Citadel may seek capital through securities offering.

Thrift holding company also may sell off problem assets

Citadel Holding Corp. officials are considering pursuing a plan to revive its ailing Fidelity Federal Bank subsidiary by unloading problem assets in a bulk sale and raising additional capital through a securities offering, informed sources told the Business Journal last week.

Details of the plan, which is similar to a recent restructuring at California Federal Bank, were being finalized last week, sources said.

Glendale-based Citadel was expected to make an announcement detailing the plan, or portions of it, "any day," sources told the Business Journal last week.

Citadel officials did not return phone inquiries. An official from Citadel's financial adviser, New York-based investment firm J.P. Morgan Securities Inc., declined to comment.

But according to sources, Citadel officials are under pressure from Office of Thrift Supervision officials to reduce non-performing assets -- foreclosed real estate and delinquent loans -- by the end of the second quarter. As a result, Citadel officials are trying to put this new plan together by June 24.

Citadel announced in May that it expected losses at Fidelity Federal in the second quarter would push its capital below federal minimum standards.

The new plan diverges from Citadel's previous announced strategy to form a so-called "bad bank" from $450 million to $490 million worth of nonperforming assets from Fidelity Federal's portfolio.

Under that plan, Citadel would sell Fidelity Federal, with a cleaned-up balance sheet, and take the proceeds to securitize the assets of the bad bank. Citadel would then work out the loans and real estate in the bad bank and essentially become a real estate management company.

Under the new plan, Citadel would sell $300 million to $400 million worth of nonperforming assets or assets at risk of becoming nonperforming, according to sources. Then, depending on what it got for those assets, Citadel would raise $100 million in new capital through some sort of securities offering, sources said.

Back in January, Citadel chose to pursue the good bank-bad bank plan because "no one was going to pay a fair price" for the soured loans and foreclosed real estate, according to a source. But the market for nonperforming real estate assets has improved markedly in the last few months.

Notably, last week, Glendale Federal Bank announced it will either break even or make a small profit on a proposed sale of $266 million worth of nonperforming assets.

"It seems there is a better market for the large pool of problem multifamily loans that have bogged down Fidelity over the last few years," said Andy Shapiro, president of San Francisco-based investment firm Lawndale Capital Management Inc., which owns almost 5 percent of Citadel's stock.

Fidelity Federal is in financial jeopardy because of a large volume of apartment and other real estate loans that soured over the past few years, according to its financial statements.

At March 31, $390 million of Fidelity's assets, or 9.48 percent of total assets, were either nonperforming or classified as at risk of becoming nonperforming. Financial institution experts say a nonperforming asset to total assets ratio of 2 percent or less is considered healthy.

At the end of the first quarter, Citadel posted a net loss of $14.757 million, or $2.24 a share. That compares with net earnings of $135,000 or 4 cents a share, for the same period in 1993.

Citadel has been trying to find a buyer for 42-branch Fidelity Federal for about 18 months, without success, because potential buyers have shied away from its large portfolio of sour loans. But that situation may be changing as some investors are speculating the California economy is on the mend.

Roderick Dillon, general partner of Columbus, Ohio-based Dillon Investors L.P., which owns about 10 percent of Citadel's stock, said, "The market (to sell) California financial institutions has improved and continues to improve as we speak."

But not everyone in the investment community is optimistic about Citadel and Fidelity Federal.

"It's all false hope," said Howard Rosencrans, analyst with Great Neck, N.Y.-based investment firm HD Brous & Co. He noted Citadel's stock "bounced up" from its 52-week low on May 17 of $3.78 a share to around $8 on June 6. The stock, which trades on the American Stock Exchange, closed at $7.12 on June 14.

The recent rise can be attributed to "positive rumor flow," Rosencrans said. "People are saying, 'Wow! There's a deal. There's a deal.'"

Rosencrans said his opinion is that Fidelity Federal ultimately "will go under."