N.J.'s Summit Fears Major Loan Default

Summit Bancorp said it expects its portfolio of bad loans to jump by as much as 63% in the third quarter, according to a regulatory filing made Thursday.

The $33 billion-asset banking company said the increase was due to one unnamed commercial borrower that owes it $60 million. As of June 30, the Princeton, N.J.-based company reported $101 million in nonperforming loans in its portfolio, a 20% rise from a year earlier.

Alone, the potentially bad loan represents more than 80% of the nonperforming commercial and industrial loans reported in the second quarter. Defaulted commercial and industrial loans have had a sharp increase, going to $76.7 million on June 30 from $46.4 million a year earlier.

In a statement issued late Thursday, Summit said, "It is premature to estimate the loss exposure on this credit or its potential impact on the provision for loan losses. This is a developing situation, one that we are watching very closely." The company declined further comment.

Lana Chan, an analyst with CIBC World Markets Inc. in New York, agreed the disclosure by itself was unlikely to have a significant impact because Summit historically has kept defaults in its loan portfolio to unusually low levels.

"They have a pretty good credit history," she said. "There's been nothing out of line. Every quarter they said, 'credit quality couldn't get any better,' and it always seemed to get better anyway. The only area they've been warning about is health care, and I would bet that this is a health-care loan."

As of June 30, the bank reported that its ratio of nonperforming loans to all loans was 0.44%, about half he national average.

The move by Summit follows a recent trend in which banks are girding against potential loan losses. Default rates are up 12% during the last year at the top 15 banks by assets, according to Standard & Poor's.

Summit's shares closed down $1 Thursday, at $35.875.

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