One small bank fails, while others thrive

The littlest bank succumbs
Kentland Federal Savings and Loan – the smallest standalone bank in America, with one branch and $3.7 million in deposits – opened its doors in Kentland, Indiana, in 1920. It shares a building with a title company on N. 3rd Street and is next to the Mainstreet Lounge and Pizzeria. Kentland is a charming midwest town, the seat of Newton County nestled into the vast farmland between Chicago and Indianapolis.

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Kentland Federal closed its doors for the last time on Friday, the third bank this year to fail, as our Ebrima Santos Sanneh reported. The bank was resolved by regulators and sold to another local institution, Kentland Bank. 

It’s hard for a small bank to survive anywhere, but it was probably a little harder in Kentland. Not because the town is bad. It’s just small. Kentland’s population is just 1,600. As far as I could see from Google Maps, there were three banks (Fowler State Bank was the third) and a couple of ATMs (one sold bitcoin). The whole town covers 1 ½ square miles. The bank’s failure made the local press. 

I don’t know exactly why Kentland Federal failed. I do know that every business needs a competitive advantage. This is difficult for banks because their product – money and credit – is essentially the same from bank to bank. A business such as Kentland Federal might have worked well for a long time given it had a relatively captive audience. Banking in general worked well for most of its history on this basic principle. A bank would set up a branch in a town or neighborhood and carve out its local niche. What banks relied upon were “sleepy deposits,” customers who put their money in a branch and just left it there, forever essentially. I’d mentioned this recently, that about half of all bank deposits are considered “sleepy” deposits. It’s an understated but important part of every bank’s profit base.

This started changing after the pandemic. Inflation took off. The Federal Reserve raised rates in response, pushing higher yield on all kinds of safe investments. Banks found themselves competing for deposits. And banks weren’t just competing against each other on opposing street corners. They were competing in cyberspace, which meant that essentially any bank could target any other banks’ customers anywhere. A little mini-monopoly like the one Kentland Financial had probably wasn’t so stable anymore. So Kentland Federal’s customers are now customers of Kentland Bank. The branch opened its doors this morning in the same location, between the title company and the Mainstreet Lounge, but with a different name in the front window. 

A century plus is a good run for any business.

Some small banks are thriving
It’s not all doom and gloom for little banks, though. This morning American Banker published its list of the 20 best-performing banks with assets under $2 billion. The story was written by our Maria Volkova, based on data from Capital Performance Group.

The top performers stood out by being able to grow their deposits while still maintaining low overhead, no mean feat given the challenges today. Capital Performance noted the “painful competition” of the past few years. The small banks that performed the best were the ones that managed to find low-cost funding sources, such as business checking accounts that paid little or no interest. They kept their own costs down and managed to avoid bad loans.

It also helps to find other sources of fortune. The number-one bank on our list, CNB Corp. in Cheboygan, Michigan, increased its net loans 8.2% from a year ago, but it also benefited from an accounting treatment on its unrealized losses.

Tune in for the rest of the summer as we rank the Top Performing Banks in successively larger asset ranges.