The Federal Home Loan Bank of Seattle is the first of the system's 12 members to implement new collateral rules, and a $2 billion-asset bank holding company in Washington State is one of the first companies to gain expanded borrowing power under them.

Some observers say the new rules, which make it easier for banks and thrifts to borrow from Federal Home Loan Banks, could spur a new round of borrowing. Interestingly, the more liberal rules came just after the first quarter-to-quarter decline in bank borrowing from the Home Loan banks. The number of commercial banks with outstanding advances in the first quarter fell 3.7% from the previous three months, to 3,696, according to the Federal Deposit Insurance Corp.

Between 1996 and 1999 the amount of bank advances outstanding rose 370%, to $155 billion. Since then it has risen just 20%, to $185 billion at the end of the first quarter.

John von Seggern, president and chief executive officer of the Council of Federal Home Loan Banks, a Washington, D.C., trade group that represents 10 of the 12 banks, blamed the economy.

"We're a cyclical business," he said. "As the economy weakens, banks are going to tighten up, and they aren't going to borrow as much."

The new collateral rules also make it easier for holding companies to consolidate their banking subsidiaries. In the past such companies may have been reluctant to consolidate their subsidiaries' charters, because only banks with less than $500 million of assets can offer small-business and farm loans as collateral for Federal Home Loan advances.

However, the new rules implemented a Gramm-Leach-Bliley provision that eliminated the 30% cap on the portion of commercial real estate loans that can be used as collateral. That promises to make borrowing from Home Loan banks easier for bigger banks, which typically have more commercial properties on their books than smaller counterparts.

Indeed, that provision helped Banner Bank in Walla Walla, whose borrowing capacity increased by more than a third.

Officials at the Federal Housing Finance Board, which regulates the Federal Home Loan Bank System, says all 12 member banks have finished writing their new collateral rules under Gramm-Leach-Bliley. They should all have their new rules in place this summer, the officials say.

The $1.79 billion-asset flagship subsidiary of Banner Corp.'s borrowing capacity rose 36% as a result of the new rules, according to Richard A. Kataoka, the Seattle Home Loan Bank's senior credit management analyst. He would give only the percentage increase, not the dollar amount it may borrow.

"There is clearly an expanded borrowing capacity for larger institutions, and where that came from is commercial real estate," said Lloyd Baker, Banner Corp.'s chief financial officer. "A much larger portion of our borrowing can be collateralized by commercial real estate."

The added borrowing power persuaded Banner Corp. to merge its $230 million-asset Banner Bank of Oregon in Hermiston into Banner Bank, a move expected to be completed this quarter. Just eight months ago the company had announced it would keep the banks separate.

Gary Sirmon, president and CEO of Banner Corp., said putting the smaller bank into the larger subsidiary would give up the chance to use small-business and farm loans as collateral. But when the Seattle Home Loan bank so drastically raised the bigger bank's borrowing capacity, that option was no longer needed, he said.

The merger would complete a reorganization that began last October, when Banner Corp. changed its name from First Washington Bancorp and consolidated its two Washington subsidiaries - First Savings Bank of Washington in Walla Walla and Towne Bank in Woodinville - to create Banner Bank. It also renamed its other subsidiary from Inland Empire Bank to Banner Bank of Oregon.

"It will be much easier to operate as one entity," Mr. Baker said.

On June 29, the same day it announced the Washington units' combination, Banner said it would come up slightly short of analysts' second-quarter consensus earnings estimate of 40 to 42 cents per share. Banner projected earnings of 38 to 40 cents a share, and it blamed the shortfall on margin pressures caused by the Federal Reserve Board's lowering of interest rates.

Jeff Smith, associate director of equity research for Sandler O'Neill & Partners in New York, said that as long as the company's asset quality remains solid, a dip in interest income is not that important.

"We've seen a pretty significant movement in interest rates," so if Banner's margin has been affected, "that doesn't surprise me," he said. "If they were to fall off from the asset-quality standpoint, though, that would concern me."

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