Troy Financial Corp. in upstate New York wants to start a commercial bank to win some of municipal deposits, which are off limits to its thrift subsidiary, Troy Savings Bank.

The $900 million-asset company has asked the state's Banking Department for permission to establish Troy Commercial Bank to leverage the financing relationships Troy Savings has with local governments.

A New York statute bars thrifts from accepting government deposits. "The law doesn't prohibit us from financing municipals, only from accepting their money," said Daniel J. Hogarty Jr., Troy Financial's chairman, president, and chief executive.

Thrift officials have long opposed the ban. A bill to end it has been pending for two years.

"In this era of so-called financial modernization, this is certainly very archaic," said Mariel O. Donath, president of the Community Bankers Association of New York.

New York and Arkansas are the only states that prohibit municipalities from making deposits in thrifts, Ms. Donath said. "It's a monopoly for commercial banks, and they are anxious to preserve it," she said.

Troy Savings Bank has been active in municipal financing since 1997 and has funded $147 million in government projects. Mr. Hogarty said he expects it to be equally successful on the deposit side by mining those established relationships. "It's a huge market," he said.

Chartering a new bank just to receive government deposits is an expensive solution, Ms. Donath said.

"It's very unfortunate they had to do this," she said.Troy Savings offers trust, insurance, and investment services. All of the new bank's business would be conducted in Troy Savings' 14 branches, which are in six counties in the Albany area. The company expects few changes in operational procedures and plans several new hires, he said.

Troy Financial plans to use about $10 million to capitalize the commercial bank and expects that deposits would grow to $150 million within a "reasonable" amount of time, Mr. Hogarty said.

The establishment of Troy Commercial, which is subject to approval by both the state Banking Department and the Federal Reserve Board, is expected in the third quarter.

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