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River City Bank Drops RAL Program

Adam Rust's picture

Posted February 16, 2011

River City Bank has conceded to an FDIC request that they exit the refund anticipation loan market. River City announced the decision on their Tax Division website yesterday afternoon.

The news means that two of the three remaining refund anticipation loan providers will drop RALs. Neither is going to exit immediately and both will run their programs through the end of this tax season. By a recent estimate in a US

Department of the Treasury report, more than 80 percent of all refund loans are originated by February 15th. Filers due a refund do their taxes earlier that tax payers.

Republic Bank of Kentucky has already indicated that they will not back away from their RAL program. The RAL program is a significant source of revenue for Republic. In 2009, they made more than $3 billion in RAL loans. The bank has $3.6 billion in assets. One analyst estimated that RALs could account for $2.35 in earnings per share in 2011.  Republic reported earnings of $3.09 per share during the last twelve months.

The stock's valuation reflects that those earnings are at risk, but the price says that buyers and sellers are still uncertain about the likely outcome. The stock is trading at $17.60 per share today. That is a p/e multiple of just 5.7. Commonly, equities trade at between 15 and 18 times per share. At that multiple, Republic's shares would trade at only $10.36, meaning that buyers and sellers are not convinced that the FDIC will triumph. Currently, prices are very optimistic across the entire domestic equity universe. Robert Shiller's numbers find that the current p/e ratio is 24 times per share. Guess what - at that multiple, earnings of 74 cents per share ($3.09 minus $2.35) price the stock at $17.76.

Republic is going to press on. They have already said that they intend to fight the FDIC's Cease and Desist order in an upcoming hearing before an Administrative Law Judge (ALJ). It will be interesting to see who they enlist in their effort. Republic certainly has in-house counsel, but it isn't hard to imagine that they will hire some big guns. Pacific Capital, a former RAL issuer, had Eugene Ludwig's lobbying firm on retainer. Ludwig was once the Comptroller of the Currency.

The ALJ will weigh the FDIC's position that RALs present a threat to Republic's safety and soundness. Republic is likely to counter with data that shows that their underwriting is translating into low loan-loss rates on RALs, in spite of the absence of a debt indicator.

News on investing message boards, which might be taken with a "grain of salt," say that the FDIC has been spot-testing at Jackson Hewitt and Liberty franchises. This would reflect something of the makeup of their likely argument. Banks are responsible to guarantee that their tax preparer partners honor a variety of laws that protect consumers. Those include the Equal Credit Opportunity Act, the Truth in Lending Act, and the Fair Debt Collection Practices Act.