion under paragraph 10 above is predicated on the representation
that no person shall receive any payment, whether in money or property, in lieu
of the issuance of subscription rights. Our opinion under paragraphs 10 and 24
is based on the position that the subscription rights to purchase shares of
Common Stock received by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members have a fair market value of zero. We note that the
subscription rights will be granted at no cost to the recipients, will be
legally non-transferable and of short duration, and will provide the recipient
with the right only to purchase shares of Common Stock at the same price to be
paid by members of the general public in any Community Offering. Based on the
foregoing, we believe it is more likely than not that the nontransferable
subscription rights to purchase Common Stock have no value.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and the Monadnock
Community Bancorp, Inc. and/or the Stock Bank may be taxable on the distribution
of the subscription rights.
All of the opinions set forth above are qualified to the extent that the
validity of any provision of any agreement may be subject to or affected by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the rights of creditors generally. We do not express any opinion as to
the availability of any equitable or specific remedy upon any breach of any of
the covenants, warranties or other provisions contained in any agreement. We
have not examined, and we express no opinion with respect to the applicability
of, or liability under, any Federal, state or local law, ordinance, or
regulation governing or pertaining to environmental matters, hazardous wastes,
toxic substances, asbestos, or the like.
It is expressly understood that the opinions set forth above represent
our conclusions based upon the documents reviewed by us and the facts presented
to us. Any material amendments to such documents or changes in any significant
fact would affect the opinions expressed herein.
We have not been asked to, and we do not, render any opinion with respect
to any matters other than those expressly set forth above.
We hereby consent to the filing of the opinion as an exhibit to Monadnock
Community Bank's combined Form MHC-1/MHC-2 Notice of MHC Reorganization and
Application for Approval of a Minority Stock Issuance by a Subsidiary of MHC,
and as an exhibit to the Holding Company's Application on Form H(e)-1, as filed
with the OTS and Monadnock Community Bancorp's Registration Statement on Form
SB-2 as filed with the SEC. We also consent to the references to our firm in the
Prospectus contained in the Forms MHC-1/MHC-2, H(e)-1, and SB-2 under the
captions "The Reorganization and Offering - Tax Effects of the Reorganization"
and "Legal and Tax Matters," and to the summarization of our opinion in such
Prospectus.
Board Of Directors
Monadnock Community Bank
May 10, 2004
Page 8
Very truly yours,
/s/ Luse Gorman Pomerenk & Schick
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LUSE GORMAN POMERENK & SCHICK
A Professional Corporation