Traverse Bank
7 Pages Posted: 3 Sep 2020
Date Written: Dec. 4, 2019
Abstract
This case follows a senior loan officer who is reviewing requests from two customers of the bank to raise their credit limits. The two businesses are alike in many ways, but the loan officer believes one represents a greater problem. The students must use a ratio and financial analysis (all ratios are provided, as the challenge is not calculating ratios but interpreting them) to identify which of the two is worthy of concern. The emphasis in this case is on interpretation rather than calculation, though an instructor can explore definitions and calculations as desired. By hinting that there is a conclusion that can be reached, students are motivated to view their analyses as supporting a judgement. Just as ratios essentially link line items to provide insight, judgement links ratios to tell a story. An intentional feature of this case is that the judgement is relatively clear, and students will finish with a sense of success.
Excerpt
UVA-F-1929
Dec. 4, 2019
Traverse Bank
In March of 2019, senior loan officer Christina "Tina" Andersen sat down to review a request from two customers of Traverse Bank to increase their lines of credit. The two customers were similar companies in quite a few respects: both were family businesses that had successfully transferred ownership and control from parents to children a few years previously, both had been customers at the bank for over 20 years, both were micro-chain clothing stores, and both were located in the Traverse City area around Grand Traverse Bay in Michigan. Andersen was not the loan officer who typically handled these particular customers, but both firms had reported sufficiently high debt levels in their recent financial statements (both had more than 30% outstanding debt relative to book assets), so an additional senior review was required before the line could be increased.
The major purpose of credit lines was to fund temporary working capital needs, such as the buildup of inventory. For this reason, as part of every agreement, the borrower was expected to pay down the line of credit in full for at least 30 days each year. However, some customers would use their line of credit to fund investment opportunities. These opportunities typically needed immediate funding, but might take more than a year to generate enough funds to pay down the added borrowing. Thus the bank would often allow a violation of the pay-down requirement, especially for valued customers, if a good argument was made. It was also true that Traverse Bank would ignore small violations of the pay-down requirement if the vast majority of the borrowings had been repaid.
The purpose of Andersen's review was to determine whether the bank should grant the requested credit expansions, but also more importantly to determine whether these customers were potential problems for the bank and would warrant more careful scrutiny going forward. Given the markets they served and the nature of their businesses, Andersen knew the two companies she was reviewing were just now preparing for their busy summer seasons.
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Keywords: ratios, financial analysis, credit, loans, risk, decision-making
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