The Role of Employee Stock Ownership Plans in the Restructuring and Privatization of State-Owned Financial Institutions David M. Binns Ronald J. Gilbert

Introduction Extensive international experience Over the past 15 years, over 20 different countries have implemented some form of employee ownership

The Rationale for the Use of ESOPs in Privatization and Financial Sector Reform Flexibility Macroeconomic policy and corporate reorganization “Mixed” Privatizations are likely to predominate Traditional boards of directors and management Financial institutions are in a unique position

Practical Considerations in Implementing ESOPs in Financial Institutions A technique for corporate finance “Non-leveraged” ESOP “Leveraged” ESOP Credit of the Corporation Access to capital credit

A Standard Leveraged ESOP

Key Issues to Consider When Valuing a Financial Institution Quality of the financial institution’s earning assets Asset/Liability management practices Management of non-interest or overhead expenses

Creating New Capital for Financial Institutions Growth of Annual $100,000 ESOP Contribution Over 10 Years Plan RetainedNew Capital Total Leveraged1.25% DepositEarningsfrom Profit New CapitalAssetsAfter-Tax ROA Year 1$100,000$42,000$ -$42,000$630,000$7,875 Year 2100,00042,0007,87591,8751,378,12517,226 Year 3100,00042,00017,226151,1012,266,52328,331 Year ,00028,331221,4333,321,49641,518 Year 5100,00042,00041,518304,9514,574,27757,178 Year 6100,00042,00057,178404,1306,061,95475,774 Year 7100,00042,00075,774521,9047,828,57097,857 Year 8100, ,857661,7619,926,427124,080 Year ,000124,080827,8422,417,632155,220 Year10100,00042,000155,2201,025,06215,375,938192,199 TOTAL$1 million$420,000$605, $797,261

Impediments to ESOP Implementation Distressed Situations Lack of Credit Availability Ideological Opposition

Impediments to ESOP Implementation - continued Inexperienced Management Lack of Public Markets Lack of Outside Investors

Impediments to ESOP Implementation - continued “Cut Throat” Competition Management as the “Competition” to the ESOP Lack of Legal and Regulatory Protections

Case Study #1: Royal Bank of Trinidad and Tobago Case Study #2: Phelps County Bank Case Study #3: Virginia Community Bankshares, Inc.

Case Study #4: National Commercial Bank of Jamaica Case Study #5: Allied Bank of Pakistan Limited Case Study #6: K-REP Bank of Kenya

ESOPs in Financial Institutions in Korea

Facilitating the Use of ESOPs in Bank Restructuring and Privatization Transactions Contemplates an IPO in the relatively near future Expects to remain unlisted for a period of several years Contemplates selling shares to strategic investor

Facilitating the Use of ESOPs in Bank Restructuring and Privatization Transactions - continued Employees will be the only shareholder in addition to the government Privatization will result in total divestiture or full privatization Management buyout is a feasible option

Conclusion

Recommended Operational Guidelines for ESOPs

An Overview of ESOP Incentives