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
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)