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LOAN WORKOUT PROJECT

LOAN WORKOUT PROJECT. Background, Class Project & Preliminary Report Information January 21, 2003. Business Background. Banks make both personal & commercial loans Personal: A type of loan you would take out to mortgage a house; pay money back in monthly installments.

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LOAN WORKOUT PROJECT

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  1. LOAN WORKOUT PROJECT Background, Class Project & Preliminary Report Information January 21, 2003

  2. Business Background • Banks make both personal & commercial loans • Personal: A type of loan you would take out to mortgage a house; pay money back in monthly installments. • Commercial (business): A loan issued where the borrower keeps the entire amount for a fixed time; makes regular interest payments. • We will only consider commercial loans.

  3. Borrowers • Q: Who should the banks lend to? • Need information about the borrower – business background, education level, etc. • What is the loan being used for? • Loans are risky – banks must monitor the loans carefully. • If the borrower fails to make interest payments, the bank has to make a decision on Foreclosure vs. Workout.

  4. Foreclosure vs. Workout • Foreclosure: In most cases, this means the bank takes over the collateral for the loan and sells it in the market. • Workout: If the bank decides that finabcially it is worth it to them to keep the loan open, the bank can set up a new schedule of loan payments with the borrower.

  5. Decision-making • The bank needs to make a workout decision using a lot of information. • Historical data on past borrowers with similar conditions as your borrower. • Current state of the Economy. • If a workout plan is decided upon, everyone must agree to it.

  6. Term / Definitions • Full Value: Amount of original loan. • Foreclosure Value: Amount of money the bank receives if it decides to foreclose on the loan. • Default Value: Amount of money the bank receives if it decides to enter into a workout and the workout fails.

  7. Class Project • In class, we will be referring to a situation that is similar to the project you will be working on. • All loans (for both class and team projects) are taken out with Acadia Bank. • Acadia Bank is composed of 3 former banks: DuPont, Cajun & BR.

  8. Class Project (cont.) • John Sanders has a commercial loan with Acadia Bank with the following information: • Full Value: $4,000,000 • 10% interest rate • 1 year old • Loan terminates in 4 years. • Missed last interest payment and will not be able to make the next 3 payments.

  9. Foreclose? • If the bank forecloses on the loan: • John Sanders will be out if business. • Bank recovers only $2.1 million of the original $4 million. • If the bank enters into workout: • If the workout succeeds, bank recovers the original $4 million. • If the workout fails, the bank only recovers $250,000 of the original $4 million.

  10. How to make the decision? • Bank needs to know the expected value of a workout. • The bank will need to use historical data on borrowers with similar information. • BR: Number of years experience. • Cajun: Education level. • DuPont: State of the economy. • All three banks have data on thousands of borrowers. • Information can be found in Loan Records.xls

  11. Conditions • John Sanders information: • 7 years experience in his business. • Bachelor’s degree in Business Administration. • State of the economy is “normal”. • All three conditions are independent of each other. • Q: Should Acadia Bank enter into a workout agreement or foreclose on the loan?

  12. Team Projects • Each team needs to go to the class web page to find information about a borrower who has fallen behind on interest payments. • Each team should have the following information: • Education level, • State of the economy, • Years of experience, • Full value, Foreclosure value and Default value of the loan.

  13. Preliminary Reports • Each team must have a preliminary report ready to present on: • Thursday, January 23rd section 28, • Friday, January 24th section 3. • This report must be done as a PowerPoint presentation. Everyone on the team must speak during the presentation. • The report will be about 5 minutes in length with me asking a question or two at the end of the presentation.

  14. In the report: • Each member of the group must be introduced. • Background about the borrower given – be creative! • Background about loan information given. • Some preliminary analysis done on historical data. • Preliminary decision given with justification.

  15. Requirements / Suggestions • Dress is business casual – • Men: Polo or button-down shirt (tucked in), belt khakis, dress slacks – no sneakers, sandals, flip-flops, shorts, t-shirts, sweat pants. • Women: No spaghetti straps, short skirts, short shirts, flip-flops, sandals, shorts, t-shirts, sweat pants. • Look at entire audience when presenting – not just at me. • Do not read too much from the slides or notes – rehearse the presentation.

  16. Requirements / Suggestions • Be confident when speaking. • Do not cut in when others are speaking – know your role. • Do not go over the time limit, but do not speed through the presentation either. • Look at the sample grading sheet on the web page. • Print out a hard copy of the slides to give to me. • Look at class web page for requirements and suggestions.

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