Like cockroaches, credit quality concerns are multiplying at a number of community banks. Regulators are reaching for the Raid.

The never-ending economic lethargy is sending more borrowers into default, plaguing the bottom lines at institutions such as First Financial Bankshares, S.Y. Bancorp and Southwest Bancorp.

Though most banks are reporting steady improvements in nonperforming assets, there are enough instances of regression to have caught the Office of the Comptroller of the Currency's attention.

Banks must be mindful to avoid excessive risk, says Kathy Murphy, the chief accountant there. "We're still seeing a lot of risk factors, very high nonperforming asset ratios … [and] vacancy rates on commercial real estate being very high," she says.

As the economy struggles to right itself with some permanence, many businesses either have or will have problems that will eventually hurt loan quality, says John Depman, the national leader of regional and community banking at KPMG.

"Banks have been trying hard to resolve problem loans and just as soon as they get those loans off the books, new bad loans are coming into the pipeline," Depman says.

Nonperforming assets at First Financial in Abilene, Texas, jumped 17% in the second quarter from a quarter earlier, to $33.9 million. Bad loans rose 13.2% at S.Y. Bancorp in Louisville, Ky., and 12.5% at Southwest in Stillwater, Okla., compared with the first quarter.

Edward Wehmer, the chief executive of Wintrust Financial in Lake Forest, Ill., predicted deterioration during a quarterly conference call earlier this year. Improving credit quality "has been our friend for the last five or six quarters and … we would like to see that trend continue," Wehmer said on an April 19 call. But, "we still understand that there is stress out there."

Wehmer was right. Nonperforming assets rose 2% at the $16.6 billion-asset company during the second quarter from a quarter earlier, to $193.5 million.

At some banks the culprit is a single problem loan.

Wintrust's rise in problem assets was largely a function of one loan going bad, accounting for about $13 million of the recent jump in nonperforming loans, Wehmer said during a conference call last week to discuss quarterly results.

The same was true at the $6.6 billion-asset CVB Financial in Ontario, Calif. The company took a hit after a $10.9 million shared national credit went into default, contributing to an 8.3% increase in its nonperforming assets from the first quarter.

"With a smaller balance of NPAs, when a single large credit goes sideways, it can mask continued improvement in the rest of the portfolio," says Aaron Deer, an analyst at Sandler O'Neill.

In an unusual case, Independent Bank in Rockland, Mass., recorded a $4 million chargeoff in the second quarter after a client was accused of overstating a financial position and placed into court receivership. The ding figured largely in the company's 7.7% increase in nonperforming assets from a quarter earlier, to $43.9 million.

"It was a one-off event that stung them in the quarter," says Damon DelMonte, an analyst at Keefe, Bruyette & Woods. "It's not indicative of any type of deterioration in their loan portfolio."

Sometimes an increase can occur in quarters following a bulk loan sale, which can temporarily address the biggest portfolio issues without fully addressing all the problems.

The $938 million-asset Republic First Bancorp in Philadelphia completed a bulk loan sale at the end of last year, resulting in a big improvement in nonperforming loans, says Frank Schiraldi, an analyst at Sandler O'Neill.

"This quarter's rise in NPA is really just a small uptick off that," Schiraldi says.

Still, the new problems are enough to keep regulators focused on how bankers handle their loan-loss allowances, Murphy says. There has been a significant decline in delinquencies and chargeoffs, the comptroller's office said in its spring report on risk. But other credit quality categories, including net chargeoff rates, which take into account recoveries, remain historically high.

"Bankers need to make sure that, when looking at their [loan-loss] allowances, they still have a lot of risk to take into account," Murphy says.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.