<PAGE>
Exhibit 8.1
[Muldoon, Murphy & Faucette LLP Letterhead]
June 23, 2000
Board of Directors
First Federal Bancshares, Inc.
109 East Depot Street
Colchester, Illinois 62326
Board of Directors
First Federal Bank, F.S.B.
109 East Depot Street
Colchester, Illinois 62326
RE: FEDERAL TAX CONSEQUENCES OF THE CONVERSION OF FIRST FEDERAL BANK,
F.S.B. FROM A FEDERALLY-CHARTERED MUTUAL SAVINGS BANK TO A
FEDERALLY-CHARTERED STOCK SAVINGS BANK AND THE OFFER AND SALE OF
COMMON STOCK OF FIRST FEDERAL
BANCSHARES, INC. (THE "CONVERSION")
To the Members of the Board of Directors:
You have requested an opinion regarding all the material federal income tax
consequences of the proposed conversion of First Federal Bank, F.S.B. (the
"Bank") from a federally-chartered mutual savings bank to a federally-chartered
stock savings bank (the "Converted Bank") and the acquisition of the Converted
Bank's capital stock by First Federal Bancshares, Inc., a Delaware corporation
(the "Holding Company"), pursuant to the plan of conversion adopted by the Board
of Directors on December 8, 1999 (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE>
Board of Directors
June 23, 2000
Page 2
We have made such inquiries and have examined such documents and records as
we have deemed appropriate for the purpose of this opinion. In rendering this
opinion, we have received factual representations of the Holding Company and the
Bank concerning the Holding Company and the Bank as well as the transaction
("Representations"). We will rely upon the accuracy of the Representations of
the Holding Company and the Bank and the statements of facts contained in the
examined documents, particularly the Plan of Conversion. We have also assumed
the authenticity of all signatures, the legal capacity of all natural persons
and the conformity to the originals of all documents submitted to us as copies.
Each capitalized term used herein, unless otherwise defined, has the meaning set
forth in the Plan of Conversion. We have assumed that the Conversion will be
consummated strictly in accordance with the terms of the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed description of
the Conversion. These documents as well as the Representations to be provided by
the Holding Company and the Bank are incorporated in this letter as part of the
statement of the facts.
The Bank, with its headquarters in Colchester, Illinois, is a
federally-chartered mutual savings bank. As a mutual savings bank, the Bank has
never been authorized to issue stock. Instead, the proprietary interest in the
reserves and undivided profits of the Bank belong to the deposit account holders
of the Bank, hereinafter sometimes referred to as "shareholders." A shareholder
of the Bank has a right to share, pro rata, with respect to the withdrawal value
of his respective deposit account in any liquidation proceeds distributed in the
event the Bank is ever liquidated. In addition, a shareholder of the Bank is
entitled to interest on his account balance as fixed and paid by the Bank.
In order to provide organizational and economic strength to the Bank, the
Board of Directors has adopted the Plan of Conversion whereby the Bank will
convert itself into a federally-chartered stock savings bank, the stock of which
will be held entirely by the Holding Company. The Holding Company will acquire
the stock of the Converted Bank by purchase, in exchange for the Conversion
proceeds that are not permitted to be retained by the Holding Company. The
Holding Company will apply to the Office of Thrift Supervision ("OTS") to retain
up to 50% of the proceeds received from the Conversion. The aggregate sales
price of the Common Stock issued in the Conversion will be based on an
independent appraiser's valuation of the estimated pro forma market value of the
Holding Company and the Converted Bank. The Conversion and sale of the Common
Stock will be subject to applicable regulatory approval and the approval by the
affirmative vote of a majority of the Members.
The Bank shall establish at the time of Conversion a liquidation account in
an amount equal to its net worth as of the latest practicable date prior to
Conversion. The liquidation account will be maintained by the Converted Bank for
the benefit of the Eligible Account Holders and Supplemental
<PAGE>
Board of Directors
June 23, 2000
Page 3
Eligible Account Holders who continue to maintain their deposit accounts at the
Converted Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to his Savings Account, hold a related inchoate
interest in a portion of the liquidation account balance, in relation to his
deposit account balance on the Eligibility Record Date and/or Supplemental
Eligibility Record Date or to such balance as it may be subsequently reduced, as
provided in the Plan of Conversion.
In the unlikely event of a complete liquidation of the Converted Bank (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their deposit accounts), each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his deposit accounts then held,
before any liquidation distribution may be made to any holders of the Converted
Bank's capital stock. No merger, consolidation, purchase of bulk assets with
assumption of Savings Accounts and other liabilities, or similar transaction
with a Federal Deposit Insurance Corporation ("FDIC") institution, in which the
Converted Bank is not the surviving institution, shall be deemed to be a
complete liquidation for this purpose. In such transactions, the liquidation
account shall be assumed by the surviving institution.
LIMITATIONS ON OPINION
Our opinions expressed herein are based solely upon current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), including applicable
regulations thereunder and current judicial and administrative authority. Any
future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be retroactive
in effect, could cause us to modify our opinion. No opinion is expressed herein
with regard to the federal, state, or city tax consequences of the Conversion
under any section of the Code except if and to the extent specifically
addressed.
