Citadel Stock Slump Tied to Large Loan : Holding company: How the Glendale parent of Fidelity Federal Bank will repay $15 million to Craig Corp. worries investors, analysts say.

In less than three months, Citadel Holding Corp., the Glendale parent of Fidelity Federal Bank, has seen its stock plunge by about 60%, from a 52-week high of $37.125 a share to $14.75 as of Monday’s close.

The problem isn’t so much that Citadel lost $33 million in the third quarter after taking big loan-loss provisions--the thrift’s percentage of problem loans is still only about half that of most other Southern California savings and loans, according to analysts.

But what has investors most worried, analysts said, is how Citadel will pay off a $15-million loan from Craig Corp., a company controlled by Citadel’s acting chairman, James J. Cotter. The loan comes due Feb. 2.

Citadel has been vague about how it plans to raise the money, but basically its options are to turn to its shareholders for more cash or convert Craig’s loan into Citadel stock, said James Wilson, a savings and loan analyst at Montgomery Securities in San Francisco. Or, Wilson said, Citadel could do both.

If Craig’s loan is converted to stock, Cotter would be much closer to his stated goal of controlling Citadel--he already controls 18.5% of the company’s stock through Craig, a Los Angeles supermarket holding company of which he is chairman, and Hecco Ventures I, an investment partnership he helps run.

If the loan isn’t swapped for stock, Citadel has said it might offer shareholders rights to buy up to $50 million of additional stock to pay off the loan and add to the thrift’s core capital. Citadel hasn’t spelled out the terms of the offering but, typically, shareholders are granted rights to buy additional stock at a discount from its market price, usually about 10%.

Wilson and other analysts said Citadel’s announcement, in a press release in September, triggered the stock’s plunge because investors worried that the additional shares would dilute the value of their existing Citadel holdings.

Wilson estimated that at present trading prices, Citadel would have to offer rights to about 3 million shares to raise $50 million. Currently, Citadel has about 3.3 million shares outstanding. Wilson also said shareholders could see the value of their holdings cut in half because the number of outstanding shares could be almost doubled. Citadel has not said how many shares, if any, it plans to offer.

As for the loan-loss provisions, “most people thought the reserves were excessive and then . . . Citadel said they are going to have a rights offering that will be incredibly dilutive. That has not made too many people happy,” Wilson said.

The stock’s plunge also highlights another concern: Citadel’s stock, listed on the American Stock Exchange, is thinly traded, and it doesn’t take much selling to send it into a nose dive.

From Sept. 27--the day the loan-loss provisions and possible rights offering were announced--to Dec. 4, it lost 78% of its value on volume of only 116,600 shares, or about 3.5% of the company’s outstanding stock. (Since then, investors have helped bid up the stock’s price from its 52-week low of $7.50 a share in early December.)

That means that stock-price fluctuations at Citadel are not as important an indicator of the company’s health as they are with larger public companies, said David Ellison, a portfolio manager at Fidelity Management & Research Co. in Boston, which owned about 9% of Citadel’s stock as of Sept. 30. He said some investors apparently were caught off guard by the size of the third-quarter loan-loss provision and the announcement of a possible rights offering.

“The illiquidity of the stock made it difficult for those who were surprised to exit without affecting the stock” such that it would drop in price, he said.

Some investors may also have thought that Citadel was not being straightforward about its financial health, said Jonathan E. Gray, an analyst with Sanford C. Bernstein & Co. in New York.

“The company’s problem-asset ratio . . . had been very low for a sustained period of time and all of a sudden they had begun to take large loan-loss provisions, suggesting that the data . . . was not indicative of the true quality of their loan portfolio,” Gray said.

But Ellison and other analysts said the stock plunge does not portend the collapse of Citadel, which despite the large loan-loss provision still remains healthier than most other local thrifts. About 90% of Citadel’s loans are residential, which typically carry less risk than commercial-property and construction loans.

Philip R. Sherringham, executive vice president and chief financial officer at Citadel, said investors’ fears of a stock dilution are unfounded. For one thing, shareholders who wouldn’t want to buy additional stock would probably be allowed to sell their rights to the additional stock, and that would make up for any dilution in the value of their holdings, he said. In addition, a rights offering is only one of several options being considered to raise money, he said.

Another possibility would be to offer shareholders some form of debt that could be converted to stock at a later date, Sherringham said.

“What we’re doing is hedging our bets a little bit,” he said. “As opposed to issuing stock, we could issue a variety of things that we are looking for that would allow repayment of that particular loan.”

Meanwhile, Citadel is backing away from its initial goal of raising $50 million. Sherringham said the final amount will probably be lower, but he would not say by how much.

Citadel’s stock troubles also come amid the latest in a tangled series of management and board changes at the thrift. In the past few months, three directors have resigned and, in October, Cotter replaced his longtime ally, Edward L. Kane, as chairman. Kane continues to be president of Craig Corp.

“The history of events on the company’s board makes the labyrinthine political reality in the former Soviet Union look like a Golden Book by comparison,” Gray said.