Don't Bank on Republic Bancorp - Barron's

Republic Bancorp (RBCAA) is one of the privileged banks to have sidestepped subprime. Thanks to careful lending, Republic's allowance for loan losses is just 0.6% of all loans - a third of the national average. Wall Street likes the stock, as shares more than doubled through August before retreating - but are still up 43% YTD.

So what's there not to like? Plenty, Barron's Bill Alpert says. Republic has built its growth strategy around tax-refund anticipation loans, or RALs. To wit, half of all Republic's profits YTD are from its tax refund business. RAL loans are typically made to the working poor, extending them cash against their anticipated tax refund - at rates that seem outrageous even for pawnshops.

Republic discloses an annual percentage rate of 110% on its average $3,300 RAL. But CEO Steve Trager says the figure is a red herring. What it actually charges, he says, is a $110 fee - just 3.3% of the loan amount - regardless of how long it takes for the IRS to forward the refund. Still, on average, RAL loans are paid up in full in 11 days, hence the 110% disclosure.

Trager dismisses critics as "a self-appointed handful whose paternalistic views would keep poor people" from their money. "I can't let a handful of people that think we charge too much dictate whether I offer it," he says. But RAL critics are everywhere, Alpert notes, and new rules proposed by the IRS in January would prevent Republic partners like Jackson Hewitt Tax Services (JTX) and H&R Block (HRB) from showing lender banks taxpayer returns in order to drum up business. "The time has come," an attorneys general memo says, "to put an end to a decades-long saga of misleading and deceiving taxpayers and undermining the public fisc."

Alpert notes that the military already stopped allowing RAL offers to enlisted personnel. Other negatives include a streamlined IRS computer system that promises to deliver refunds in under a week, and a president-elect that make the future of predatory lenders even more doubtful.

Without the RAL business, he says EPS would drop to $1.15 from $1.92 - which could send shares ($24) below the mid-teens.

Comments

[Ransome:]

How does this differ from the credit card bank charging a 3% fee on a transaction that gets paid back on an average of between 10 and 15 days. The fee is assessed regardless of paying the card off every month. The only difference is the vendor pays but the extra cost is reflected in the price. Much to the chagrin of the credit card banks, some vendors offer a cash discount, most notable when the credit card fee on a gallon of gas exceeded the profit margin. .

2008 Nov 09 08:21 PM

[Did U Think...:]

It doesn't. All banking is predatory in some way. But now we have moved into the phase where there will be villification of the successful. So, XOM will be asked to disgourge profits for the good of the socialist republic and so on.

2008 Nov 10 12:03 AM

[Credit I. P...:]

I wrote a response blog post and posed a question about how other fees especially when annualized dwarf the 110% annual which RBCAA is getting.

2008 Nov 10 01:57 AM

[Credit I. P...:]

I left out the link to my post from the previous comment:
creditincomeprofit.com.../

2008 Nov 10 01:59 AM

[Tax Refund ...:]

During between the months of February and April, tax refund loans earn so much popularity.Tax refund loans are loans made against the filer’s anticipated return, made out by the tax preparers, and it only costs you a percentage of the total return, a cash advance against money from the IRS. Often they’ll get you a check in a day or two, or wire the money into your bank account. However, you might want to be wary of these loans, if you’re considering them. A lot of people get them and when the IRS rejects their return, they have to pay back not only the loan itself but a mountain of interest. Almost a billion dollars was spent in America on tax refund loans, mostly in fees.

Mar 14 04:50 AM