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.
Much of U.S. Bancorp concerns come from the poor perfomance of the
banking industry especially within the C&I market. After revealing that of the
losses in commercial real-estate and domestic were on the mainly on the East
Coast, gives positive light to Redhook Ale. The northwest area is thriving for
business with high price ale sales expected to reach $145 million in that
region alone. If Redhook Ale is optimistically able to capture that 50% market
share in that area as well in lager market they would be able to bring in
roughly $7.25 million almost tripling what they bring in now in revenues. The
potential is definitely there since they are the only ones in the local market.
Since they created a niche the board see no reason why they will not do
extrodinarily well.

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.





2
nd

The case US Bank of Washington discusses the dilemma of providing a new loan to Redhook Ale
Brewery that has decided to expand and has chosen US Bank of Washington as one of the sources of
finance. Redhook Ale Brewery has developed a good relationship with the mentioned commercial bank
and currently expects 6.5 million of financing.
The problem in the case consists in the choice to finance a deal that seems risky to Mal Harding, Vice
President of US Bank of Washington. Despite the reputation of the company, its large market share,
increasing sales, etc., Harding is not sure Redhook Ale Brewery will meet the financial projections
presented in the new loan application.
Another problem is the banking industry itself. In 1989 the profit indices in the whole industry were
weak, mainly because of losses in the C&I loans and, thus, the situations has become more complicated
since the Bank has to decide whether the investment will be a good one or not given the situation.
The risk that Harding associates with the deal under discussion is related to the fact Redhook Ale
Brewery is planning to enter a new market, particularly market for lager beer, and Harding and the Bank
as whole are reluctant to undertake high-risk projects despite the fact that they do value long-term
relationships with the customers and especially with a loyal customer like Redhook Ale Brewery.
Another factor that needs attention is the source of payment that Redhook Ale Brewery provides in the
new loan application. The payment of the loan is projected to be made by means of future profits and
cash flows. It is apparent that any projections, even the best ones are just projections and the risk is
obviously high.

Having identified the main problems of the case, the following needs to be taken into consideration
while deciding on the new loan provision:
First of all Redhook Ale Brewery is successfully conducting its business, and it is hardly probable that the
company will go bankrupt within the seven years of loan payment period. Second, the merging of big
regional breweries and successive closing down of small ones has provided a perfect environment with
little competition for the new entry of lager beer of Redhook Ale Brewery. Third, Redhook Ale Brewery
has a reputation of premium beer producer and its new product is highly possible to succeed. Fourth,
the collateral of 13,757,000 USD is provided in the application, 3,700,000 USD of out which are the
plants in Washington and California. The mentioned amount comprises approximately the 50% of the
loan.
Another factor to consider is the significance of long-term relationships with customers which is even
more essential in the period of instability of banking industry. The history of the relationships is not of
little importance either.
Thus, my recommendation to the US Bank of Washington is to extend the above-described expansion
loan to Redhook Ale Brewery.

3
rd

U.S. Bank of Washington
Problem
The loan approval board has currently reviewed the loan application of the
Redhook Ale Brewery in connection to the proposed issuance of an expansion
loan for the amount of $6.5 million dollars. Redhook Ale has been a valued
customer with no complaints but yet there are still some areas of concern in
regards to this proposed application. U.S. Bank could possibly face losses on
their investment in the end causing more liability.

Currently the profit indices for the banking overall were weak in 1989. The
larger banks were reporting weak earnings and commercial and industrial
(C&I) loan growth was recently on the decline. This problem is then weather
or not this would be a good investment for U.S. Bank due to the under
performing industry trends and will it this investment properly fit into the
companys portfolio.

Another problem that may possibly arise, could be Redhook failing. The new
Redhook ale may not do as well as projected and attract fewer sales leading
to a default on their loan. But for the sake of this case we will assume that
Redhook received the $5 million equity infusion.


http://www.scribd.com/doc/116998333/US-Bank-of-Washington-Commercial-Banks-in-US
In general explain how and why bank earn its spread
why can banks go away with so less equity today when money mkt funds also offer low cost
deposits
what strategies bank are pursuing to create value
general banking industry worldwide n Pakistan in particular
whats this particular bank strategy for success and how they following it
how attractive is red hook as credit
Sir may ask to play the roles of CEo CFo loan officer, credit committee members, european
brewery and some venture capitalists should bank loan them in current forecasts?
give reasons, details n explanations, maturity date & conditions
how can mickelson sell it to harding
Sir may ask to role play for all or may be for any situation