1. 1 Project Description  Business Background  Class Project

2. 2 Business Background  Loans Personal- Borrower receives money & pays back monthly Commercial- Borrower keeps the entire money (for a fixed period) Returns the Principal as a lump sum Regularly pays the interest  We will be considering Commercial loans

3. 3 Business Background- contd.  Most Important problem for Banks- Deciding to whom they should lend  Decisions- Processing information (Business plan/ Data about past loan workouts)  Lends money if the Probability of repaying loan is sufficiently high  If the borrower fails to make expected interest ( Default on the loan)  Bank has two options ( Objective-Profitability) - Foreclose loan - Loan Workout

4. 4 Business Background- contd.  Bank Forecloses a loan if Benefits of Foreclosure > Benefits of Workout  What is Foreclosure? Bank requires the borrower to pay back Principal+ Interest or Bank takes over ownership of the relevant assets & sells it (may put the borrower out of business)

5. 5 Business Background- contd.  Bank enters a Loan Workout if Expected Value Workout > Expected Value Foreclose  What is Loan Workout? Attempt to salvage the loan by setting up a new schedule or temporarily deferring such payments

6. 6 Class Project  John Sanders ( has failed to pay interest)  7 years Experience  Bachelor’s Degree  Economic Condition- Normal  Full Value- $ 4,000,000 (Loan value)  Default Value- $ 250,000 (loan workout fails )  Foreclosure Value- $ 2,100,000 (If bank Foreclose )

7. 7 Class Project  Acadia Bank (Merger of BR Bank/ Cajun Bank/ Dupont Bank)  Historical Data on Loan Workouts ( Assume similar Clients) 1. BR - Experience 2. Cajun- Education Status 3. Dupont- State of Economy

8. 8 Class Project  Using the Mathematical Tools (Eg: Basic Probability/Expected Values/ Conditional Probability…)  Need to create a Business Solution  Should Acadia Bank enter into a workout agreement with John, or should it foreclose on the loan?

9. 9 Project 1-assumptions  Similar clients-Each of the three former banks made loans to very similar populations of borrowers  Experience/Education Status/State of Economy are all independent of each other

10. 10 Preliminary Report  Preliminary Report – TBN  Teams & Data for Project 1 on Class website  3-5 minutes PowerPoint presentation  You will be asked 1-2 questions about the presentation  You need to give me a copy of the PPT presentation (size 6X4)  Dress Code- Business Casual

11. 11 Preliminary Report- contd.  Read about report on MBD part1.ppt(Slide # 32)  Should start the presentation by introducing the team  A Discussion of the problem  Definitions  Project Assumptions  Study of Historical Data ( Loan Record.xls)  Tentative decisions (based on problem data/common sense/ business considerations)  Evaluation Form for the Presentation is posted on the class website