Construction Loan Subsidiary Undermines 3 Minnesota S&Ls

American Banker, December 3, 1985 | Go to article overview

Construction Loan Subsidiary Undermines 3 Minnesota S&Ls


ST. PAUL -- A construction loan subsidiary that helped some northern Minnesota thrifts weather a stormy period in the early 1980s has turned into a leaky drain for them.

Three years ago, when high interest rates were the main problem faced by the industry, three savings and loan associations started the First Financial Capital Management Corp., a construction loan subsidiary bsaed in Edina, a Twin Cities suburb.

The owners of First Financial Capital Management are First Federal Savings & Loan Association of Brainerd; First Federal Savings & Loan Association of Hibbing, and First Federal Savings & Loan Association of Grand Rapids.

In the beginning, upfront fees and variable interest rates on the subsidiary's construction loans offset the owner's large losses caused by their old low interest rate mortgage portfolios.

Ralph Klapperich, former president of First Federal of Brainerd and now the head of First Financial Capital Management, said the firm's construction loans helped all three thrifts get through two difficult years, 1982 and 1983. He said First Federal of Brainerd probably would not have survived without the income from First Financial.

But now construction loans purchased through First Financial are dragging its owners down. Partly as a result, First Federal of Brainerd lost $1.8 million and First Federal of Hibbing lost $1.2 million in the first six months of 1985. First Federal of Grand Rapids earned $862,000 despite losses from construction lending.

In addition to the three owners, one active customer of First Financial Capital Management, Western Minnesota Federal Savings & Loan Association of Fergus Falls, lost $1.5 million. "Our losses have come in prat due to higher reserve requirements on construction loans," said M. Gene Donley, president of Western Minnesota Federal. "We have had some problems with their [First Financial's] paper."

First Financial's losses -- about $120,000 last year and $80,000 so far this year -- are split equally among the three partners. In addition, a number of construction loans that its owners purchased through the subsidiary for their own portfolios have turned sour.

First Financial essentially serves as the broker and servicing agent between the developer and the three S&Ls that own the firm and other S&Ls that choose to participate.

A number of thrifts have gotten into trouble both because of the risky nature of construction loans and because many of First Financial's loans were made outside the state in highly competitive markets. …

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