Nearly a year after it chartered a commercial bank to solicit government deposits, Troy Financial Corp. in New York has won the business of its hometown.

The $1.2 billion-asset parent of Troy Savings Bank established the Troy Commercial Bank last August to get around a decades-old New York law that bars thrifts from accepting municipal deposits. Since then, it has taken in more than $13 million of deposits from cities, towns, school districts, and revenue authorities, and it landed its biggest prize this month when the City of Troy shifted its deposits and other services from Key Bank to Troy Commercial Bank.

"In the municipal deposit game, you want the general fund, you want the payroll, and that's what we got," said senior vice president Michael C. Mahar. "This is a big deal for us."

Troy Financial's success - it now has more than a dozen government clients - bodes well for banking companies such as National Penn Bancshares Inc. in Boyertown, Pa., and Hudson United Bancorp in Mahwah, N.J., that have recently established government banking groups.

The potential to gather deposits is the chief reason why Troy, National Penn, and Hudson United are more aggressively courting governments' business. Deposits can be fickle - up when the stock market is down and vice versa - and bankers view government funds as stable sources of liquidity.

Also, big banking companies, as they have grown, seem to be interested only in serving the largest accounts, Mr. Mahar said. This has created an opportunity for smaller institutions, which are more than happy to pick up the neglected business.

"Big banks will always be interested in doing business with the cities of Troy or Albany," said Mr. Mahar, "but they probably are not that interested in the East Greenbush Fire District. We are."

Hudson United's division, formed two weeks ago, is headed by Michael A. Schiavone, former New York regional manager for public affairs and government banking at First Union Corp. Neither Mr. Schiavone nor chairman Kenneth T. Neilson returned telephone calls, but in a July 9 announcement, Mr. Neilson said the Poughkeepsie, N.Y., unit will target state and local governments, school districts, universities, public projects, and charitable organizations. Hudson United, with $6.8 billion of assets, operates about 200 branches in New Jersey, Pennsylvania, New York, and Connecticut.

"We are confident that our public-sector group will provide significant benefit for our customers and an opportunity for deposit growth," he said.

Not that Hudson United or other community and regional banks have been shut out of the government banking arena. Many small-town banks have long been the primary institutions for their communities, and some larger community banks, such as $2.3 billion-asset Cole Taylor Bank in Chicago, routinely handle cash management and other services for cities, towns, and school districts.

But according to Robert J. Marino, a senior vice president at National Penn, "small banks having units dedicated to this business is a relatively new concept."

National Penn, for example, which has $2.7 billion of assets, had already been in the government banking business before it started its specialized division in January. The difference is that, while it used to sit around and wait for governments to issue requests for proposals, it now has a specialist staff to go out and knock on doors. The result: 25 new clients this year, according to Mr. Marino.

"What we've found is that there are a lot of local governments and school districts that don't go through" the request-for-proposal process, he said.

Of National Penn's new governmental clients, only five have what Mr. Marino called "total banking relationships." This means National Penn may not yet have the deposits of a local government but may handle its cash management or lockbox services, for which the company collects fees.

"We've opened the door for full-blown banking relationships in the future," he said.

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