FEDERAL TAX OPINION
Based upon the Representations and the other factual information referred
to in this letter, and assuming the transaction occurs in accordance with the
Plan of Conversion, and taking into consideration the limitations noted
throughout this opinion, it is our opinion that under current federal income tax
law:
(1) Pursuant to the Conversion, the changes at the corporate level other
than changes in the form of organization will be insubstantial. Based
upon that fact and the fact that the equity interest of a shareholder
in a mutual entity is more nominal than real,
<PAGE>
Board of Directors
June 23, 2000
Page 4
unlike that of a shareholder of a corporation, the Conversion of
the Bank from a mutual entity to a stock savings bank is a
tax-free reorganization since it is a mere change in identity,
form or place of organization within the meaning of section
368(a)(1)(F) of the Code (see Rev. Rul. 80-105, 1980-1 C.B. 78).
Neither the Bank nor the Converted Bank shall recognize gain or
loss as a result of the Conversion. The Bank and the Converted
Bank shall each be "a party to a reorganization" within the
meaning of section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money
from the Holding Company in exchange for shares of the Converted
Bank's capital stock or by the Holding Company upon the receipt
of money from the sale of its Common Stock (Section 1032(a) of
the Code).
(3) The basis of the assets of the Bank in the hands of the Converted
Bank shall be the same as the basis of such assets in the hands
of the Bank immediately prior to the Conversion (Section 362(b)
of the Code).
(4) The holding period of the assets of the Bank in the hands of the
Converted Bank shall include the period during which the Bank
held the assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account
Holders and the Supplemental Eligible Account Holders of the Bank
on the issuance to them of withdrawable deposit accounts in the
Converted Bank plus interests in the liquidation account of the
Converted Bank in exchange for their deposit accounts in the Bank
or to the other depositors on the issuance to them of
withdrawable deposit accounts (Section 354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to
the subscription rights is equal to the fair market value of the
stock, 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 Holding Company (Section
356(a)). 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
(Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income as
<PAGE>
Board of Directors
June 23, 2000
Page 5
a result of the exercise by them of the nontransferable
subscription rights (Rev. Rul. 56-572, 1956-2 C.B.182).
(7) The basis of the deposit accounts in the Converted Bank to be
received by the Eligible Account Holders, Supplemental Eligible
Account Holders and other shareholders of the Bank will be the
same as the basis of their deposit accounts in the Bank
surrendered in exchange therefor (Section 358(a)(1) of the Code).
The basis of the interests in the liquidation account of the
Converted Bank to be received by the Eligible Account Holders and
Supplemental Eligible Account Holders of the Bank shall be zero
(Rev. Rul. 71-233, 1971-1 C.B. 113). The basis of the Holding
Company Common Stock to its stockholders will be the purchase
price thereof plus the basis, if any, of nontransferable
subscription rights (Section 1012 of the Code). Accordingly,
assuming the nontransferable subscription rights have no value,
the basis of the Common Stock to the Eligible Account Holders and
Supplemental Eligible Account Holders will be the amount paid
therefor. 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
(Section 1223(6) of the Code).
Our opinion under paragraph (6) 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 (6) and (7)
above assumes 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 understand that you have
received a letter from RP Financial, LC. that the subscription rights do not
have any value. We express no view regarding the valuation of the subscription
rights.
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 Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause us
to modify our opinion.
<PAGE>
Board of Directors
June 23, 2000
Page 6
We consent to the inclusion of this opinion as an exhibit to the Form AC
Application for Conversion of the Bank and the references to and summary of this
opinion in such Application for Conversion. We also consent to the inclusion of
this opinion as an exhibit to the Form SB-2 Registration Statement and the Form
H-(e)1-S Application of the Holding Company and the references to and summary of
this opinion in both the Form SB-2 and the Form H-(e)1-S.
Sincerely,
/s/ Muldoon, Murphy & Faucette LLP
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
CERTIFICATE OF REPRESENTATIONS
I, James J. Stebor, President of First Federal Bank, F.S.B. (the
"Bank"), for the purpose of obtaining an opinion of counsel to be tendered by
Muldoon, Murphy & Faucette LLP in connection with the conversion of the Bank
from a federally chartered mutual savings bank to a federally chartered capital
stock savings bank (the "Conversion") and the acquisition of the Bank's capital
stock by First Federal Bancshares, Inc., a Delaware corporation (the "Holding
Company"), pursuant to the plan of conversion adopted by the Board of Directors
on December 8, 1999 (the "Plan of Conversion"), do hereby certify that all the
information set forth in the following representations is true to the best of my
knowledge and belief:
(a) The fair market value of the withdrawable deposit accounts
plus interests in the liquidation account of the Converted
Bank to be received under the Plan of Conversion will, in each
instance, be equal to the fair market value of the
withdrawable deposit accounts (plus the related interest in
the residual equity of the Bank) deemed to be surrendered in
exchange therefor.
