Project 1: Loan WorkoutsSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Project 1: Loan WorkoutsProject 1: Loan WorkoutsCan someone briefly describe the loan workout project?Arcadia Bank is in a commercial loanBorrower is in defaultBank has two options:Foreclose on the loanAttempt a workout of the loanProject 1: Loan WorkoutsOption 1 Foreclose: What are the consequences of a foreclosure for the bank and borrower?For the bank:Takes an immediate loss on the loanSeizes control of borrower’s assets (collateral) and sells them on the marketProceeds from the sale of assets is foreclosure valueLost business relationship between clientProject 1: Loan WorkoutsConsequences (continued)For the borrower:Forced into bankruptcyBusiness venture and reputation are ruinedLost business relationship with bankProject 1: Loan WorkoutsOption 2 Attempt a Workout: What are the consequences of a workout for the bank and borrower?For the bank & borrowerMeans readjusting monthly payment schedule on loan amountThere is a chance that the entire loan amount could be recoveredMaintains healthy business relationship with borrowerProject 1: Loan WorkoutsConsequences (continued)Workouts can sometimes be RISKYIf the workout fails:Borrower’s assets (collateral) are worth even lessBank recovers less money upon seizing borrower’s assets (default value) than foreclosure valueProject 1: Loan WorkoutsHow should you as the loan officer of Arcadia Bank decide whether to foreclose or attempt a workout?If the borrower is in default it could mean:a temporary lack of funds: “business is slow right now” or “expenses are more than anticipated” etc.a more severe problem: “management of the business is proficient”, “industry is in flux”, “no demand for the business” etc.Project 1: Loan WorkoutsAs the bank you have already taken somewhat of a risk in making the loanDo you want to widen the risk by attempting a workout between the borrower or the risk is unacceptable at this point and you’d rather cut your losses now?Project 1: Loan WorkoutsWhat is acceptable in a workout?What is unacceptable that you would want to foreclose?What factors should you look at in deciding this?Project 1: Loan WorkoutsPast history of your bank:What has been the past history of foreclosures and workout attempts for your bank?LoanRecords.xlsHow many successful loan workouts?How many unsuccessful?Project 1: Loan WorkoutsBorrower Information:Remember that Arcadia Bank is the merger of three other banks:DuPont: workout records based on state of economy (recession, normal, boom)BR Bank: workout records based on entrepreneurial experienceCajun: workout records based on educational level (high school, bachelor’s degree, graduate degree)Project 1: Loan WorkoutsHow much do each of these factors weigh in making the decision to workout or foreclose on the loan?Entrepreneurial ExperienceSuggests strong business sense and savvy by acquiring a reputation built on years of experience2 years experience vs. 14 years experience?Project 1: Loan WorkoutsFactors to consider (continued)Education LevelSuggests proficiency and formalized training especially if it is in businessMay make-up for a lack of experience in businessFlexibility to learn and acquire new skills and strategies for making business decisionsHigh School Diploma vs PhD?Project 1: Loan WorkoutsFactors to consider (continued)Economic Conditionsmay impact the likelihood of a successful business ventureConditions might be ripe for a new business to take holdRecession vs. BoomProject 1: Loan WorkoutsOther factors:How does the size of the foreclosure value compare to the loan amount?Loan Amount $6,900,000 vs. Foreclosure Value $4,000,000How does the foreclosure value compare to the default value?Foreclosure Value $4,000,000 vs. Default value $850,000Project 1: Loan WorkoutsGet with your team members now:Look at your particular borrower’s informationDecide what you are going to look for determining whether you workout or forecloseThink about how the LoanRecords.xls file might help you with thisHow are you going to make sense of the information for you Preliminary Report?Project 1: Loan WorkoutsBefore you leave you need to tell me the following (write on a piece of paper and give to me)What is your overall plan for deciding to workout or foreclose?Explain what you will try to look as far as the borrower’s characteristics and loan records show. Be specific.What is your group’s meeting time?Project 1: Loan WorkoutsReminder: Jan 20th Kick-Off eventSee:
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