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Project 1: Loan Workouts

Project 1: Loan Workouts. Project 1: Loan Workouts. Can someone briefly describe the loan workout project? Arcadia Bank is in a commercial loan Borrower is in default Bank has two options: Foreclose on the loan Attempt a workout of the loan. Project 1: Loan Workouts.

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Project 1: Loan Workouts

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  1. Project 1: Loan Workouts

  2. Project 1: Loan Workouts • Can someone briefly describe the loan workout project? • Arcadia Bank is in a commercial loan • Borrower is in default • Bank has two options: • Foreclose on the loan • Attempt a workout of the loan

  3. Project 1: Loan Workouts • Option 1 Foreclose: What are the consequences of a foreclosure for the bank and borrower? • For the bank: • Takes an immediate loss on the loan • Seizes control of borrower’s assets (collateral) and sells them on the market • Proceeds from the sale of assets is foreclosure value • Lost business relationship between client

  4. Project 1: Loan Workouts • Consequences (continued) • For the borrower: • Forced into bankruptcy • Business venture and reputation are ruined • Lost business relationship with bank

  5. Project 1: Loan Workouts • Option 2 Attempt a Workout: What are the consequences of a workout for the bank and borrower? • For the bank & borrower • Means readjusting monthly payment schedule on loan amount • There is a chance that the entire loan amount could be recovered • Maintains healthy business relationship with borrower

  6. Project 1: Loan Workouts • Consequences (continued) • Workouts can sometimes be RISKY • If the workout fails: • Borrower’s assets (collateral) are worth even less • Bank recovers less money upon seizing borrower’s assets (default value) than foreclosure value

  7. Project 1: Loan Workouts • How 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.

  8. Project 1: Loan Workouts • As the bank you have already taken somewhat of a risk in making the loan • Do 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?

  9. Project 1: Loan Workouts • What is acceptable in a workout? • What is unacceptable that you would want to foreclose? • What factors should you look at in deciding this?

  10. Project 1: Loan Workouts • Past history of your bank: • What has been the past history of foreclosures and workout attempts for your bank? • LoanRecords.xls • How many successful loan workouts? • How many unsuccessful?

  11. Project 1: Loan Workouts • Borrower 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 experience • Cajun: workout records based on educational level (high school, bachelor’s degree, graduate degree)

  12. Project 1: Loan Workouts • How much do each of these factors weigh in making the decision to workout or foreclose on the loan? • Entrepreneurial Experience • Suggests strong business sense and savvy by acquiring a reputation built on years of experience • 2 years experience vs. 14 years experience?

  13. Project 1: Loan Workouts • Factors to consider (continued) • Education Level • Suggests proficiency and formalized training especially if it is in business • May make-up for a lack of experience in business • Flexibility to learn and acquire new skills and strategies for making business decisions • High School Diploma vs PhD?

  14. Project 1: Loan Workouts • Factors to consider (continued) • Economic Conditions • may impact the likelihood of a successful business venture • Conditions might be ripe for a new business to take hold • Recession vs. Boom

  15. Project 1: Loan Workouts • Other factors: • How does the size of the foreclosure value compare to the loan amount? • Loan Amount $6,900,000 vs. Foreclosure Value $4,000,000 • How does the foreclosure value compare to the default value? • Foreclosure Value $4,000,000 vs. Default value $850,000

  16. Project 1: Loan Workouts • Get with your team members now: • Look at your particular borrower’s information • Decide what you are going to look for determining whether you workout or foreclose • Think about how the LoanRecords.xls file might help you with this • How are you going to make sense of the information for you Preliminary Report?

  17. Project 1: Loan Workouts • Before 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?

  18. Project 1: Loan Workouts • Reminder: Jan 20th Kick-Off event • See: http://math.arizona.edu/~sreyes/

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