Republic's Quarter Might be a Short-Term Trend that belies problems

Republic Bank (RBCAA) of Louisville reported its earnings today.  First quarter earnings jumped by 16 percent, to $1.24 per share.  Given that its stock is currently trading between $21 and $22 per share, that’s indicative of a stock that could be undervalued.

A closer look at the results shows that most of its income came from one source.  The firm’s tax refund solutions business provided $20.9 million of the banks $25.8 million in profits.  Outside of that, results were mixed.  Mortgage banking surged, but it still made less than $3 million.  Banking outside of mortgages actually declined by 74 percent, to just over $2 million.

The tax refund business provides short-term liquidity to tax preparers that provide their clients with refund anticipation loans.  Most of the individual loans last from between 9 and 15 days.  For the filers, the costs might consist of between $40 and $120.  Republic doesn’t see all of that money, but they are able to generate a steady stream of dollars.  Its actually somewhat recession resistant, as in times like these, more people qualify for the Earned Income Tax Credit.  Moreover, more qualifiers are able to qualify for larger refunds, too.

Notice how Republic Bank gives incentives to tax preparers to provide RALs.

One of the downsides of this business, from the perspective of shareholders, is that it can’t be captured again until the first quarter of next year.  Thus, the $1.24 in earnings is likely to shrink by a significant margin for the remaining quarters.

Perhaps a larger problem is the possibility of some kind of government intervention that puts a wrench in this line of business.  One possible change would be for the IRS to slow down the response time on the debt indicator.  Right now, preparers using RALs are able to get refunds back to clients in one day.  Otherwise, e-filing is likely to require at least a week and perhaps longer.  If the debt indicator turnaround time was lengthened, the marginal value to consumers would shrink.

The debt indicator solution could be achieved without legislative change.  It could merely be enacted through administrative preference.  That makes Republic vulnerable.  It would put a stake in the heart of their earnings.

That fix might not occur, but the earnings remain tied to the TRS.  Moreover, the regulatory wolves are at the door.  In February, the FDIC issued a cease-and-desist order against Republic for its management of the RAL program.