The leveraged employee stock ownership plan is finding its way into the world of community banking.

The majority shareholders of Antioch Bancshares, instead of selling out to a large regional bank or a competing community bank, sold their controlling interest in the company to the bank's employees.

The unusual deal for the $86 million-asset Illinois company was completed last week, giving its employee stock ownership plan 63.3% of the outstanding shares and netting tax benefits for the sellers.

Leveraged ESOP was one of the buzzwords of the 1980s, and over the years lawyers and accountants have at various times pushed the concept as an ideal one for healthy community banks facing an ownership crossroads.

It never caught on in a big way. But the players in the Antioch deal believe such an arrangement could be an option for other privately held community banks whose shareholders have different goals.

"I've seen many situations where banks had to sell," said James J. Brennan, a lawyer who worked on the deal. Antioch provided "an alternative to make everybody happy."

Antioch, which owns the First National Bank of Antioch, began considering the $7.5 million deal in March 1993 when the Schroeder family - descendants of the bank's founder who controlled about 56% of the stock - decided to sell.

"We looked at the various alternatives and felt, all things being equal, we would like to give the opportunity to the existing management," said seller Charles Schroeder Jr., a great-grandson of Antioch's founder. "We thought it was a fair deal for everybody."

Others in Same Boat

At first, Antioch officials thought it would be the country's only employee-owned bank. However three small banks in Kansas and Missouri have the same situation, said Ted C. Axton, Antioch's president and chief executive.

Still, they were covering very new ground. "It wasn't as if it was, here's the form, fill in the blanks," Mr. Axton said. "I felt like I was walking down the games at a carnival and you're supposed to be hitting all the targets at the same time. We just addressed one target at a time and zeroed in on the issues."

The purchase agreement, signed last December, called for the sale of up to 25,483 common shares from the controlling shareholder group and other shareholders at $300 per share.

Terms of the Transaction

The deal went like this: Antioch initially had 35,232 outstanding shares. The company redeemed 3,480 shares from the ESOP and 14,622 from other shareholders. This reduced the number of outstanding shares so the ESOP could purchase a smaller number of them and still get controlling interest, Mr. Axton said.

The company financed its share purchase though a $3.9 million loan, as well as its recent private placement, in which $1.5 million of Antioch preferred was sold to qualified local investors.

The ESOP purchased 10,850 shares from the existing shareholder group, using the proceeds from its own sale and a $2.1 million loan. ESOP borrowings are repaid in pretax dollars, Mr. Axton said.

The sellers' advantage is that they receive cash after the ESOP has more than 30% of the shares, Mr. Axton explained. And, as long as they invest the cash in marketable securities within a year, it remains tax deferred.

This scenario allows the sellers to diversify the proceeds from the sale and keep them tax-free, in stark contrast to a stock exchange with another bank company, Mr. Axton said.

Selling to an ESOP is an option for other community banks, Mr. Schroeder said. "It takes shareholders with low basis in their stock. That's what makes the tax benefits worthwhile."

As for drawbacks, Mr. Brennan cautions that the institution must be healthy to start. "You need to have a strong bank," he said. "You have to demonstrate the ability to service debt."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.