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 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

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

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

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

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.

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?

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?

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?

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)

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?

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?

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

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

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?

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?

Project 1: Loan Workouts Reminder: Jan 20 th Kick-Off event  See: