Second Take on the Jackson Hewitt – Republic Partnership

While Jackson Hewitt and Republic Bank have both announced a new agreement for the funding of refund anticipation loans, there are miles to go before that relationship bears fruit. Republic still needs to get the go-ahead from the FDIC, and there is little time for Jackson Hewitt to respond if the FDIC wants to intervene.

The new agreement runs through 2012. Of note, it increases the number of locations where Republic will provide funding support for Jackson Hewitt franchisees.  It covers funding both for Jackson Hewitt’s refund anticipation loans and their assisted refund products.

Republic submitted a second 8-K on December 30th that indicated that it would be in talks with the FDIC about this new agreement.  The statement is simple, but it is hard to imagine that there isn’t something lurking behind these words:

“In February of 2010, Republic Bank & Trust Company (the “Bank”), a subsidiary of Republic Bancorp, Inc., expects to meet with the Federal Deposit Insurance Corporation (the “FDIC”), at their request, to review the future viability of the Bank’s Refund Anticipation Loan program beyond the upcoming tax season.”

That is the entirety of the 8-K. Right off of the bat, this 8-k stands out. Banks meet with their regulators all of the time. Those meetings are not announced through an SEC filing. The 8-k reflects activity that should be of concern to shareholders.

Indeed, the FDIC could be ready to act. Let’s parse out a few of the possible meanings behind the oracle’s language:

• at their request:  The fact that the meeting is at the request of the FDIC is significant.
• in February 2010: Timing matters, because the tax season is not going to wait. February 2010 arrives at the onset of the RAL calendar. If the FDIC waits until the end of the month, much of the issue is settled for the year. It is simply too late.
• beyond the upcoming tax season: This one could have two meanings. If it means that they are not concerning with the next tax season, then Jackson Hewitt has dodged a bullet. They will have their solution for this year. Since most RALs are funded in the first 6 weeks of the tax year, they don’t have much more time if this is not going to work out.  If it means that they are concerned with the future of their RAL activities in general, then this is news.

If I had to bet on these tea leaves, I would bet that the FDIC is going to let them have a “pass” for the next year. Republic is staffing up.  They are posting new job listings on their site for their Refund Solutions division at this very moment.

This matters both to more than a few parties. For sure, it is going to have bearing on the business models of both of these institutions. Since Republic supplies refund anticipation loan dollars to many independent tax prepares, it will have impact on Main Streets across the country. It also weighs on the fortunes of H&R Block, as the lack of RAL offerings at Jackson Hewitt would push some customers over to nearby Block franchises.

Last, this resuscitates the i-power card. I-power is the prepaid debit card, operating through MetaBank, that can accept tax refunds. Customers can put their refund on to the card. Those who do so are likely to be some of the 9 million American households without a basic checking account (the “unbanked“).  The i-power card comes linked to a credit account. Consumers can borrow money for up to 35 days in $20 increments. Each increment bears a $2.50 fee.

All of this reflects poorly on the management of Jackson Hewitt. They know that RALs are vital to the ongoing viability of their business model. They should have seen this coming at Pacific Capital. Perhaps they did. The question still must be asked, though: Why did they leave the success or failure of their business up to the preferences of the FDIC?