Citadel Pulls Out of Bid to Take Over Ailing Valley Federal
Citadel Holding Corp., after hinting for two years that it wanted to marry Valley Federal Savings & Loan, has left the struggling Van Nuys-based thrift at the altar.
Citing accounting snags, Citadel, the Glendale-based parent of Fidelity Federal Bank, said Friday that it was no longer interested in pursuing the acquisition. (Fidelity on Monday changed its name from Fidelity Federal Savings & Loan.)
It was an abrupt departure that disappointed Wall Street and sent Valley Federal’s stock into a tailspin. The stock plunged $3 a share, or 32%, on Friday alone but recovered 50 cents, closing at $7 a share in over-the-counter trading Monday.
But if Valley Federal executives are dejected about being jilted, they aren’t showing it. Dan Nelms, president, said Citadel’s decision “returns a high degree of employee morale back to us that I think was lacking while this cloud was hanging over” the company.
Surprised at Sharp Drop
However, Nelms did acknowledge that “we are surprised” that the stock fell as sharply as it did.
Valley Federal, with $3.3 billion in assets, faces the task of rebuilding its profitability and its capital, or net worth, on its own. The company lost $2.4 million in the first half of this year after losing $3 million in 1988, and the S & L must bolster its capital to meet new tougher capital requirements contained in the federal S & L bailout law enacted in August.
The company already agreed to sell 13 branch offices, which would leave it with 32, and its All Valley Mortgage Co., a mortgage banking concern. The sales and other cost-cutting steps have enabled Valley Federal to make substantial progress in paring its overhead expenses, Nelms said.
Nelms indicated that additional asset sales might occur in 1990. “At the moment, everything we own is being scrutinized” for possible sale, he said.
One asset still for sale, and still going begging, is All Valley Acceptance Co., a subsidiary that has been Valley Federal’s major headache for the past two years. The unit makes loans to buyers of manufactured housing, such as mobile homes, then sells the loans to investers but continues servicing the loans for a fee.
“If it weren’t for AVAC, Citadel would have made an offer a long time ago” for Valley Federal, said Dan B. Williams, who follows thrifts for the investment firm Sutro & Co. “I’ve thought all along that the problem had to do with AVAC.”
AVAC has been pummeled by an unexpectedly high rate of prepayments of the loans in some areas of the country, depriving the unit of the servicing income, and by high default rates in the Southwest region, where energy-related problems depressed local economies.
Loss of $8.7 Million
AVAC suffered a pretax loss of $8.7 million in the first half of 1989 after losing $11.5 million last year. While hoping for a buyer of the unit, Valley Federal has cut back its operations and closed 11 of its 18 branches to reduce losses.
But Samuel C. McCarver, Citadel’s executive vice president, said the new capital requirements--which are designed to give thrifts a stronger cushion against bad loans and other problems--were the main reason why Citadel backed away from Valley Federal.
Because of accounting rules related to takeovers, Citadel’s purchase of Valley Federal would likely have left the combined companies’ capital level below the new federal minimums, McCarver said. That would have forced Citadel to raise more money--by issuing additional stock or by some other means--to boost its capital, he said.
He declined to say exactly how much Citadel would have needed, but said it would have been “a very substantial percentage” of Citadel’s present capital of just under $200 million. It was a step “we weren’t willing to commit to,” he said, adding that Citadel also is not looking to acquire any other institution at this time.
