A federal appeals court in Houston ruled last week that banks cannot sell annuities in towns with populations greater than 5,000.

The decision, which came in a case involving a subsidiary of Charlotte, N.C.-based NationsBank Corp., affects banks only in the U.S. fifth circuit, which is made up of Texas, Louisiana, and Mississippi.

It would not reach beyond the fifth circuit unless the comptroller of the currency "decides to acquiesce nationwide," said Ronald Glancz, a Washington lawyer who has followed the case.

It was not possible to learn Monday whether either the comptroller or NationsBank would appeal the decision.

A Hot Product

Annuities are an increasingly profitable and popular product for banks, and the insurance industry has battled hard to keep banks out of the business. An effort to negotiate an agreement on interstate branching last year faltered in part because banks were unwilling to give up annuity powers.

The fifth circuit decision appears to conflict on key points with a ruling by the second circuit court of appeals, which held that banks can sell insurance anywhere from branches or offices located in towns of under 5,000. The conflict could open the door to an appeal to the Supreme Court.

In reaching its decision, the court concluded that annuities are a form of insurance, taking exception to a finding by the comptroller of the currency.

On March 21, 1990, Robert L. Clarke, who was then comptroller, authorized annuity sales for national banks, arguing that while "annuities have historically been a product of insurance companies, they are primarily financial investments."

However, the three-judge appellate panel described annuities as "the mirror image of life insurance."

Michael F. Crotty, who oversees litigation for the American Bankers Association, disagreed with the court's reasoning.

"Federal law talks about insurance but does not define it," he said. "The fact that it is regulated by state laws is not controlling."

In the absence of clear guidance in federal law on the subject, "it was not unreasonable for the comptroller to construe annuities as something other than insurance," he added.

Once the panel concluded that annuities are an insurance product, it went on to hold that national banks are prohibited from selling insurance in towns of more than 5,000 persons. Because Congress authorized bank insurance activities in smaller towns, the court reasoned, it barred them in larger ones.

The court also held that annuities are not one of the "incidental powers" that can be authorized because they are necessary to the business of banking.

Mr. Glancz noted that because the court had already struck down annuity powers because of the insurance argument, it was unnecessary to take up the incidental power issue.

Still, Mr. Crotty expressed surprise that the court took so "parsimonious a view of incidental powers."

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