U.S. Bank of WashingtonExecutive Summary

By:Shibo Liang

Ricardo CuellarKristaps StaksEdwin Godinez

Dilemma: The U.S. Bank of Washington will need to determine if making a loan to Redhook Ale Brewery fits the bank’s

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

bank’s 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 client’s 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 Redhook’s 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 Redhook’s 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 bank’s 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

Cash Flows from Operating Activities

(+) Net Sales 3,559,707 4,886,522 (-) COGS 2,262,390 2,698,806 (-) SG&A Expenses 802,758 1,055,423 (-) Tax Expense 234,519 578,264 (-) Change in WCR 207,602 184,658

A. Net Operating Cash Flow (NOCF) 52,438 369,371

Cash Flows from Investing Activities

(+) Sale of fixed Assets - - (-) Capital Expenditures and Acquisitions (299,340) 2,430,660 11,258,848

B. Net Cash Flow from Investing Activities 299,340 (2,430,660)

Cash Flows from Financing Activities(+) Increase in long-term borrowing - (+) Increase in short-term borrowing 24,884 16,951 (-) Long-term debt repaid 117,854 146,619 (-) Interest Payments 110,934 95,079 (-) Dividend Payments - -

C. Net cash flow from financing activities (203,904) (224,747)

D. Total Net Cash Flow (A + B + C) 147,874 (2,286,036)

E. Opening Cash 141,952 289,826

F. Closing Cash (E + D) 289,826 (1,996,210)

1990 1991

Exhibit 1 Continued

Cash Flow Statement

Cash Flows from Operating Activities

(+) Net Sales 6,777,320 15,841,093 26,459,783 (-) COGS 3,294,352 8,831,167 12,160,594 (-) SG&A Expenses 1,327,843 2,904,611 3,969,472 (-) Tax Expense 802,635 1,135,131 3,351,083 (-) Change in WCR 261,077 1,490,906 1,816,392

A. Net Operating Cash Flow (NOCF) 1,091,413 1,479,278 5,162,242

Cash Flows from Investing Activities

(+) Sale of fixed Assets - - - (-) Capital Expenditures and Acquisitions (765,258) (1,317,911) 15,090,284 13,772,373

B. Net Cash Flow from Investing Activities 765,258 (15,090,284) (13,772,373)

Cash Flows from Financing Activities(+) Increase in long-term borrowing 6,006,581 - - (+) Increase in short-term borrowing 11798 (678) 20,817 (-) Long-term debt repaid 815,738 1,496,557 (-) Interest Payments 203,982 771,536 600,332 (-) Dividend Payments - - 1

C. Net cash flow from financing activities 5,814,397 (1,587,952) (2,076,073)

D. Total Net Cash Flow (A + B + C) 7,671,068 (15,198,958) (10,686,204)

E. Opening Cash (1,996,210) 5,674,858 (9,524,100)

F. Closing Cash (E + D) 5,674,858 (9,524,100) (20,210,304)

1992 1993 1994