Republic Bancorp's move to appease regulators by ending its refund-anticipation loan program may have cost it one of its main tax servicing partners.
Republic (RBCAA) said late Wednesday that it had received notice that JTH Holding (TAX), the parent of Liberty Tax Service, was terminating its marketing and servicing agreement.
The termination could mean as much as a 20% hit to the gross revenue of Republic Processing Group, which includes the Louisville, Ky., company's tax business. The processing group accounted for 55% of Republic's $222.4 million in revenue for the first six months of the year. The tax business makes nearly all of its money in the first six months of the year because of tax season. Republic has a similar agreement with Jackson Hewitt Tax Service, which contributes 40% of the tax business' gross revenue.
Republic's tax business has three main components: electronic refund check processing, electronic refund deposit and the refund-anticipation loan. In December, Republic ended a long and bitter battle with the Federal Deposit Insurance Corp. over the refund-anticipation loans, agreeing to stop offering them after the 2012 tax season. The loans, which fronted consumers up to $1,500 of their refund, were a popular and very profitable item, but regulators and consumer advocates have long argued that they are predatory on claims that the $91.22 that Republic charged on the short-term loan seemed extraordinarily high when expressed as an annual percentage rate.
Within days of the FDIC settlement, JTH said in a regulatory filing that it had found a nonbank partner, which was not named, to make the loans. In a filing this week, JTH identified the refund-anticipation loan discontinuance as part of the reason for terminating the agreement, which is set to become effective on Sept. 16. The contract was expected to expire in October 2014.
"The termination notice was based upon a determination that following Republic Bank's agreement with federal regulators to cease providing RALs, and based on our experience in the most recent tax season, the agreement no longer provides the same opportunity to the company," JTH said in its filing. The agreement allows for termination if either party breaches any of the terms or if the program was no longer commercially feasible or practical or no longer provided the same opportunity because of legal, legislative or regulatory determinations.
Republic said in a filing that it believes no occurrence has arisen that would cause the termination and it disagrees with the JTH's interpretation. It vaguely hinted at possible litigation.
"The bank will continue to evaluate its alternatives as it seeks to protect its rights under the agreement," it said. Calls to Republic on Thursday were not immediately returned.
Republic and JTH, however, said in filings they are looking for ways to modify the terms of the agreement to avert the termination. One option could include a collaboration limited to Republic's electronic refund check product.
Republic has also expressed optimism that bank acquisitions could help replace lost revenue.
Republic has the capital to make acquisitions; at June 30, its total risk-based capital ratio was 27.5%.
Ross Demmerle, an analyst at Hilliard Lyons, said the loss of revenue from JTH is definitely a hit, but it should have been expected following the discontinuance of the refund-anticipation loan product. "It is going to hurt them, for sure, but they are on a path to become more of a traditional bank anyway," he said in an interview Thursday. "The business certainly adds to retained earnings and the capital base, which will be missed."
Demmerle said he is waiting to hear back from the company. He said he is curious to see if it will foreshadow Republic's relationship with Jackson Hewitt. "That's one of the reasons I want to talk to the bank. I want a better impression as to where that relationship is going," he said.