Community Developments Investments (November 2013)
Associated Bank and the USDA: Helping a Company on the Verge of Recovery to Soar
Bryan Spaeth, Relationship Manager-Commercial, Associated Bank
Steve Pleshek works with Mod Tech's computer-controlled machining equipment. Mod Tech was able to expand with the help of a loan package put together by Associated Bank in partnership with a USDA loan program, and the company now employs 70 people. (Mod Tech)
There's little doubt that the recent recession has been especially tough on American manufacturers and their suppliers. But many of these companies are now recovering, thanks to the drive and determination of their leadership and to a helping hand extended by the U.S. Department of Agriculture's (USDA) Business and Industry (B&I) Guaranteed Loan Program.
An excellent case in point is Mod Tech Industries Inc. of Shawano, Wis.—perhaps surprisingly, the heart of foundry country, with five of the world's largest metals foundries located within an hour's drive of this rural community.
Launched in 1984 in the garage of local entrepreneur Jim Lacy, Mod Tech specializes in casting and forging procurement, assembly, and project management. The company produces parts for rugged equipment—ranging from semitrucks to earthmoving equipment—and sells those parts to original equipment manufacturers (OEM). Now, with 70 employees and annual sales approaching $8 million, Mod Tech is one of the nation's largest production machining companies.
Mod Tech's business prospects weren't always so bright. Around 2000, the company was among those already reeling from U.S.-based OEMs' decision to export parts sourcing to other countries. Then the recession hit, further depressing both orders and revenues and forcing heart-wrenching layoffs: Lacy saw the number of his employees reduced from 52 to 32.
Mod Tech was hardly alone. Some companies limped along, hoping for better times. Others closed their doors permanently. Between 2008 and 2012, Shawano County, with a population just under 42,000, lost five major employers and hundreds of jobs.
But a few entrepreneurs took aggressive action, not only to survive but to position their companies to capitalize on the post-recession recovery. Fortunately for Shawano County, Jim Lacy was among the boldest of these businessmen.
Recovery, Just Out of Reach
By 2010, Mod Tech's orders began to pick up for a number of reasons.
- Eventually, equipment wears out and must be replaced. Pent-up demand for products depending on parts like Mod Tech's was finally being unleashed.
- The skyrocketing cost of fuel makes it increasingly expensive to transport parts halfway around the world, eroding the price advantage that offshore competitors offer.
- Many OEMs were learning a hard lesson about quality. They began to realize—sadly, too late for some companies—that consistently high-quality parts sometimes can be had only in this country.
Lacy was determined to take full advantage of an influx of opportunity. But production machining is a capital-intensive business. To meet the tight quality standards required by OEMs with orders on deck, Lacy knew that Mod Tech needed at least two new computer-controlled horizontal machining centers, incredibly sophisticated systems with price tags of about $500,000 apiece.
There was no way he could swing that kind of money on his company's current profits. He needed financing. Unfortunately, it may have been the worst time during the entire recession to be looking for financing. Lacy was handed rejection after rejection, only slightly softened by promises to help Mod Tech once the economy improved.
But then a solution was suggested by Dave Kerber, a certified public accountant with Kerber, Rose & Associates, which has been serving Mod Tech almost since its inception. Kerber suggested that Lacy check out the B&I Guaranteed Loan Program, developed to help improve the economic climate in rural communities by lending businesses a helping hand with their credit needs. And the USDA advised Kerber and Lacy to find a bank to partner with them on the program.
Easier said than done. Lacy personally approached seven financial institutions with the offer of a 70 percent to 80 percent federal guarantee on the funds Mod Tech needed to grow. For whatever reasons—caution, loan fatigue, or unwillingness to spend time investigating the Mod Tech opportunity—the banks all turned him down.
Search for a Partner
Months into the search, Kerber explained his client's credit needs to me over lunch in Green Bay, Wis. I was immediately intrigued on a number of levels.
First, Associated Bank is a regional bank—Wisconsin's largest, growing in Minnesota and Illinois, and expanding even beyond this footprint. But we were founded in 1970 by local bankers fighting to survive amid the onslaught of gigantic banks moving into the territories they had served for a century. So we tend to have a heart for local businesspeople striving to support their communities.
