Hedging over whether commercial credit quality could be the next big shoe to drop in the financial market is now history.

As banking companies unveiled third-quarter results this month, many confirmed that commercial and industrial lending deterioration is quickly becoming a big problem — and not just for those serving home builders that have dramatically cut production in the face of the housing bust.

"It is definitely getting worse, and it is adding up," Jefferson Harralson, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said in an interview last week. "And I think as the overall economy continues to get worse, so does C&I."

David Rochester, an analyst at Friedman, Billings, Ramsey & Co. Inc., wrote in a research report issued last week that bankers have entered the "early innings" of what is likely to be a prolonged C&I slump that past cycles suggest could last four years. He and other Friedman analysts noted that the median chargeoff rate for 30 banking and thrift companies with over $5 billion of assets grew 16 basis points from the second quarter.

Sovereign Bancorp Inc. in Philadelphia said chargeoffs on C&I loans nearly tripled from the second quarter, to $64 million. The total included $25 million to cover a "large syndicated loan" to a client that went bankrupt, but the rest covered a range of other business.

Among large-cap companies, Bank of America Corp. in particular is showing C&I weakness. The Charlotte company said net chargeoffs increased 38% from the second quarter, to $960 million. Nearly half the deterioration was driven by commercial real estate losses, but the rest "was broadly spread across various industries," Joe Price, B of A's chief financial officer, said in an Oct. 6 conference call with analysts.

Bankers had expected retail projects planned near unfinished housing developments to get delayed or scratched, and developers to fall behind on loan payments, as unsold homes gathered in the market. But now with the economy faltering and consumers at all levels holding back on spending, a wide swath of projects are getting put on hold, and more loans are souring. "We would expect to see challenges in the consumer-dependent sectors of our commercial portfolios," Mr. Price said. "Given these scenarios, we would expect net losses [this quarter] to be at least at levels we experienced in the third quarter."

KeyCorp in Cleveland and Fifth Third Bancorp in Cincinnati cited deterioration in their C&I books. KeyCorp said nonperforming assets in its portfolio rose 15% from the second quarter, to $364 million, making up nearly a third of all its nonperformers. Fifth Third said its nonperforming C&I assets spiked 35%, to $557 million.

Beth E. Mooney, KeyCorp's vice chairman and head of community banking, said in an interview last week that C&I issues within the Cleveland company's branch network involved a range of small businesses.

Daniel T. Poston, Fifth Third's interim chief financial officer, said last week that "tremendous economic headwinds" will continue to pressure the Cincinnati company's C&I book this quarter and into next year.

Mr. Rochester wrote in the report that banking companies in regions with rising unemployment and plummeting home prices are the most vulnerable, but he warned that the problem is developing nationwide.

In an interview after Comerica Inc. reported earnings, Beth Acton, its chief financial officer, said C&I deterioration can be found in all industries. The Dallas company said Oct. 17 that its third-quarter earnings dropped 85% from a year earlier, to $27 million, as a result of weakness in middle-market and small-business lending. That was a big reason nonperforming assets rose 18%, to $881 million, Comerica said.

UnionBanCal Corp. reported last week that its third-quarter earnings fell 18% from a year earlier, to $104.8 million. The San Francisco company, which is mostly owned by Mitsubishi UFJ Financial Group Inc., noted C&I deterioration across all industry types. Its C&I nonperforming assets ballooned 98% from the second quarter, to $162 million.

UnionBanCal anticipates prolonged deterioration in C&I loans, Philip B. Flynn, its chief operating officer, said in an interview last week. "For the next few quarters, there's going to be a lot of pressure in the economy, which is going to be impacting our borrowers," he said.

Joe Morford, an analyst at Royal Bank of Canada's RBC Capital Markets, said in an interview last week that UnionBanCal's troubles are "an ominous sign" for the industry. There were already clear signs of C&I softness by the second quarter, he said, and by the third quarter it had become a significant problem not just for UnionBanCal, but for the industry in general.

Mr. Rochester wrote that the C&I troubles will worsen significantly this quarter. "We argue that current valuations of C&I lenders do not fully reflect the degree to which we expect commercial credit to ultimately deteriorate."

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Corrected October 29, 2008 at 8:14PM: In the Oct. 29 paper, the graphic on page 1 understated the ratio of commercial and industrial net chargeoffs to total loans at several companies. The chargeoffs should have been shown as percentage points, not basis points.