Project 1: Loan Workout

1
Project 1 Loan Work-out

• Project Background
• Preliminary Report Information

2
Business Background

• Carefully read pp. 15 18 of Student Notebook.
• Banks make both personal commercial loans
• Personal Credit card debit, car loans, student
  loans and mortgages generally principal and
  interest paid back in monthly installments
  
• Commercial (i.e., Business) takes many
  different forms could be public or private
  typical feature of loan is that only interest is
  paid monthly with face amount due at expiration.
• We are interested in commercial loans

3
Risk Factors

• Question To whom should a bank lend money?
• Must consider borrowers education level, special
  training, experience etc
  
• What is the purpose of the loan?
• Lender has a fiduciary responsibility to
  shareholders since loans contain default risk,
  banks monitor their loan portfolios carefully.
  
• If the borrower misses one or more interest
  payments, the lender (bank) must decide what to
  do with the loan.

4
Foreclose versus Work-out

• There may be many options available to the
  lender. We consider only two
  
• Foreclose Borrower is required to return the
  principal value of the loan. In many cases this
  means the bank will assume control of available
  assets and sell them may force bankruptcy.
• Work-out If bank decides that it is worth the
  risk to maintain the loan, they may decide to
  enter into a work-out arrangement with the
  borrower.

5
Decision-making

• The lender (Acadia Bank) makes foreclosure
  decisions based upon certain empirical
  information, for example, the performance data of
  previous borrowers.
• Problem
• Acadia Bank is comprised of three banks that
  merged to form one entity
  
• DuPont
• Cajun
• BR
• Each of the three banks retained different
  information regarding its borrowers.

6
Example From Student Notebook

• John Sanders has a commercial loan with Acadia
  bank with the following information
  
• Full Loan Value 4,000,000
• 10 interest rate
• 1 year old
• Terminates in 4 years
• Missed last interest payments and will not be
  able to make at least the next three payments

7
Foreclose or Workout?

• If the bank forecloses on the loan
• John Sanders will be forced out of business
• Bank recovers only 2.1M of the original 4M
• The 2.1M represents the foreclosure amount
• If the bank enters into a workout arrangement
• If successful, bank recovers original 4,000,000
• If unsuccessful, bank recovers only 250,000 of
  the original 4,000,000
  
• The 250,000 represents the default amount

8
Review of Key Terms

• Commercial Loans / Personal Loans
• Foreclosure
• Workout Arrangement
• Full Loan Value
• Foreclosure Value
• Default Value

9
How to Decide

• We must balance the certain quantity, that is,
  the foreclosure amount against the uncertain
  quantity of the loan workout.
  
• The question then is, How do we give a dollar
  value to loan workout given its uncertain
  outcome?

10
How to Decide

• Acadia will use its historical database to
  identify borrowers with similar attributes as our
  clients.
  
• BR Number of years of experience
• Cajun Educational level
• DuPont State of economy
• All three former banks have data on thousands of
  borrowers (over 8,000 in all)
  
• Information found in Loan Records.xls

11
Sample of Bank Loan Records
12
Client Attributes

• John Sanders information
• 7 years of experience
• Bachelors degree in Business Administration
• State of economy is normal
• All three conditions are independent of each
  other (more on independence later)
  
• Question Should Acadia enter into a workout or
  foreclose on the loan?

13
Team Projects

• Assume that you are a loan officer employed at
  Acadia Bank
  
• Each team must go to my web page for information
  about a borrower who has fallen behind on their
  loan payments. Each team is given the following
  information concerning a hypothetical client
• Education level
• State of economy
• Years of experience
• Full Value, Foreclosure Value, Default Value of
  loan

14
Preliminary Report Requirements

• All teams must give a preliminary report. (The
  date is in the syllabus.)
  
• This report must be done as a PowerPoint
  presentation and everyone on the team must
  participate (speak) during the presentation.
  
• The report will be no more than 3 or 4 minutes in
  length. I will ask a question or two during or at
  the end of the presentation.

15
Preliminary Report Requirements

• Introduce each member of the team
• Provide background on borrower be creative!
• Provide loan information
• State your decision
• Support your decision via
• Common sense
• Historical data

16
Preliminary Report Requirements

• Before you begin your presentation give me a copy
  of your slides printed as a Power Point handout
  with six slides on a page. Black and white print
  is fine.
• You must stay within the time limits
• Dress is business casual --
• Men Polo or button-down shirts, tucked in,
  belts, khakis or dress slack -- no sneakers,
  sandals
  
• Women Use your good common sense

17
Suggestions

• Keep your slides simple
• Be careful with your use of colors
• Do not cut in when others are speaking -- know
  your roles
  
• Look at entire audience when presenting -- not
  just me
  
• Team members that are not presenting should focus
  on the speaker
  
• Do not read from slides or notes internalize
  your presentation