By Ray Birch
LAKE FOREST, Ill.— It’s Leap Day tomorrow, those extra 24 hours in February that arrive in most years divisible by four. But the day is more than just a calendar quirk—it also creates some financial dilemmas, the experts say.
While the affects differ among consumers, for credit unions Leap Year always raises questions when it comes to how to handle various charges and other costs related to 2020’s extra day.
“The answer is driven by several factors,” said Michael Moebs, economist and CEO at Moebs $ervices.
Moebs said the questions involve loans vs. deposits, total net revenue of service, consumer vs. business loans, loan size, as well as the credit union’s net income and capital position.
“The first consideration is do you charge for one extra day of interest on loans, but not pay for one extra day of interest on deposits?” said Moebs. “If few members have both loans and deposits, then the answer is easy—charge for loans, but don’t pay for deposits. Yet, is the amount of revenue made worth the potential reputation risk?”
If a credit union has capital of 10% or more and its net income-to-asset ratio is 1% or higher, for example, the solution is easy, said Moebs.
Michael Moebs
“Leave well enough alone and calculate rates like it’s a non-Leap Year,” he recommended. “Is one day of revenue on loans offset by one day of deposits worth the potential loss of goodwill?”
Other Leap Year-related questions aren’t as easy to answer. For instance, some loans are obviously much larger than others and may need special consideration, as one extra day of net revenue can be significant, said Moebs.
“More important is understanding the net between larger loans and larger deposits,” Moebs said. “If the net margin is 3% or greater and amounts to a net of $10 on 1,000 large loans and deposits, the revenue is $10,000, and the decision is easy to make—pay the rates for the extra day, and probably do it for all loans and deposits.”
The final consideration, according to Moebs, is consumer vs. commercial business.
“Balances of business deposits and loans are generally greater than on the consumer side,” said Moebs. “The ‘buyer beware’ adage applies for business services, so charging for business loans and paying or not paying on business deposits is common for most financial institutions on Leap Day. Consumers are a different story, and credit unions may consider not including consumers in calculating the extra daily rate for Leap Year.”
Another Valentine’s View
Andrew Vahrenkamp, senior research analyst at Raddon, breaks down Leap Day differently.
“Typically speaking, the extra day is great if you are paid hourly or daily or if you are paying monthly or yearly,” said Vahrenkamp. “You get an extra day of income or you get a ‘free day’ of services you aren’t paying for.”
The reverse, noted Vahrenkamp, is much less appealing.
Bill Handel
“Salaried employees work an extra day for free, and your expenses that day are above and beyond what you would already spend on the 28th or first day of the month.
Vahrenkamp looked back on how Leap Year affected him when he was a CFO at a credit union in Oregon.
“Our credit cards were set to charge fees on the 30th of every month, except for February, when they’d be on the 28th,” Vahrenkamp said. “Somehow the core system ended up charging twice on Leap Year in 2012, and we had to scramble to fix the accounts. I’m still not sure why it was set up that way or hadn’t been an issue in 2008, but it did spoil our extra day.”
Vahrenkamp said that as a researcher and former credit union executive, “I can confirm that it never hurts to double-check and make sure everything is in order, especially when something out of the ordinary is happening.”