Project 1 Introduction

Bank Loans

• Two types of loans:

- Personal

- Commercial

Personal Loans

• Borrower pays monthly installments

• Payments are a combination of outstanding principal and interest

Commercial Loans

• Borrower pays monthly installments

• Payment is interest only

• Principal is paid in full at end of set time period

• Project revolves around commercial loan

Commercial Loans

• Who receives a loan?

• Monitored by bank once loan is made

• Failure to make payments may result in foreclosure

Foreclosure

• Foreclosure

- taking over ownership of some assets & selling these in some market

• Owner loses business

• Decision must be made on quantifiable items

Foreclosure vs. Work Out

• Bank makes decision to foreclose or work out a new payment schedule

• Why is borrower unable to make payments?- temporary or permanent situation?

• Use historical factors to aid decision

• Use specific characteristics of borrower to aid decision

Project 1 Background

• Acadia Bank has just formed

• Merger between 3 Banks:

- BR Bank, Cajun Bank, and DuPont Bank

• Commercial loan with John Sanders

Project 1 Background

• Loan is for $4.0 million

• Interest rate is 10.0%

• Loan is one year old

- scheduled for 4 more years

Decision

• Mr. Sanders missed his last payment

- Cannot make next 3 payments

• Should Acadia Bank foreclose on his business?

• Should Acadia Bank work out a new payment schedule?

Monetary Values

• Foreclosure value

- Amount Acadia Bank would receive if they seized control of Mr. Sanders assets

- Forces Mr. Sanders out of business

- Guaranteed value of $2.1 million

Monetary Values

• Work out value

- Risky for Acadia Bank

- Possibility of receiving full amount: $4.0 million

- Possibility of receiving default amount: $250,000 as assets diminish in value

Monetary Values

• Benefits of a loan work out:

- Mr. Sanders keeps his business

- Bank could receive full amount: $4.0 M

• Risk of a loan work out:

- Bank could receive default amount: $250,000

Bank Information

• Acadia Bank formed through merger of 3 Banks:

- BR Bank, Cajun Bank, and DuPont Bank

• Each bank kept separate records on their borrowers characteristics

• Each bank dealt with similar populations

Bank Information

• BR Bank

- records for years in business

• Cajun Bank

- records for educational status

• DuPont Bank

- records for economic status

Bank Information

• Several thousand records from each bank exist

• Records from banks exist in Excel file Loan Records.xls

• Years of experience, education level, and economic conditions are independent from each other

Borrower’s Information

• Seven years of experience

• Bachelor’s Degree

• Normal economic status

Team’s Information

• You will receive information about your borrower at:

http://math.arizona.edu/~sreyes/

• Several pieces of information given

Team’s Information

• Years of experience, Education level, Economic status

• Full amount of loan, foreclosure amount, default amount

• Use this information to decide: foreclose or work out

Hints for Preliminary Report

• Present using PowerPoint

• Dress professionally

• Explain your purpose for presenting

• Clearly state your solution (foreclose or work out a new payment schedule)

Hints for Preliminary Report

• Avoid slides that are too wordy: 5 and 5 rule

• Every member should present something substantial

• Keep presentation to 3-5 minutes