Citron Reports on Republic Bancorp (NASDAQ: RBCAA)


“A man walks into a store to buy a toaster … and they gave him a bank.” – 2008 Humor

Republic Bancorp (NASDAQ: RBCAA) is a regional bank with operations in Kentucky, Indiana and Florida.   What makes Republic interesting in they do not operate like a traditional bank, rather they have built a business on aggressive non-banking lending practices that extend to payday and social security advances to IRS refund anticipation loans.  These businesses are combined with its traditional mortgage business concentrated in the Cincinnati/Kentucky region. 

In this report Citron will show the signs of a bank that could be in for a double whammy.  It is the opinion of Citron that not only is their loan portfolio significantly under-reserved compared to peers, but they also operate lending practices so abusive that there is great risk they will soon become heavily regulated or ended entirely by government intervention. 

Republic’s Tax Refund Business

Over the last twelve months, 33% of RBCAA’s net income has come from tax refund operations. 

As stated in their own 10-K:

“The TRS (“Tax Refund Solutions”) business segment represents a significant operational risk, and if the Company were unable to properly service the anticipated growth in the business it could materially impact the earnings of the Company”

The lion’s share of this business is generated by refund anticipation loans (“RALs”), which have been decried by the IRS and Congress for their abuse of consumers, including very high fees for very short term loans, and undisclosed consumer risks.  Nearly 2/3rds of RAL consumers are Earned Income Tax Credit (EITC) recipients – not a class of customer with a lot of economic clout.

In 2008, the IRS issued a proposed rule that would effectively shut down tax preparers from being involved with RAL’s. 

IRS Proposed Rule (PDF)

The enthusiasm that the government has to shut down all RAL programs is most clearly expressed in this letter from the US Government Accountability Office.


This would separate RBCAA from tax preparers like its current partner Jackson Hewitt (NYSE: JTX) and cut the company’s earnings by a third. JTX’s shares took an immediate hit since the IRS announcement and are down 62% this year.

By contrast, RBCAA’s shares have increased over 40% this year.  It is the opinion of Citron Research that with future regulation of the RAL business and IRS’s large-scale implementation of its new CADE system, (which further streamlines refund issuance) the writing is on the wall for all in the tax refund business.

Republic’s “Currency Connection” Business

In 2006, Republic was chased out of the payday loan business by the FDIC:

The FDIC did not think the usurious nature of payday loans was appropriate for member banks to be involved in.  The agreement with the FDIC expired in the early 2008.

FDIC and AA Agreement (PDF)

Republic is back with a product called Currency Connection, lurking in the shadow of the regulators’ intent, loading Social Security payments directly to a debit card or a check for those without a bank account or credit history.

Interestingly enough, at the same time Republic is attempting to move away from the FDIC and trying to become regulated by the Office of Thrift Supervision.  In a 100 page letter from consumer advocacy groups to the OTS, the nature of Republic’s Currency Connection business is discussed in detail.

Republic OTS Comment (PDF)

It has been suggested that Currency Conversion violates section 207 of the Social Security Act, which prohibits the assignment of benefits to pay debts.  If that holds true, than this is another part of Republic’s business that can simply go away.  Moreover Citron finds it disturbing that RBCAA does not mention this business in any of their recent filings, creating a complete lack of transparency. 

What is most worrisome to Citron Research is the nature of the business.   If you are marketing RAL products and benefits advance products to lower income, high risk credit individuals, what does your loan portfolio look like?  Does the aggressive nature of the bank’s lending spill over into their accounting?  Only time will tell.

Overleveraged and Under Reserved?

Let us first give the notice that Citron Research is not a specialized banking analyst … not that the analysts were all that impressive at predicting the consequences of aggressive lending indulged in by a plethora of banks.  This following commentary simply asks the difficult questions about numbers that are obviously outlying competitive norms. 

In the following analysis of a comparison of regional banks that operate in the Kentucky/Indiana region we find some startling revelations. 

RBCAA appears to be startling 251% over levered vs. its peers.  Further troubling is is that the loss allowance for total loans is 51.95% under-reserved vs peers.


And conditions in the region aren’t getting better so fast.  Just last month the Federal Home Loan Bank Of Cincinnati, along with Republic, offered $500,000 to establish a program that helps with mortgage counseling and foreclosure mitigation.


Republic’s banking conditions appear to be troubled.  Non-performing assets are up over 120% year-over-year while its reserves for loan losses are down substantially as a percentage of non-performing loans (see attached model).   It is the opinion of Citron that the reason the reserves have gone down against a higher rate of non performing is to make the numbers look better for the short term.


In the recent earnings release we see that the allowances for loan losses are over 50% lower than other regional banks with almost identical loan books.  If RBCAA were to increase its reserves to the average, the company would need to have a $15.4 million write-down of assets.  This would cut RBCAA’s net income in half.


It is the opinion of Citron that companies making a business model in abusive consumer practices carry business risks.  When you combine that with a bank that might be over-leveraged and under-reserved, investors should take notice. 

Cautious investing to all.