State taxes motivate Iowa credit union to switch charters

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Cobalt Credit Union in Council Bluffs, Iowa, is planning to switch back to a federal charter at least in part to avoid paying state taxes.

The $1 billion-asset credit union, which was formerly called SAC Federal Credit Union, initially changed from a federal charter to a state one in 2018 to expand into additional counties, something it couldn’t do under a federal charter.

Gail DeBoer, president and CEO of Cobalt Credit Union
Gail DeBoer, president and CEO of Cobalt Credit Union

But management is now seeking to switch back partly because “a federally chartered credit union does not pay state taxes but Iowa state chartered credit unions do,” according to a notice sent to members obtained by the Credit Union Journal.

“At Cobalt Credit Union our goal is to make decisions that protect our membership and the credit union movement,” the notice said. “With this philosophy in mind, the board of directors has made the determination to seek a change in charter converting to a federally chartered credit union. We have made this determination based on a number of factors.”

Representatives from Cobalt CU did not immediatley provide a statement on the matter when contacted by Credit Union Journal.

The notice then outlines three reasons for converting, with the tax issue listed first.

The letter also says Iowa lawmakers were considering legislation that “would further increase the tax burden to credit unions.” Iowa credit unions currently pay a monies and credits tax of 0.5% on their legal and special reserves.

The notice adds, “The proposed bills in the last few years would increase the tax burden on our credit union, making it difficult to offer competitive dividend and loan rates.”

The letter is signed by Julia Cronin-Gilmore, the credit union’s interim board chairperson, and Denise Seaman, board secretary.

Iowa has been ground zero in recent years for the battle between banks and credit unions. Earlier this year the Iowa banking regulator objected to a deal where a bank to sold seven branches and related assets to a credit union.

In 2018, the industry was able to beat back a proposed state law that would have imposed a tax on credit unions. That same year a new legislation was passed that prohibited Iowa credit unions from using the name of state universities in their own name. That forced two institutions to rebrand.

Cobalt’s notice to members also said that being a federally chartered institution would allow it offer small-dollar loans since the state does not have a payday alternative loan program. State regulations currently limit the fees institutions can charge on small dollar credits, making offering these products financially difficult, the credit union said.

Finally, the credit union said its costs $708,440 more each year to be a state chartered credit union. By saving this money, the institution will be able to offer better rates to members, according to the letter signed by Cronin-Gilmore and Seaman.

Cobalt expects to spend roughly $49,000 in attorney and consulting fees to convert back to a federal charter, up from the $39,000 it spent to convert to a state charter, according to the letter.

The notice, which was dated Jan. 24, said a meeting will be held on May 1 in Papillion, Neb., to vote on the proposal.

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