U.S.

Bank of Washington Executive Summary

By: Shibo Liang Ricardo Cuellar Kristaps Staks Edwin Godinez

Dilemma: The U.S. Bank of Washington will need to determine if making a loan to Redhook Ale Brewery fits the banks portfolio. Alternatives: 1) Provide loan for Redhook Ale Brewery using a floating rate based on the U.S. Bank of Washington Prime 2) Provide loan for Redhook Ale Brewery with loan covenants 3) Reject loan request from Redhook Ale Brewery and keep current loan portfolio 4) Reject loan request from Redhook Ale Brewery and shift focus from commercial lending to residential lending Criteria: 1) Improves revenues and cash flow stream of U.S. Bank of Washington 2) Fits within U.S. Bank Corps overall stated goals of 1% Return on Assets (ROA) and +15% Return on Equity (ROE) 3) Reduces risk of outstanding/existing (in terms of loan sector concentration) loan portfolio Analysis: 1) Through the analysis of cash flows, it can be seen the total net cash flows as volatile. Based on estimates made, the cash flows remain positive for certain years and negative for others as seen in Exhibit 1. The risk profile that the bank wishes to maintain will not fall in line with the cash flows that Redhook Ale Brewery will provide. The significant projected negative cash flows from investing activities are a risky part of the company. With a loan at just the floating rate, the risks of the company will dilute the quality of the loan portfolio. 2) The net operating cash flow of Redhook Ale Brewery is projected to be on a significant increase. Should the terms of the loan structure limit the amount of investments that Redhook Ale Brewery can make, it will greatly reduce the risk. If the projected net operating cash flows prove to be accurate, the company is operating very efficiently. The risks of the banks loan portfolio will be reduced through making a loan with strong positive cash flows. The loan terms with covenants will provide the U.S. Bank Corp overall additions to their return on assets and return on equity. 3) With a conservative view on this loan, the US. Bank Corp may reject the loan based on the closing cash of Redhook Ale Brewery. Taking a look at the cash flows from investing, it is determined that the company still needs significant investments to expand. This will pose as a risk that is outside of the loan portfolio profile of the bank. 4) It has been seen that consumer loans have been on steady growth for the five years prior to 1989 and is expected to continue to grow for the overall banking industry. U.S. Bank of Washington will need to maintain their market share in order to compete with its peers and continue to grow their loan portfolio on pace or ahead of the industry. In addition, it is

expressed that the U.S. Bankcorp is focused on improving the quality of their loan portfolio by mitigating risky loans; thus leading the bank to reduce their C&I loans. Decision: After creating and analyzing projected Cash Flow Statements, from the perspective of the loan officer, we would recommend not presenting this loan application to the internal review committee and extending the $6.5M loan to Redhook primarily due to the given the volatility of the cash flows, instead pursue alternative three and/or four: keep focus on current loan portfolio or shift attention towards residential lending. Though the analysis of the clients projected NOCF (Net Operating Cash Flow) looks favorable the cash flows over the life of the proposed 7 year loan prove particularly volatile. The Bank of Washington must not overlook important concerns, namely Redhooks ability to service the loan and liquidity profile; in this case both of these considerations prove precarious given the volatile cash flow projection generated from Redhooks financial statements. U.S. Bank of Washington ought to consider that the financial statements provided by Redhook Ale Brewery most likely consider the best future performance of the company which may not necessarily be the most likely outcome given industry competition and potentially anemic economic conditions over the life of the potential loan. Moreover, in context of overall loan portfolio of the banks loan portfolio extending this loan would not o add exposure to perceived increasingly risky commercial loan sector in effect increasing the overall risk profile of the Bank. This denial of the loan application decision does not come without possible downsides/risks: namely forgoing potentially high return cash flows from interest payments by the Redhook Brewery Ale Company (if they outperform) and potentially losing a long-term business relationship with this expanding company to competing lending institution in the region. Plan of Action: In order to improve the quality of the loan portfolio, The Bank of Washington will decrease C&I loans and focus on expanding on residential loans (due to shrinking in thrift industry) to maintain overall growth and maintaining market share from competitors. In terms of the Redhook, moving forward U.S Bank go Washington ought to maintain, an open, honest, and transparent relationship with Redhook Ale Brewery Company and aid with possible future financials needs. The U.S. Bank of Washington should continue to look for opportunities in other non-commercial to increase revenue and cash flow stream and not make any loan which does not meet stated goals of 1% ROA and +15% ROE.

Exhibit 1
Cash Flow Statement 1990 Cash Flows from Operating Activities (+) Net Sales (-) COGS (-) SG&A Expenses (-) Tax Expense (-) Change in WCR A. Net Operating Cash Flow (NOCF) 3,559,707 2,262,390 802,758 234,519 207,602 52,438 4,886,522 2,698,806 1,055,423 578,264 184,658 369,371 1991

Cash Flows from Investing Activities (+) Sale of fixed Assets (-) Capital Expenditures and Acquisitions B. Net Cash Flow from Investing Activities Cash Flows from Financing Activities (+) Increase in long-term borrowing (+) Increase in short-term borrowing (-) Long-term debt repaid (-) Interest Payments (-) Dividend Payments C. Net cash flow from financing activities D. Total Net Cash Flow (A + B + C) E. Opening Cash F. Closing Cash (E + D) (299,340) 299,340 2,430,660 11,258,848 (2,430,660)

24,884 117,854 110,934 (203,904) 147,874 141,952 289,826

16,951 146,619 95,079 (224,747) (2,286,036) 289,826 (1,996,210)

Exhibit 1 Continued
Cash Flow Statement 1992 Cash Flows from Operating Activities (+) Net Sales (-) COGS (-) SG&A Expenses (-) Tax Expense (-) Change in WCR A. Net Operating Cash Flow (NOCF) 6,777,320 3,294,352 1,327,843 802,635 261,077 1,091,413 15,841,093 8,831,167 2,904,611 1,135,131 1,490,906 1,479,278 26,459,783 12,160,594 3,969,472 3,351,083 1,816,392 5,162,242 1993 1994

Cash Flows from Investing Activities (+) Sale of fixed Assets (-) Capital Expenditures and Acquisitions B. Net Cash Flow from Investing Activities Cash Flows from Financing Activities (+) Increase in long-term borrowing (+) Increase in short-term borrowing (-) Long-term debt repaid (-) Interest Payments (-) Dividend Payments C. Net cash flow from financing activities D. Total Net Cash Flow (A + B + C) E. Opening Cash F. Closing Cash (E + D) (765,258) (1,317,911) 765,258 15,090,284 (15,090,284) 13,772,373 (13,772,373)

6,006,581 11798 203,982 5,814,397 7,671,068 (1,996,210) 5,674,858

(678) 815,738 771,536 (1,587,952) (15,198,958) 5,674,858 (9,524,100)

20,817 1,496,557 600,332 1 (2,076,073) (10,686,204) (9,524,100) (20,210,304)