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The Role of Employee Stock Ownership Plans in the Restructuring and Privatization of State-Owned Financial Institutions

The Role of Employee Stock Ownership Plans in the Restructuring and Privatization of State-Owned Financial Institutions. David M. Binns www.beysterinstitute.com Ronald J. Gilbert www.esopservices.com. Introduction. Extensive international experience

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The Role of Employee Stock Ownership Plans in the Restructuring and Privatization of State-Owned Financial Institutions

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

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

  3. 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

  4. 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

  5. A Standard Leveraged ESOP

  6. 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

  7. Creating New Capital for Financial Institutions Growth of Annual $100,000 ESOP Contribution Over 10 Years Plan Retained New Capital Total Leveraged 1.25% Deposit Earnings from Profit New Capital Assets After-Tax ROA Year 1 $100,000 $42,000 $ - $42,000 $630,000 $7,875 Year 2 100,000 42,000 7,875 91,875 1,378,125 17,226 Year 3 100,000 42,000 17,226 151,101 2,266,523 28,331 Year 4 100.000 42,000 28,331 221,433 3,321,496 41,518 Year 5 100,000 42,000 41,518 304,951 4,574,277 57,178 Year 6 100,000 42,000 57,178 404,130 6,061,954 75,774 Year 7 100,000 42,000 75,774 521,904 7,828,570 97,857 Year 8 100,000 42.000 97,857 661,761 9,926,427 124,080 Year 9 100.000 42,000 124,080 827,842 2,417,632 155,220 Year10 100,000 42,000 155,220 1,025,062 15,375,938 192,199 TOTAL $1 million $420,000 $605,062 - - $797,261

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

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

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

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

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

  13. ESOPs in Financial Institutions in Korea

  14. 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

  15. 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

  16. Conclusion

  17. Recommended Operational Guidelines for ESOPs

  18. An Overview of ESOP Incentives

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