Second, we had recently decided to aggressively pursue companies that had made it through the depths of the recession and were on the verge of recovery. We are committed to digging into their balance sheets and identifying trends that show promise even if the companies aren't already turning a solid profit. From what Kerber told me, Mod Tech was an excellent example of just this.
Third, Kerber made me aware of a USDA B&I loan guarantee, which could be ideal for a rural-based company such as Mod Tech. Associated Bank has a strong history of working with government programs. For years, we've been Wisconsin's largest U.S. Small Business Administration (SBA) lender, and among the largest SBA lenders in Minnesota and Illinois. We have an outstanding government-guaranteed loan resource center dedicated to helping us meet the needs of our customers.
The offer for the bank to be a partner with USDA and Mod Tech was irresistible. I immediately began delving into the B&I Guaranteed Loan Program and scheduled a meeting with Lacy at Mod Tech.
The personal tour was key. Even with federal guarantees, there still are risks—in this case, the guarantee covers 80 percent up to $5 million, and 70 percent thereafter. So we used due diligence in weighing the Mod Tech opportunity against the risk.
On the surface, the numbers didn't look great. Mod Tech hadn't broken any profit records in the previous year (2010) and its year-end cash flow was less than robust. What's more, given the financing Lacy needed, there was a possibility of under-collateralization from the standpoints of both real estate and equipment values.
These were the loan characteristics that had made conventional financing troublesome for our competitors. But we took a closer look and saw some promising trends over the previous four quarters, trends that boosted our confidence in Mod Tech. We decided to do whatever we could to partner with this company and help it grow.
The rest is a happy piece of Wisconsin business history.
On the Road to Success
With the help of Justin Kirking, the USDA's Rural Development Specialist in Stevens Point, Wis., Associated Bank put together a B&I loan package for Mod Tech with very favorable terms and conditions, including low interest rates and longer-than-usual amortizations. As a result, Mod Tech has achieved the following:
- Completed a 23,000-square-foot addition to its facility.
- Added five horizontal machining centers instead of the two originally proposed.
- Consolidated a chaotic collection of individual loans, including three for real estate and 10 for various pieces of equipment, into just two notes—a single 10-year equipment note and a 20-year real estate note.
- Solved its cash flow problems, thanks in large part to the extended amortizations.
- Seen a substantial increase in its Associated Bank line of credit, a move made possible because of the financing improvements as well as the B&I loan package's mitigation of the collateral issue.
What's the bottom line? With an infusion of more than $3 million in new investment, Mod Tech is in a better position than ever to meet its customers' quality and service demands. The company is welcoming new business at a brisk pace. Orders are up 40 percent over 2010. Now, Mod Tech employs 70 people, 18 more than before the recession. In addition, Lacy announced a 6 percent across-the-board pay increase in 2012, resulting in wages and salaries on the higher end of Shawano's average pay scale.
While Mod Tech has not yet recovered entirely from the recession and global downturn, the company is well on its way, and ready to embrace dramatic growth in the years ahead.
A Partnership We Can Build On
Associated Bank's private-public partnership with Mod Tech has obviously made an enormous difference in the company's trajectory. In addition, the partnership has breathed new life into our bank's commercial banking plans. Now, we are on a mission to do whatever it takes to make this recession a thing of the past, by helping our most promising businesses position themselves for prosperity.
As bankers, it's our goal to be more than loan processors—to be, in fact, partners with the companies we serve. This goal dovetailed perfectly with the one Lacy expressed when we first met. He said he was looking for a bank that would be engaged with his business and knowledgeable enough about it to respond quickly to the company's rapidly evolving requirements. With the help of the USDA's B&I Guaranteed Loan Program, Associated Bank became the partner he was searching for.
Mod Tech may have survived without us, and without the USDA loan program. But with our collaboration, the company is ready to soar. And this experience will remain with us at Associated Bank as we search for ways to help other business customers and loan prospects in the rural communities we serve.
It's impossible to predict future volume from any particular loan program, because it depends on factors from borrower eligibility to program funding and loan demand, factors that are obviously out of our control. But to meet our customers' needs, we employ all the credit-solution tools available to us, including those offered by federal, state, and local agencies. We believe that our recent experience with the USDA's B&I Guaranteed Loan Program will serve as a catalyst for future opportunities across our bank's footprint.
This publication is part of:
Collection: Community Developments Investments
Letty Ann Shapiro
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.