Midwestern community banks are lining up to take advantage of new guidelines that make it easier for agriculture lenders to join the Federal Home Loan Bank System.

The new rule, which took effect Wednesday, lets banks use a wider range of assets as collateral for Home Loan bank advances. As a result, 40 community banks have applied for membership in the Federal Home Loan Bank of Des Moines, and at least 100 are expected to join by yearend, according to Thurman C. Connell, president of the Des Moines bank.

And at the Federal Home Loan Bank of Topeka, Kan., an additional 282 community banks now qualify for membership, of which at least 20 have already applied.

"This is an important step in helping banks to continue to meet the funding needs of their communities," Mr. Connell said. "Deposit gathering is slowing down. Banks need programs like this to get the money to fund loans."

"This is very important for us," said Dennis Utter, president of $50 million-asset Adams County Bank, Kenesaw, Neb. "It may not solve all our liquidity problems, but it certainly helps."

The Federal Home Loan Bank System was founded in 1932 to provide liquidity to thrifts making residential loans, and it was expanded to include commercial banks in 1990. As deposits have fled to the stock market, more institutions have turned to the system to fund loans. At yearend 1997, 6,500 banks were members.

To join the Federal Home Loan Bank System, banks must hold 10% of their assets in mortgages or mortgage-backed securities. Under the previous rule a loan could be counted as a mortgage only if the property backing it included a residence that accounted for at least half the land's value. The new regulation lets a loan to a farm be counted toward the 10% requirement as long as a residence is an "integral" part of the property.

First State Bank of Munich (N.D.), one of the recent applicants to the Home Loan Bank of Des Moines, plans to use its membership to build the residential mortgage business, said Steve Boone, senior vice president of the $68 million-asset bank. That was a tough goal to accomplish under the old membership guidelines, he said.

"It's a chicken or the egg situation," Mr. Boone said. "We wanted to build our residential portfolio to a point where we could become a Home Loan bank member, but because we weren't a member, we didn't have the funds to make more residential loans."

And it will not be long before the Topeka Home Loan Bank gets an application from Farmers State Bank, Fairmont, Neb.

During the spring planting season this year, the loan-to-deposit ratio at the $8.5 million-asset bank climbed to 90%, well above the 75% cap suggested by its board of directors.

"We were obviously looking for some relief," said Tom Boyer, president of Farmers State. But the bank did not qualify for Home Loan Bank membership under the old rule.

Now that the rule has changed, Mr. Boyer said, he expects Farmers State will be a member by next year's planting season.

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