RTC Sales Plan Confuses Bidders
The introduction of a new selling procedure by the Resolution Trust Corp. has fundamentally altered the mechanics and strategy of bidding for the assets of failed banks.
The new routine, introduced in June and known as the zeta process, has these features:
* Franchises are sold with little or no assets.
* Assets are sold separately in two schedules: B and A. Schedule B contains performing one-to four-family mortgages passed with representations and warranties. Schedule A contains all other financial assets. Both are offered at minimum, fixed transfer prices.
* Putbacks are restricted or eliminated.
* Premiums on winning bids for assets are counted toward the premium bid for franchises.
Bidders Still Learning
Because the procedures are so new, bidders are on a trial-and-error learning curve, some finding extraordinary bargains, some paying extraordinarily high premiums (5% and even 6% of core deposits).
In the past, the RTC's evaluation of bids was necessarily subjective. The RTC often did not have a reliable, in-house estimate of the value of the assets it offered for sale, and lumping assets of widely varying value together with the franchise created a package whose value was very difficult to evaluate.
The RTC also necessarily considered whether the bidder had a history of putting back assets in earlier deals.
Under zeta procedures, the evaluation of bids is much easier for the RTC since the highest bid wins. Bidders, on the other hand, now find themselves in more competitive auctions with little relevant data as a guide.
Looking at Fulton Federal
A good example of the results of this procedure is the July 26, 1991, resolution of Fulton Federal Savings Association, Atlanta, Ga., which was sold in pieces to eight separate financial institutions.
Fulton had total assets of $1.36 billion and total liabilities of $1.43 billion, including $1.24 billion in 187,900 deposit accounts. Its core deposits were $1.03 billion. The RTC received premiums totaling $11.4 million, or 1.1% of core deposits.
The metropolitan Atlanta cluster of 22 branches went to South Trust Federal Savings Bank, Atlanta, for a bargain price. There had been only one bidder because of the obligation to do data processing for the other branches until accounting systems can be separated.
The winner of the Claxton branch, Claxton Bank, paid $505,000, while the No. 2 bid was $152,000 and the low bid was $37,500.
Hidden Value Detected
"We wanted to be sure we got the branch," said Claxton's chief financial officer, Patsy B. Rogers, who explained that the option on the building was itself worth the price.
As the accompanying chart shows, bids for branches varied wildly.
Consider the bids for the Claxton branch as percentages of the winning bid. The high bid is, by definition, 100%. The second highest bid was 30.1%, and the low bid was 7.4%. The absence of well-developed bidding strategies can be seen in two statistics: The average bid is 45.8% of the winning bid, and the standard deviation is 39.4%.
This result seems typical of the early stages of a competitive system. There is a great deal of evidence to support the thesis that, as participants in competitive systems refine their skills and information-gathering, the variation in performance measures tends to decline.
The Weak Get Stronger
For example, studies of the won-lost records of Major League Baseball teams show that, over the course of the last 100 years, the winning percentages of championship teams have been in a declining trend, while, at the other extreme, the winning percentages of the worst teams have been rising.
A similar tendency toward a central average can be seen in the pricing of private deals.
Since the third quarter of 1986, Bank Mergers and Acquisitions has evaluated the pricing of deals in terms of the estimated number of years it would take a buyer to fully achieve a targeted return on investment.
Applying this method to the transactions of the last five years, it is fair to say that the lower the average investment workout period, the greater the efficiency in deal pricing.
Mr. Piro is executive editor and Mr. McRae senior editor of Bank Mergers and Acquisitions, a newsletter published by SNL Securities. The data base and publishing firm, based in Charlottesville, Va., specializes in the banking and thrift industries.
