Recent Failures Highlight Challenges for Small Banks

Two small banks were shuttered by regulators recently over consecutive weeks, highlighting how hard it can be for community institutions to survive.

The $3.7 million Kentland Federal Savings and Loan Association in Kentland, Indiana, was the smallest bank in the country until its closure on July 10 by the Office of the Comptroller of the Currency. The following week, the $73 million Small Business Bank in Lenexa, Kansas, was shuttered by the Kansas Office of the State Bank Commissioner.

Both banks were under regulatory enforcement orders that identified issues with the banks’ operations, including compliance.

“I would definitely say that smaller banks are going to struggle to meet the compliance demands,” says B. Gabe Nachand, a principal at the accounting firm Baker Tilly. “That has been a theme for probably 10 to 20 years.”

Overall, the banking industry is in a good place right now, says Christopher Marinac, director of research at the investment bank Brean Capital. First quarter net income at community banks ticked up almost 4% from the prior quarter, according to the Federal Deposit Insurance Corp.’s quarterly banking profile. That increase was mostly attributed to lower provisions for loan losses and noninterest expenses, which offset lower noninterest and net interest income. “The earnings are pretty solid,” Marinac adds. “We still have a good feeling about the banking industry.”

Still, small banks face several challenges, and experts believe there could be more bank failures in 2026. So far this year, four banks have been shuttered, with the largest being Community Bank and Trust – West Georgia in Lagrange at $288 million in assets. There were two failures each year in 2025 and 2024.

Marinac notes that smaller institutions can more easily be affected by singular issues. For instance, smaller banks may struggle to raise capital to absorb loan losses or may not have the resources to overcome a fraud event. “It may mean there is limited room for error,” he adds. “You can have an incident or two take the bank out, which is unfortunate.” Capital deficiencies at Small Business and Kentland had been flagged by regulators prior to their failures.

Compliance and governance can also be difficult for small banks due to a limited number of employees and resources, says Mike Rempel, a senior director at the consulting firm Cornerstone Advisors. This was a theme in enforcement actions against both Kentland and Small Business. A November 2024 cease and desist letter from the Federal Reserve flagged issues with Small Business’s anti-money laundering compliance, including with the Bank Secrecy Act. Kentland had been under a consent order from the OCC, which required the institution’s board to ensure it had sufficient risk management and governance in place, among other things. Bank Director was unable to contact the executives of the failed banks.

“In a larger shop, you have more dedicated roles across credit, risk, capital management and vendor management,” Rempel adds. “In a smaller shop, you are given more tasks, or you use a third party. I don’t think a smaller shop is in any way unable to have proper risk management, but it is harder.” That can make it difficult to fix an issue once it has been flagged by regulators.

Finding a potential buyer or raising capital may also prove fruitless, because there would likely to be a limited pool of people interested in buying or investing in a troubled community bank. “I would say as a board member, when you get regulatory criticism and you get an order, it is almost too late,” Nachand says. “You need to solve the problem immediately, and that often requires resources.”

Not all community banks are struggling with these challenges. The Farmers State Bank of Oakley, Kansas, a small agricultural bank based in the western part of the state, assumed substantially all the deposits and certain assets of Small Business. It was the $374 million Farmers’ second acquisition in the last 12 months; it bought Kaw Valley State Bank in Eudora, Kansas, in September 2025. Acquiring Small Business will help bolster Farmers State’s new presence in the eastern part of the state, says CEO Matthew Engel. He adds that Farmers State now wants to buckle down and fully capitalize on both deals.

Small Business didn’t offer consumer accounts, but Engel plans to change that, noting that employees were excited about the prospect. He believes the bank’s personal service will be welcomed in its new larger markets, which are less than an hour’s drive outside of Kansas City. “We are finding that they are missing the community bank personal touch,” he adds. “There will always be people who want the personal touch of banking with their neighbor or friend.”