Estate Tax Change Brings Hope for Small Banks

Chris Gosnell, CEO of Farmers Bank & Trust of Magnolia (Jason Burt)

The number of community banks has been on the decline across the country, but some bankers hope a change to tax policy in the One Big Beautiful Bill Act will help the remaining banks continue to serve rural communities.

Community banks hold only about 11% of bank assets, but they make 37% of small loans to businesses and 63% of agricultural loans, according to a recent presentation by Brandon Milhorn, president and CEO of the Conference of State Bank Supervisors.

Those statistics make the state of community banking clear: The banks have fewer resources, make smaller loans and serve rural areas. And the number of banks of this kind has been falling. In 2014, there were 6,100 of these banks and now there are 4,050, Milhorn found.

The total number of financial institutions has fallen nationally over the past 30 years from more than 9,900 in 1995 to less than 4,500 this year. The number of banks and thrifts chartered in Arkansas has fallen from 260 in 1995 to 78 today. Federal legislation could help preserve some of the remaining community banks.

Last year, several banking advocacy groups raised concerns that provisions of the Tax Cuts & Jobs Act of 2017 would expire in 2026 unless action was taken. Among those provisions was an exemption to the federal estate tax, which taxes the transfer of wealth after a death.

Under the Tax Cuts & Jobs Act, the threshold for triggering the estate tax was raised from $5.49 million per individual to $11.18 million per individual. Those figures are also adjusted for inflation in the legislation, meaning the exemption trigger is $13.99 million this year. If it expired, the exemption would have returned to around $6.5 million. The OBBBA permanently raises the exemption to $15 million and that figure will be adjusted for inflation going forward.

Several banking advocacy groups, including the Arkansas Bankers Association and the American Bankers Association, said the lower exemption level would have had consequences for community banks.

The concern among bankers was for small community banks, which are privately owned and, sometimes, family owned. The banking groups were concerned that, after an owner’s death, a bank would have to be sold for the owner’s estate to generate enough cash to pay the tax bill.

The Independent Community Bankers of America, another advocacy group supporting the higher exemption, said in a letter to congressmen last year that the estate tax jeopardizes the future of banks that have been held by families across generations. The organization called for repealing the tax or making the higher exemption level permanent. “A family estate should never be forced to sell its interest in a community bank to pay a transfer tax,” the organization said.

The ICBA, which also advocated for eliminating the estate tax entirely, said the sale of community banks would lead to more banking consolidation and less competition in the marketplace, which would be bad for consumers.

Chris Gosnell, chairman of the Arkansas Bankers Association, said the sale of banks for tax purposes is a real concern. If a smaller bank is sold, it would likely be to a larger bank with different priorities. “Bigger banks don’t care about serving those communities,” Gosnell said. “If you lose those little banks that make these small consumer loans that people need every day, it affects a community big time.”

Gosnell is also the chairman and CEO of Farmers Bank & Trust of Magnolia, which has assets of around $3 billion and has branches in Arkansas, Oklahoma and Texas. While Gosnell’s bank has grown, he said his bank primarily serves rural communities.

Gosnell said his bank regularly makes loans for repairing a car, buying a refrigerator or starting a small business.

“All this kind of stuff is backed by the bank,” he said. “If that goes away, it’s a massive impact,” he said.