By Eli Segall, Associated Press
TRENTON, N.J. (AP) — New Jersey's community banks have performed well during the economic crisis, but some face a grim future of loan defaults and thinned profits, a leading banker said Monday.

New Jersey's 108 chartered banks largely avoided the risky loans and exotic securities that have sunk financial firms worldwide. Instead, the banks kept it simple, making traditional loans to consumers, companies and homebuyers, according to state and private sector officials.

Now, with country mired in the worst recession in decades, many of those customers are defaulting, said John McWeeney, co-chief of the New Jersey Bankers Association, a trade group.

McWeeney, who spoke at a state Assembly hearing, said banks' profits also are getting sliced by two other factors: demand for traditional loans is falling and banks are setting aside more cash to cover possible loan defaults.

"They are not completely immune from what's going on in the economy because their clients are impacted," McWeeney said in an interview after the Assembly Financial Institutions and Insurance Committee hearing. "But for the most part their balance sheets and loan portfolios have remained very solid."

Despite their conservative lending, New Jersey banks have watched the economy crumble around them, spurred in large part by the actions of larger, riskier banks — many of which are, or until they collapsed, were, based in neighboring New York.

In the past year, New Jersey's tax revenue has plunged, the pension fund has shed billions, and the state's unemployment rate has nearly doubled, to 7.1 percent.

Nevertheless, no bank has failed in New Jersey, and most steered clear of subprime loans that have shredded banks' balance sheets, officials said Monday.

Banks traditionally earn money by lending customers' deposits. But with consumer spending in a free fall and companies contracting, the demand for loans, risky or otherwise, has dropped.

One way to help the banks, McWeeney said, is to inject them with more deposits.

Specifically, he wants to siphon money from the state's Cash Management Fund, an account that in June 2007 had nearly $20 billion worth of government bonds, corporate debt and other investments.

Most of this money, he said, is invested outside New Jersey and the country, and he wants to shift a large chunk of it back to the Garden State.

Last fall, Gov. Jon Corzine proposed putting $500 million of the fund into New Jersey's banks, but McWeeney said $5 billion would have a bigger effect.

"The banks do want to lend," he said. "That's the business they're in. If they don't make loans, they're not going to make money."

A key state legislator, however, would not say whether he supports the plan.

"I think it's something to be explored. I think that we need to understand all the ramifications," said Assemblyman Gary Schaer, chairman of the Financial Institutions and Insurance Committee.

Asked what the pros and cons of the idea were, Schaer said he wasn't ready to answer.

"I need to do much more research on it before I'd be prepared to answer," he said.

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