Here's what happened when a struggling bank was 'too small to save'

• Key insight: America's smallest bank, with just $3.7 million of assets, survived for more than a century, including the Great Depression and the Great Recession. But, it could not survive overzealous regulators.
• What's at stake: What if the government was the primary cause of the failure because it was "too small to save?"
• Supporting data: Kentland became "critically undercapitalized," below 2%, at the end of the first quarter of 2026, with a 1.66% tangible equity capital ratio.

When big banks fail in the U.S., like the three $100+ billion banks in 2023, there are congressional hearings, postmortems, even TV specials.

Nobody cares when small banks fail, even if it's the smallest bank in the country.

But, what if the government was the primary cause of the failure because it was "too small to save?"

This is the untold story of why America's smallest bank, Indiana's $3.7 million Kentland Federal Savings and Loan Association — a two-employee operation halfway between Chicago and Indianapolis — failed.

I've consulted for over 40 years with community banks in Indiana's small towns, including Seymour, the inspiration for John Mellencamp's famous "Small Town" song.

The U.S. is unique among developed economies in that it has a large number of small banks and a small number of large ones.

The ICBA adage says it best: "Why give a community a branch, when you can give it the whole tree, including the roots?"  

Kentland embodied that saying until it was uprooted, declared insolvent and closed by the Office of the Comptroller of the Currency on July 10.

Founded in 1920 and run by four generations of one family, Kentland survived the Great Depression, the Great Recession, and every other crisis for more than 100 years.

But, it couldn't survive an overzealous OCC, the "Office of Colossal Corporations," which regulates big banks, including eight of the 10 largest, controlling more than two-thirds of bank assets.

Kentland became a regulatory orphan after the Great Recession, the smallest of about 650 savings and loans formerly regulated by the now-defunct Office of Thrift Supervision. Supervision of federal S&Ls was transferred to the OCC.

Kentland's adoptive OCC father was supportive for a dozen years until April 2023, the big bank failure year, when it shocked Kentland with a very strong consent order. It required more capital and almost everything else larger banks have but smaller ones, especially the nation's smallest, don't.

Kentland's president's response: "The powers that be are concerned about our capital growth — they deem us too small to survive."

Instead of celebrating a national banking treasure, demonstrating banks of all sizes are important, the OCC threw the regulatory book at Kentland.

How can the nation's smallest bank be expected to run like a big city OCC bank?

That order was never terminated, but Kentland did everything possible to comply, including a strategic capital restoration plan.

The first step was qualifying as a Community Development Financial Institution, or CDFI. As someone who has been involved with CDFIs since President Clinton signed the Community Development Banking Act in 1994, I had no doubt Kentland, a true George Bailey bank, would qualify.

As a CDFI, Kentland would exceed all capital requirements, because it had commitments from three different entities to purchase $600,000 of approved Mutual Capital Certificates or MCCs. Investors would help Kentland and themselves, since CDFI investments are CRA-qualified.

Everything was on schedule until a rogue OCC CRA team arrived in late 2023, that same cursed big bank failure year, and improperly downgraded Kentland to a failing CRA rating.

Reserved for the worst 2% of banks, the failing rating derailed Kentland's recapitalization, since a passing CRA rating was required for the planned CDFI designation and follow-up capital commitments.

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Still reeling from the excessive consent order, management was doubly shocked, since Kentland had passing CRA ratings for more than a quarter century.

Kentland's pro bono attorney called me, because I helped develop the current CRA regs and had considerable experience with rogue CRA examiners.

As Kentland's pro bono CRA consultant, I concluded the OCC failed Kentland because over half its loans, just four of six, were outside its home-county assessment area. Looking closely, I found two were just over the county line. CRA performance context and other regulatory factors, however, required a passing rating.

My independent CRA audit to the OCC argued for an expedited exam with the correct Satisfactory rating. The OCC agreed and upgraded Kentland to Satisfactory in March 2025.

With this good news, a mutual thrift demonstrated its confidence in Kentland's recapitalization plan by investing $125,000 in its MCC, temporarily boosting Kentland's capital while awaiting CDFI approval.

The Treasury Department houses both the OCC and the Community Development Financial Institutions Fund. Despite the scaling back of the CDFI Fund, they could have worked together to expedite approval of Kentland's CDFI application, submitted in late 2025, to help ensure a first-quarter recapitalization.

This didn't happen, and Kentland became "critically undercapitalized," below 2%, at the end of the first quarter of 2026, with a 1.66% tangible equity capital ratio.

Had Kentland received the correct passing 2023 CRA rating, likely follow-up CDFI approval, and the committed $600,000 MCC capital infusion by year-end 2023, its tangible equity capital ratio, assuming subsequent operating results otherwise remained unchanged, would have been approximately 27% at year-end 2023, 23% at year-end 2024, 16% at year-end 2025, and 15% by the first quarter of this year.

If the OCC wanted to save Kentland, it could have exercised regulatory capital forbearance because there was a realistic path to adequate capitalization that would have succeeded. One mutual thrift had already purchased Kentland's MCCs and three additional investors had committed to invest upon CDFI approval under its capital restoration plan.

Many banks and thrifts during difficult periods were allowed to operate with minimal, sometimes negative, capital. Citi reportedly had 2% capital during the Latin Debt Crisis. Bureaucrats themselves are flexible: When did the Fed last meet its 2% inflation target?

Adding regulatory insult to injury, the FDIC guesstimated a $1.2 million expected loss, about one-third of Kentland's assets. Based on my knowledge of its assets and its March 31, 2026, Report of Condition, this seems inflated to help justify the closing. This happened before with the OCC's closing of Miami's SouthEast Bank , which actually resulted in an FDIC profit.

The OCC's closure order correctly found Kentland "critically undercapitalized," but it omitted that the OCC itself was primarily responsible for that outcome.

The OCC's rogue CRA team that improperly downgraded Kentland in 2023, besides proudly notching another failing CRA rating in their regulatory overreach belt, can also claim an even bigger bank failure notch.

I hope there's an independent postmortem of Kentland, because America's smallest bank deserved better.

Maybe it's time John Mellencamp wrote a sequel, not about the virtues of living in a small town, but the regulatory perils of operating a small bank in one.