1. (a) Class I (highest quality).

   1. (1) Companies with ample cash flow to cover existing debt.
   2. (2) A history of stable, uninterrupted profits and the backing of local financial institutions.

   3. (3) The company should have strong, stable management who:

      1. (A) Take the necessary steps to see the future outlook of the industry in which it operates; and
      2. (B) Position the company to take advantage of these trends.
   4. (4) The company has enough liquidity to survive short-term troughs and the ability to get financing to help them through long-term troughs.
   5. (5) The loan is secured by excellent collateral, and the owners have a substantial equity position.
   6. (6) All of the key financial ratios should fall within the upper quartile of the RMA Annual Statement Studies.

2. (b) Class II (good quality).

   1. (1) Companies with similar qualities of those in Class I except some characteristics are not as strong.

   2. (2) They could have:

      1. (A) Less liquidity;
      2. (B) Lower debt service coverage; or
      3. (C) More cyclical earnings.
   3. (3) Alternative sources of funding in slow periods are available.
   4. (4) The companies operate efficiently now but may require capital outlays to help meet the future industry demands.
   5. (5) There is good collateral coverage, and the owners have an acceptable equity position in the company.

3. (c) Class III (satisfactory quality).

   1. (1) Companies with average financial statements when compared to RMA Annual Statement Studies.
   2. (2) Profits and cash flow may be erratic but as yet the company will not have been over thirty (30) days delinquent with any scheduled debt service payments.
   3. (3) Alternative sources of finance are possible to help in slow periods.
   4. (4) Collateral coverage shows at least a one hundred percent (100%) coverage on the balance sheet but conversion to cash will be slow and prices received would be uncertain.

4. (d) Class IV (below average quality).

   1. (1) Companies with:

      1. (A) Poor liquidity; and
      2. (B) Erratic earnings or losses.
   2. (2) The primary source of repayment is uncertain, and collateral conversion may be necessary.
   3. (3) Collateral coverage is questionable, and below market prices are assured.
   4. (4) Industry trends are down, and technological advances may make the company product obsolete.
   5. (5) No additional sources of finance are available.
   6. (6) Close monitoring and continuous communication with management is required.

5. (e) Class V (poor quality).

   1. (1) All characteristics, collateral, net worth, cash flow are substandard.
   2. (2) Constant and intense supervision is required.
   3. (3) The possibility of a partial or full loss is expected.
   4. (4) Additional collateral or equity injection will be required to keep company operating.

6. (f) Class VI (poorest quality).

   1. (1) Loan is a loss.
   2. (2) Debt service payments have stopped.
   3. (3) No chance of recapitalization exists.
   4. (4) A full or partial loss is assured.

Codification Notes: "RMA" means Risk Management Association.