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Gross vs Net Loans Analysis at Sea Level Bank

The Sea Level Bank has $800 million in gross loans with a $45 million allowance for loan losses account. Two years ago, the bank made a $12 million loan to finance the Sunset Hotel. $2 million of principal was repaid before default. The bank believes the hotel will sell at auction for $7 million and wants to immediately charge off the remaining $5 million.

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514 views1 page

Gross vs Net Loans Analysis at Sea Level Bank

The Sea Level Bank has $800 million in gross loans with a $45 million allowance for loan losses account. Two years ago, the bank made a $12 million loan to finance the Sunset Hotel. $2 million of principal was repaid before default. The bank believes the hotel will sell at auction for $7 million and wants to immediately charge off the remaining $5 million.

Uploaded by

paresh agrawal
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

The Sea Level Bank has Gross Loans of $800 million with an ALL account of $45

million. Two years ago the bank made a loan for $12 million to finance the Sunset
Hotel. Two million dollars in principal was repaid before the borrowers defaulted
on the loan. The Loan Committee at Sea Level Bank believes the hotel will sell at
auction for $7 million and they want to charge off the remainder immediately.

a. The dollar figure for Net Loans before the charge-off is _____.

Net Loans = Gross Loans –ALL = $800 − $45 = $755 million

b. After the charge-off, what are the dollar figures for Gross Loans, ALL and Net Loans
assuming no other transactions?

Gross Loans = $800 million – ($10 million − $7 million) = $797 million

ALL =$45 million – ($12 million− $2 million − $7 million) = $42 million (The amount
of the loan that is bad)

Net Loans = Gross Loans – ALL = $797 − $42 = $755 million

c. If the Sunset Hotel sells at auction for $10 million, how will this affect the pertinent
balance sheet accounts?

Gross loans and ALL would not change as the bank would recover all the money invested
earlier.

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