LOAN WORKOUT PROJECT

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.
• Bachelors 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.