Analyze this case and decide whether or not you would approve the loan request. Please incorporate the four C's of credit if possible
MILWAUKEE MACHINING, INC. CASE This company is a Subchapter S Corporation. The company with the same ownership, Machining Investments, LLC, owns the real estate occupied by Milwaukee Machining, Inc. and is an LLC as the name would indicate. Currently, the corporation has outstanding a balance of $801,865 on its line of credit and a balance remaining on a term loan in the amount of $157,087 from another bank. In addition, officers of this company have loaned the business $842,290. The Park Bank is reviewing the situation to evaluate if they should take over the lending relationship for this company. If so, the Park bank would loan $750,000 on a term loan basis and would establish a line of credit on a borrowing base formula with a cap of $500,000. The draw on the line of credit upon closing the loan transaction would be $208,000. In addition, Machining Investments, LLC, the owner of the real estate occupied by Milwaukee Machining, Inc., has a first mortgage loan outstanding in the amount of $1,756,424 with the current lender and a second mortgage outstanding (subordinate to the bank's first mortgage) in the amount of $464,376 with the Milwaukee Economic Development Corporation. If the Park Bank assumes the lending relationship, they would provide a first mortgage loan in the amount of $1,816,000, ahead of the second mortgage held by the Milwaukee Economic Development Corporation. The shareholders would sign personal unlimited guarantees to secure the loans and cross-guarantees would be granted by each of the two corporations. See the attached Park Bank loan presentation documents including the loan officer's and analyst's presentation and the financial statements for the two companies. ASSIGNMENT: As a loan committee member at the Part Bank, would you approve the request? Why or why not? WHAT CRITERIA DO BANKS USE IN MAKING LOANS? 1. The old four Cs of credit are still applicable. a. Character of the managers of the business b. Capacity of the business to repay interest and principal on time c. Conditions of the industry and the economy d. Collateral that can be used to secure the loan 2. Other factors used are RMA ratio comparisons. 3. Key to remember - banks are lending out depositors' dollars, not our own, therefore must be extremely cautious in making loan decisions. 4. "Gut feel" plays an important role in this process to assess management strength. Various non-financial elements can be important, such as a proprietary product, an important patent or trademark, an extensive distribution system, a strong customer list, a specially designed computer system, etc. MILWAUKEE MACHINING, INC. CASE This company is a Subchapter S Corporation. The company with the same ownership, Machining Investments, LLC, owns the real estate occupied by Milwaukee Machining, Inc. and is an LLC as the name would indicate. Currently, the corporation has outstanding a balance of $801,865 on its line of credit and a balance remaining on a term loan in the amount of $157,087 from another bank. In addition, officers of this company have loaned the business $842,290. The Park Bank is reviewing the situation to evaluate if they should take over the lending relationship for this company. If so, the Park bank would loan $750,000 on a term loan basis and would establish a line of credit on a borrowing base formula with a cap of $500,000. The draw on the line of credit upon closing the loan transaction would be $208,000. In addition, Machining Investments, LLC, the owner of the real estate occupied by Milwaukee Machining, Inc., has a first mortgage loan outstanding in the amount of $1,756,424 with the current lender and a second mortgage outstanding (subordinate to the bank's first mortgage) in the amount of $464,376 with the Milwaukee Economic Development Corporation. If the Park Bank assumes the lending relationship, they would provide a first mortgage loan in the amount of $1,816,000, ahead of the second mortgage held by the Milwaukee Economic Development Corporation. The shareholders would sign personal unlimited guarantees to secure the loans and cross-guarantees would be granted by each of the two corporations. See the attached Park Bank loan presentation documents including the loan officer's and analyst's presentation and the financial statements for the two companies. ASSIGNMENT: As a loan committee member at the Part Bank, would you approve the request? Why or why not? WHAT CRITERIA DO BANKS USE IN MAKING LOANS? 1. The old four Cs of credit are still applicable. a. Character of the managers of the business b. Capacity of the business to repay interest and principal on time c. Conditions of the industry and the economy d. Collateral that can be used to secure the loan 2. Other factors used are RMA ratio comparisons. 3. Key to remember - banks are lending out depositors' dollars, not our own, therefore must be extremely cautious in making loan decisions. 4. "Gut feel" plays an important role in this process to assess management strength. Various non-financial elements can be important, such as a proprietary product, an important patent or trademark, an extensive distribution system, a strong customer list, a specially designed computer system, etc
