Acadia Bank Loan Officers: Jennifer Jones Lindsay Yoshitomi Leslie White Jeff Guba
The Evolution of Acadia Bank: Acadia Bank was created through the merge of the following 3 banks: -BR Bank (Who handles the Business Experience of their clients) -Cajun Bank (Handles the Level of Education for their clients) -Dupont Bank (Handles the Economic Condition of the Market during their clients’ loan) B+C+D= Acadia
Computer Programmers Corp. Michael Smith: High School diploma, 10 years of business experience, and during a boom economy. Loan: $5,000,000 taken out Foreclosure value of loan: $3,500,000 Default value of loan: $1,000,000 Current situation of loan: Mr. Smith has told Acadia Bank that he is having trouble making payments on his loan he borrowed. Our job now is to determine whether to foreclose on Mr. Smith and repossess the collateral for the loan in default which could cause Mr. Smith into Bankruptcy. The other option is to work out Mr. Smith’s loan and try to change payment plans, payment schedule, or even reduce payment amount.
Terms to know from a bank: -Foreclosure: The means to repossess the collateral for loan that is in default which is initiated by a creditor. -Loan Work Out: means of a bank to decide to continue a loan with the borrower by either changing payment plans, conditions, or dates for payments. -Foreclosure Value: Amount recovered from a loan the bank has foreclosed on. -Full Value: Amount returned following a successful work out, otherwise the original amount borrowerd. -Default Value: Amount returned following a failed work out.
The Overall Probability of Success and Failure The probabilities below deal with a random borrower (client) from Acadia bank. Below the probabilities were determined by dividing total successful or failed work outs by the total number of borrowers from Acadia Bank.
Conditional Probability: -Definition: Probability that a certain event will occur given that another event has already occurred. Conditional Probability Formula: Random Variables for the Loan: -Y: represents # of years of experience borrower has had in business (10 years). -T: represents education level of the borrower (High School Degree). -C: represents economic condition at the time the loan was taken out by the borrower (Boom Economy).
Probability of Success and Failure: Given Y, Given T, and Given C: Probability of success given Y: Probability of success given T: Probability of success given C: Probability of failure given Y: Probability of failure given T: Probability of failure given C:
Probability of Y, T, and C: Given a Successful Work Out Here we assume that Y, T, and C are independent events where the outcome of one event has no effect on the outcome of another event. In math terms: The same can be said for failure of a work out:
The value shown above expresses there is a 0.32% chance that our client, borrower, has the exact experience, education, and econ. Condition given he or she has had a successful work out. The value shown above expresses there is a 0.27% chance that our client, borrower, has the exact experience, education, and econ. Condition given he or she has had a failed work out.
Bayes' Theorem: From the data that we have calculated we can use Bayes’ Theorem to calculate: From the information above we have found overall success or failure given the borrower had the same experience, education, and econ. Conditions as ours. From here it seems there is a 51% chance of a successful work out and a 49% chance of a failed work out to pay back the $5,000,000 loan.
Expected Value The following represents the value of Mr. Smiths’ loan workout represented by: - Z represents the amount of money that is recovered by Acadia Bank in the event of a work out. The foreclosure value of Mr. Smiths’ loan is $3,500,000.00…
Acadia Bank Final Decision: After calculations of all possibilities to determine how to deal with the current situation it comes to the banks’ attention that to foreclose would save the bank money. As loan officers we have decided to foreclose on the clients’ loan after concluding the expected value of a successful workout would still be over $540,000 less than the foreclose value of $3,500,000.