Republic Looks for New Ways to Plug Tax-Refund-Loan Gap

Republic Bancorp Inc. has a year to figure out how it to replace a business that has brought in $24.5 million so far in 2011.

The $3.1 billion-asset company in Louisville, Ky., said in a Friday regulatory filing that it has settled a dispute with the Federal Deposit Insurance Corp. over its refund-anticipation loan business, a business the FDIC has been trying to push the company out of for more than a year.

Republic's bank will be able to offer the highly profitable service this upcoming tax season, but it will then end the program, which fronts customers up to $1,500 as the Internal Revenue Service processes their income tax returns.

While Republic had hoped to keep offering the product, Steve Trager, the company's president and CEO, said he is ready to move on. Rather than wallow, Trager says he is going to go shopping for something new. With a total risk-based capital ratio of 25.16%, Republic has money to spend.

"It was important to the FDIC and we respected that. It was important to us, too, but it was only a third of our tax business," Trager said in an interview Friday. "We have the benefit of having a lot of capital and there is so much opportunity out there for us."

Trager said he plans to look at whole bank acquisitions, troubled institutions and ancillary businesses to plug the hole the outgoing business will leave behind.

"We're fully engaged. We hope the regulators see us as another prospective purchaser of struggling banks," he said. "We have an appetite for various non-traditional things to meet our customer needs."

Trager said Republic would look to expand and enhance its core bank, which has weathered the downturn well, and its remaining tax business. The biggest part of the tax business is the processing of electronic refund checks.

All banks are looking to supplement income. Refund-anticipation loans might have caught the ire of consumer advocates and regulators, but it was a good business for Republic. The duration of the loans was about 10 days and brought in $91.22 each. This year the company had a 98.5% recovery rate on the loans.

Despite Trager's optimism, several industry observers said that Republic will undoubtedly struggle to find another golden goose.

"The best you can do in these sorts of cases is to do your best and move on and it sounds like they did that," said Jeffrey Gerrish, a partner at Gerrish McCreary Smith. "Where they find that revenue gap is going to be the problem, though. Everyone is looking for a fee generator."

Adam Fiedor, a vice president at St. Charles Capital, a Denver investment bank, said that the company might need to face the reality that it will not be able to find a way to replace that revenue stream quickly. "It could be a big hit to their value, but it could be nearly impossible to replace," he said.

Terry Keating, a managing director at Amherst Partners, a Chicago investment bank, said Republic would need to strike a transformational deal if it wanted to replace that revenue through its core bank.

Otherwise, Keating said the company could look to insurance agencies, mortgage banking or other sorts of processing, such as credit cards or other merchant services. He agreed, however, that an immediate fix might not be available. "Absent pulling a rabbit out of their hat, that level of earnings might be gone for a while," he said.

Investors seemed undaunted by the future hit, but rather pleased with the clarity over the year-long ordeal that was costly. Shares of Republic were up nearly 5% to $21.76 per share, the stock's highest trading price in more than six months.

While Republic agreed to terminate the product after the 2012 tax season, the FDIC agreed to terminate a 2009 cease-and-desist order on the bank involving the refund-anticipation loan business. The FDIC and the bank also developed a plan for better oversight of the tax preparers. A pending civil money penalty of $2 million was reduced to $900,000.

The FDIC has been aggressively trying to force Republic out of the business since last year, when the Internal Revenue Service said it would stop providing lenders with details about prior claims on refund loans.

In February, the FDIC issued the bank a notice of charges stating that the product was unsafe and unsound since the debt indicator would no longer be available. Republic vowed to fight for its ability to continue to offer the product.

Weeks later, Republic sued the FDIC in federal court after the FDIC staged an impromptu examination of hundreds of the bank's tax preparation partners across the country. The FDIC also upped the ante on the notice of charges by claiming the bank violated laws such as the Truth-In-Lending Act, because the preparers did not state the fee as an annual percentage rate.

Republic also agreed to drop its litigation as part of this week's settlement.