At least 12 community banks nationwide hold high levels of public deposits, according to an American Banker study.

Topping the list is Community Bank of Espanola, N.M., with 42% of deposits from public entities. Twenty percent is generally considered to be the threshold of safety for such deposits.

"If I were a director of one of these banks, I would be very interested in the liquidity issue," said Walt Moeling, a lawyer at Powell, Goldstein, Frazer & Murphy in Atlanta. "What happens if those funds pull out? For those that say it's not likely, I would compare that to saying that the real estate market won't go down."

The management at Community Bank in Espanola is not oblivious to this concern. The $40 million-asset bank, which was acquired by a small group of investors last fall, is working toward reducing its public deposits.

"Anytime you have a number that is reliant on one specific area, that is of interest and concern to management and is something that needs to be looked at," said James A. Kruger, chairman and chief executive of Community Bank.

Mr. Kruger said the percentage will be whittled down by expanding the bank's overall deposit base through moving into new markets, such as Santa Fe, rather than by cutting back its business with Rio Arriba County.

Mr. Kruger acknowledged that though the bank has been the financial agent for Rio Arriba County for nearly a decade, the county could pull out its funds at any time. The bank has no contract, he said.

Traditionally, public deposits have been viewed as political, and, consequently, highly volatile. Depending on them for a large chunk of a bank's funding, therefore, could spell disaster for a small bank, observers said.

Anyone who supports an ousted incumbent "is likely to be on the outs, too," said Mr. Moeling. "And that could mean banks as well. The new regime will be looking to change the old ways of doing business."

Those banks that have large percentages of deposits in public funds, however, said that their relationships with the entities - whether they be universities, county boards, or city governments - are based on the quality of service they provide, rather than on political favoritism.

Public deposits are also doled out to banks more frequently through a bidding process. Some of the banks, such as the Commercial State Bank of Sinton, Tex., have two-year contracts with the entities, providing some stability.

"We have the capital to be able to support it and we can make a little money on it," said Terry W. Webster, president of $50 million-asset Commercial State, which has 31% of its deposits in public money. "Plus, it's a community service."

Liberty Bank and Trust Co. of New Orleans said its public deposits jumped last year nearly five-fold, to $19.7 million, or 18% of its total, because of a city account that rotates annually among local institutions. Bank officials said the deposits would help fuel growth that will bring in new deposits.

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