In a move designed to give employees more of a stake in the company while also ensuring a smooth exit for founder Mike Hardwick, Churchill Mortgage and its parent company, Churchill Holdings Inc. have become an employee-owned company.

The Brentwood-based mortgage lender has established an Employee Stock Ownership Plan (ESOP).

Hardwick, who was sole shareholder of Churchill Holdings, sold stock to the ESOP on Oct. 31, and will maintain controlling interest in the parent company, according to Hardwick, who says that Churchill may be the first privately owned mortgage company to offer this type of plan.

“Studies have shown that companies’ average growth rate is 2.4 percent higher after an ESOP is implemented, so there is a tremendous potential value for our employees who will now share in the continued success of the company and benefit financially from a job well done,” he wrote in a statement.

“Churchill has experienced exponential growth over the last 20 years, and we anticipate even more success in the coming years.”

Churchill was founded in 1992, has more than 300 employees and provides conventional, FHA, VA and USDA residential mortgages across 31 states. The new ESOP will not affect business operations, which Hardwick will continue to lead, but rather was designed as a long-term retirement benefit for employee owners and Hardwick himself.

All employees 21 or older and with the company at least one year will be eligible to participate, and they will earn shares annually by way of a formula that takes into account total eligible compensation. All told, 49 percent of Churchill Holdings’ shares will be allocated over the next several years.

“As we stepped back and started thinking about positioning the company to succeed past our owner’s retirement, we looked at a variety of different options,” says Matt Clarke, chief financial officer.

“We had some specific goals in mind: One was to enable him to get a monetary benefit from the 22 years he’s invested up to this point, and however many years he will continue to invest. Second, we wanted to come up with a strategy that would let the company continue once he decided to stop working. Lastly, we wanted to do something that would benefit the employee base. The ESOP met those three requirements.”

Given that an employee stock ownership plan is not an easy thing to set up, there has to be a pretty strong desire for this type of asset conversion, says attorney Wm. Jay Harrelson of Harwell Howard Hyne Gabbert & Manner.

“The appeal of an ESOP varies depending on the purpose for establishing it,” Harrelson says.

“Some of the reasons include using an ESOP as an exit strategy for the owners; getting money out of the business while still maintaining control of the business; getting money out of the business on a tax-deferred basis; allowing employees to enjoy the future growth of the business; motivating employees to perform better because they are invested in the success of the business; and to permit employees to purchase the business with tax-deductible dollars for the company.”

Before settling on the plan, the Churchill management team also looked at conversion vehicles such as an outside capital investment, partnerships and an outright sale. Each of those had merits, Clarke says, but also held the possibility of a shift in how Churchill operates. Further, they did not allow for a monetization event for Hardwick when he opts to fully retire.

“If we sold the company, that could have taken three to five years, or even longer, for the process to complete,” Clarke says. “And they would also run it the way they wanted to run it. Those two things didn’t really work for us.

“Mike’s at an age where we wanted to come up with a better strategy.”

Another element that led to the ESOP was the company’s sound financial footing, even through periods of economic uncertainty. Had its operating position been more tenuous, such a plan might not have been the best route.

“We have been through a lot of different economic cycles in terms of real estate and the overall economy,” Clarke says. “When the real estate market is doing well, we have lots of purchase business; when the rate market is doing well, we have lots of refinance business.

“At the end of the day, we have a continuous flow of business because of all the good housing financing opportunities out there.”

The benefits to owner and employees are pretty solid, as well, notes Harrelson.

“The benefits to the company are generally in the form of better motivated employees, who can more easily see the personal benefit and gain by making the company a success,” he says. “In addition, the loan payments – used to buy the stock for the ESOP – are fully deductible and dividends are deductible. The employees receive the tax-deferral typical of any tax-qualified retirement plan, but unlike in another retirement plan are able to convert the gain in value of the stock to a capital gain.”

The ESOP announcement led to some intrigue in the mortgage-lending sphere, since this isn’t a common practice in that arena, Clarke says. It also surprised employees to some degree, but in a very positive way.

“It’s a complicated thing to pull off because there are many factors, and it’s hard work,” he says. “A lot of people are like us, where someone has built this asset and isn’t quite sure what they want to do with it, so we’ve gotten a lot of questions from other firms, and are even coaching some of them as to how we went about doing it.

“Internally, we’ve had an outstanding response. When people become owners of something, their whole perspective changes. There’s a tremendous amount of excitement, because this isn’t something most people have an opportunity to take part in.

“It’s not a get-rich-quick scheme, but a sound retirement vehicle. And people here know that if we do as well over the next 10 or 20 years as we have in the last 10 and 20, they stand to be handsomely rewarded.”