As you join the meeting, Mike McCard has just given the Loan Committee Report where he asked for the board to affirm, as required by law, loans made last month in excess of 5 percent of the bank’s capital. After his report, Mike will ask Sean Miller, an up-and-coming young loan officer, to present a loan request from the Harvard Westerman Company.

The Harvard Westerman Company is a highly successful electronics firm that grew from humble beginnings in Jacob Harvard’s garage. Harvard Westerman is now a nationally known company and is Midwest City’s largest employer. The company has always conducted business with larger metropolitan banks and has never worked with Insights Bank and Trust. Lending to this company would be a big achievement for Insights Bank – testimony to the success of its new lending program. Mike asks for the board’s approval of the loan “just as Sean presented it.”

As you read the presentation sheet and listen to the meeting, ask yourself:

It is important that you take the review of loan requests seriously. The loan proposal came to the board for approval for a reason - most likely because it presents more than normal risk for the bank. Ask questions if the analysis is incomplete or needs clarifying. If you find that important information is missing, ask for it. Don’t assume that the missing information is unimportant or unavailable. It may simply be a case of something that was innocently overlooked. With adequate information in hand, you should be able to determine any circumstances or problems that may affect repayment and whether these obstacles are temporary or long term.

Lesson Objectives

After you complete this lesson, you should be able to:

• Define credit risk.
• Explain why large loans are always an important credit risk concern.
• List bank practices that can increase credit risk.