Community Developments Investments (November 2018)

Falcon National Bank: Financing Wireless First, Then Broadband in Rural Minnesota

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Janet Fix, Community Affairs Analyst, and Timothy Herwig, District Community Affairs Officer, OCC

When Falcon National Bank was asked in 2009 to lend to a small, locally owned wireless phone company, the community bank in Foley, Minn., had been in business just six years and had not previously loaned to a startup telecommunications company.

Unbeknownst to either party at the time, that first $50,000 loan request would lead to a long and beneficial banking partnership with Palmer Wireless, a new Clear Lake, Minn.-based telecommunications company. Falcon Bank's experience with the borrower—and federal small business loan guarantees—gave the bank the confidence to help finance the development of a broadband network that would bring high-speed, reliable internet to the bank, residents, schools, and businesses in the underserved, rural area located in central Minnesota 50 minutes north of Minneapolis.

Over the years, Falcon Bank made seven loans to Palmer Wireless totaling $1.2 million. The U.S. Small Business Administration (SBA) guaranteed each loan through its 7(a) Program¹ for a total of $806,000.² In May 2018, this mutually beneficial partnership paid off unexpectedly when Palmer Wireless was sold to a larger telecommunications company.

Before the sale, Falcon Bank financed a number of innovative initiatives undertaken by Palmer Wireless that first improved wireless capabilities. In 2015, the bank's loans financed the company's shift into fiber optics and the installation of a broadband network benefitting the rural communities in Benton and Stearns counties, including Duelm, Palmer, Becker, and Big Lake.

Falcon National Bank financed the following projects:

• From 2009 to 2014, Falcon Bank financed the development of the wireless connections that Palmer Wireless made between existing cell towers and rural residences and businesses. In 2014, the bank financed "rolling study halls" for the Becker School District. In all, 20 school buses were wired with 20 mobile 3G/Wi-Fi modems so that students could do their homework between home and school. Falcon Bank also financed the school district's connection to a 170-foot cellular tower that Palmer Wireless built on a campus in Becker, Minn. The tower does double duty by providing schools with wireless access while lighting the soccer field.
• From 2014 through 2017, Falcon Bank financed an additional expansion of fiber-optic service by Palmer Wireless. The project expanded the high-speed internet network to rural communities and customers along the way. Falcon Bank's financing provided the state of Minnesota's Border-to-Border Broadband program with the local commitment needed for nearly $400,000 in grants. This financed the buildout of high-speed, fiber-optic cable that linked directly to underserved, rural homes, schools, and businesses from existing cell towers along a 60-mile stretch of Highway 10, a corridor running from St. Cloud, through Becker, to Big Lake, Minn.

Looking back, Falcon Bank could have just as easily have rejected Palmer Wireless' first $50,000 loan request.

Large national banks with branches in St. Cloud, Minn., had previously declined to lend to Palmer Wireless. "They looked at us like we were crazy," said Laura Kangas, who, with her husband, Albert, founded Palmer Wireless. "When we started our business, nobody understood what we were trying to do."

Falcon Bank, however, took the time to understand the company's business plan and evaluate the owners' commitment to the needs of the rural community. The couple had long lived in Palmer Township, and Albert had decades of experience in the cellular phone business with a national company and as chief operating officer at a rural technology carrier. Most importantly, the bank recognized that Palmer Wireless would be able to address a key community economic development need.

"As a community bank, we really focus on trying to help the communities that are surrounding us," said Jessica Bitz, Falcon Bank's market president, who worked closely with Palmer Wireless from 2009 through 2018 in making seven loans.

"One of the big struggles in rural areas is broadband access," Ms. Bitz said. "So, we looked at these loan requests from a different perspective and thought, ‘How can we make this work?' "

The first step was to minimize Falcon Bank's risk by securing SBA 7(a) loan guarantees. In addition, on the first loan, Falcon Bank took out a lien on the equipment owned by Palmer Wireless and a second mortgage on the couple's home.

The SBA 7(a) guarantee is designed to help creditworthy small businesses obtain financing when they cannot otherwise obtain credit at reasonable terms. The guarantee helps banks lend to small businesses that have sufficient cash flow to repay loans but may not have the necessary collateral or credit history typically required by the banks' lending policies. SBA 7(a) guaranteed loans can be used to purchase machinery, fixtures, and supplies; make improvements to land and buildings; finance receivables and augment working capital; acquire and start businesses; and refinance certain existing debt.

Falcon Bank and Palmer Wireless agreed: Without the SBA guarantees, the partnership would not have gotten off the ground. "It was a little riskier project, so we definitely wanted to have that SBA 7(a) guarantee behind us," Ms. Bitz said. "The biggest struggle for banks is getting your arms around projects without collateral."

Given its success in financing Palmer Wireless, Falcon Bank encourages other community banks to carefully evaluate loan requests from local telecommunications companies in the hope that they, too, can bring quality, high-speed internet access to their rural communities.

"Understand the needs of your communities … and take full use of the federal and state programs available to you," Ms. Bitz said. "Thanks to the SBA 7(a) loans and Minnesota's Broadband Initiative, our project with Palmer Wireless succeeded."

For more information, contact Janet Fix at janet.fix@occ.treas.gov or Timothy Herwig at timothy.herwig@occ.treas.gov.

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