Federal Reserve ends enforcement action vs. Illinois bank

Andrew Harrer/Bloomberg

The Federal Reserve has ended an enforcement action against a small Illinois bank and its holding company.

The Fed Board ended its written agreement with Perry County Bancorp and its subsidiary, Du Quoin-based Du Quoin State Bank last week. The move, which was announced Tuesday, comes a little more than two years after the action went into effect.

A representative for Du Quoin State Bank did not immediately respond to a request for comment on Tuesday.

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The 2023 order did not cite specific violations by the bank, but it did note that Du Quoin State Bank needed to improve its interest rate risk management — a topic of particular concern for regulators at that time in the wake of the failure of Silicon Valley Bank that March.

The Fed's push to rapidly increase interest rates in 2022 resulted in paper losses on the balance sheets of banks throughout the country. The existence of new, higher-yielding Treasuries caused older, lower-yielding bonds to be automatically devalued. 

Typically these unrealized losses are not an issue for banks unless they are forced to sell the assets, as Silicon Valley Bank did in March 2023. The crystalized losses contributed to a bank run that rendered the bank insolvent.

An American Banker investigation in 2023 identified Du Quoin as one of dozens of banks with enough underwater securities on the balance sheets to wipe out their equity. 

During 2022, Du Quoin saw its total bank equity capital erode from a little more than $18 million to -$547,000 due to unrealized losses on its securities portfolio, according to quarterly filings with the Federal Financial Institutions Examination Council. This was because the $12.8 million decline in its securities holdings exceeded its common stock holdings and retained earnings.

Despite these paper losses, Du Quoin's regulatory capital remained sufficient, because of the ability for most banks to opt out of including accumulated other comprehensive income, or AOCI, in their capital calculations. Because of this, the $140 million bank's common equity tier 1 capital was just under $12.3 million at the end of 2022. 

The bank has built up its capital position since then by increasing its retained earnings, according to subsequent FFIEC filings. Its total bank equity capital was $2.8 million at the end of last quarter and its tier 1 capital was $14.6 million. 

Du Quoin still has unrealized losses on its books, totaling more than $12 million at the end of last quarter, but the Fed appears to be satisfied with the bank's progress to date. The central bank did not explain its decision to terminate the enforcement action against Du Quoin.