(b) If an individual's total deposits in the Bank equal or exceed
$50 as of the Eligibility Record Date or the Supplemental
Eligibility Record Date (if any), then no amount of that
individual's total deposits will be excluded from
participating in the liquidation account. The fair market
value of the deposit accounts of the Bank which have a balance
of less than $50 on the Eligibility Record Date or the
Supplemental Eligibility Record Date (if any) will be less
than 1% of the total fair market value of all deposit accounts
of the Bank.
(c) Immediately following the Conversion, the Eligible Account
Holders and the Supplemental Eligible Account Holders (if any)
of the Bank will own all of the outstanding interests in the
liquidation account and will own such interest solely by
reason of their ownership of deposits in the Bank immediately
before the Conversion.
(d) After the Conversion, the Converted Bank will continue the
business of the Bank in the same manner as prior to the
Conversion. The Converted Bank has no plan or intention and
the Holding Company has no plan or intention to cause the
Converted Bank to sell its assets other than in the ordinary
course of business.
(e) The Holding Company has no plan or intention to sell,
liquidate or otherwise dispose of the stock of the Converted
Bank other than in the ordinary course of business.
(f) The Holding Company and the Converted Bank have no current
plan or intention to redeem or otherwise acquire any of the
Common Stock issued in the Conversion transaction.
<PAGE>
(g) Immediately after the Conversion, the assets and liabilities
of the Converted Bank will be identical to the assets and
liabilities of the Bank immediately prior to the Conversion,
plus the net proceeds from the sale of the Converted Bank's
common stock to the Holding Company and any liability
associated with indebtedness incurred by the Employee Plans in
the acquisition of Common Stock by the Tax-Qualified Employee
Stock Benefit Plans.
(h) The Bank is federally chartered as a mutual savings bank.
(i) None of the shares of the Common Stock to be purchased by the
Directors and depositor-employees of the Bank in the
Conversion will be issued or acquired at a discount. However,
shares may be given to certain employees as compensation by
means of the Tax-Qualified Employee Stock Benefit Plans.
Compensation to be paid to such Directors and
depositor-employees will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will
equal or exceed the sum of the liabilities of the Bank which
will be assumed by the Converted Bank and any liabilities to
which the transferred assets are subject.
(k) The Bank is not insolvent and is not under the jurisdiction of
a bankruptcy or similar court, a receivership, foreclosure, or
similar proceeding in a Federal or State court.
(l) Upon the completion of the Conversion, the Holding Company
will own and hold 100% of the issued and outstanding capital
stock of the Converted Bank and no other shares of capital
stock of the Converted Bank will be issued and/or outstanding.
At the time of the Conversion, the Converted Bank does not
have any plan or intention to issue additional shares of its
stock following the transaction. Further, no shares of
preferred stock of the Converted Bank will be issued and/or
outstanding.
(m) Upon the completion of the Conversion, there will be no
rights, warrants, contracts, agreements, commitments or
understandings with respect to the capital stock of the
Converted Bank, nor will there be any securities outstanding
which are convertible into the capital stock of the Converted
Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders (if any), or others in
lieu of (a) nontransferable subscription rights, or (b) an
interest in the liquidation account of the Converted Bank.
(o) Depositors will pay the expenses of the Conversion solely
applicable to them, if
<PAGE>
any. The Holding Company and the Bank will each pay expenses
of the transaction attributable to them and will not pay any
expenses solely attributable to the depositors or to the
Holding Company shareholders.
(p) The exercise price of the subscription rights received by the
Bank's Eligible Account Holders, Supplemental Eligible Account
Holders (if any), and other holders of subscription rights to
purchase Holding Company Common Stock will be equal to the
fair market value of the stock of the Holding Company at the
time of the completion of the Conversion as determined by an
independent appraisal.
(q) The liquidation account will be maintained by the Bank for the
benefit of the Eligible Account Holders and the Supplemental
Eligible Account Holders (if any) who continue to maintain
deposit accounts at the Bank.
(t) There is no plan or intention for the Converted Bank to be
liquidated or merged with another corporation following this
proposed transaction.
(u) The liabilities of the Bank assumed by the Converted Bank plus
the liabilities, if any, to which the transferred assets are
subject were incurred by the Bank in the ordinary course of
its business and are associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to
future tax years.
I understand that any change in facts or in the execution of this
transaction could cause a modification of the opinion of Muldoon, Murphy &
Faucette LLP. Since these representations are being offered in advance of the
closing of this transaction, I will undertake to promptly notify Muldoon, Murphy
& Faucette LLP if I discover at any time following the date hereof that any of
the above representations cease to be true, correct and/or complete.
Each capitalized term not defined herein shall have the same meaning as
in the opinion of Muldoon, Murphy & Faucette LLP or the Plan of Conversion, as
appropriate.
June 23, 2000 /s/ James J. Stebor
---------------------------------------
James J. Stebor
President
First Federal Bank, F.S.B.
