- Key insight: Small Business Bank, a $73 million-asset bank outside Kansas City, has drawn the Federal Reserve's enforcement ire for the third time in three years — this time for having too little capital.
- What's at stake: The enforcement action comes as the Fed and other banking regulators have promised to revise their supervisory procedures to focus more on material financial risks.
- Forward Look: The bank has 30 days to issue new equity, arrange a sale or otherwise address its capital issues.
A small bank in the outskirts of Kansas City has 30 days to raise its capital level, according to an enforcement action announced by the Federal Reserve on Thursday.
Lenexa, Kansas-based Small Business Bank is "significantly undercapitalized," the Fed noted in a call for prompt corrective action. This is the third enforcement action the Fed has leveled against the $73 million-asset bank
In its latest directive, the Fed said the bank's capital was deemed deficient as of June 18, possibly signalling that its balance sheet has undergone rapid changes.
As of April 30, when it filed its latest call report with the Federal Financial Institutions Examination Council, Small Business Bank had a common equity Tier1 capital ratio of more than 14% — more than double the 6.5% needed to be deemed well capitalized. The standard for a bank to be deemed "significantly undercapitalized" is a ratio of less than 3%.
Call reports show that the bank's common equity Tier 1 capital has been on a steady decline in recent years, falling from $8.5 million at the end of the first quarter of 2024 to $6.9 million in the first quarter of last year and then to $3.5 million this year.
However, this decline in the numerator of the bank's capital ratio calculation has been offset by a fall in its risk-weighted assets. As a result, its capital ratio actually increased from 19.2% in 2024 to 23.8% in 2025 before tumbling nearly 10 percentage points to its latest reported level of 14%.
Overall, the bank has steadily been shedding assets during the past three years, falling from a peak of nearly $104 million at the end of the third quarter in 2022 to slightly less than $73 million as of this spring.
The decline matches the timeline of the Fed's issues with Small Business Bank's management. After a joint exam with the Kansas Office of the State Banking Commissioner on Oct. 31, 2022, Federal Reserve Bank of Kansas City examiners cited the bank for failing to meet anti-money-laundering and Bank Secrecy Act requirements. The discovery led to a wide-ranging cease and desist order against the bank and its holding company, Gardner Bancshares Inc., in September 2023.
The order called for the bank to address a litany of issues, including staffing, internal controls, credit risk management, lending and credit administration, capital, information technology and information security, books and records, regulatory reporting, liquidity and funds management, earnings, interest rate risk management, and third-party risk management.
A subsequent examination in May 2024 revealed AML and BSA deficiencies, as well as a failure to comply with Treasury Department regulations. This led to a
Per the Fed's latest enforcement action, the bank has 30 days from June 29 to either raise capital by selling new equity shares, arranging for itself to be purchased by another bank or find some other way to increase its capital level.
Before moving forward on any plans, the executives of Small Business Bank must get clearance from the Fed.
