Life Insurer's Collapse Hits Community Banks

LOS ANGELES -- The earnings of hundreds of community banks around the country are being pounded by the collapse of Executive Life Insurance Co.

One $25 million-deposit Texas bank has already failed because of losses on bonds guaranteed by the insurer, and more failures could result from the investments.

Value Has Fallen Sharply

The bonds, rated Triple-A when issued because of Executive Life's backing, now are worth about 25 cents on the dollar, forcing holders to write down the value of their investments.

The Los Angeles-based insurer had backed about $1.85 billion in outstanding taxable municipal bonds when it was seized by regulators on April 11.

Of the bondholders identified so far, 385 are banks, 17 are savings and loans, and seven are credit unions, according to Robert Knight, the chairman of a group representing the investors. He said the final tally might be twice as high.

Big Part of Capital

"This is very sad," said Mr. Knight, who is also president and chief executive of the Alliance National Bank and Trust Co. in Alliance, Neb. "It is a very, very serious situation."

According to Mr. Knight, eight banks have amounts invested in the bonds that total more than 100% of their capital. Nine others have amounts totaling 50% to 100% of capital.

Eleven of those 17 banks are in Texas, said Mr. Knight, who declined to name any of the institutions.

One Investor Closed

One investor, Buchel Bank & Trust Co. of Cuero, Tex., was closed last week by state banking commissioner Kenneth W. Littlefield. "The primary cause of the bank's failure resulted from its significant investment in bonds guaranteed by Executive Life Insurance Co.," the commissioner's announcement said.

Buchel was bought by First Bank, Edna, becoming that $113 million-asset bank's fourth office.

Mr. Littlefield could not be reached about the status of the other Texas banks with large holdings in bonds backed by Executive Life.

Risk Thought to Be Low

Under the guarantee arrangement with Executive Life, the municipalities invested the bond proceeds in guaranteed investment contracts issued by the insurer.

Such contracts - similar to certificates of deposit -- are very popular because they carry higher yields than those on money-market funds and are generally regarded as low-risk. However, despite their name, the contracts are backed only by the insurance companies that issue them.

Once Executive Life collapsed, the likelihood of repayment of the contracts dropped sharply. That in turn reduced the value of the bonds, which the issuing municipalities had not guaranteed to repay.

The bondholders have sued the California insurance commissioner, which is conservator for Executive Life, seeking reimbursement. They will have a hearing before the Superior Court of the State of California on Sept. 30.

The bondholders are complaining that the insurance commissioner, John Garamendi, wants to give higher priority to the claims of retail insurance customers.

One court document said "defendant Garamendi has said that the municipal bond investment contracts fall |at the bottom of the credit ladder.'" The holders of the investment contracts feel that their investments should hold equal claim to repayment as a retail life insurance policy or annuity.

"The whole thing stinks," said Mr. Knight.

Mr. Garamendi could not be reached for comment.

Calif. Banks Hit Hard

Among other casualties of the Executive Life seizure are two well-regarded California banks.

Home Bank, a subsidiary of Home Interstate Bancorp., announced Tuesday that it had boosted its reserve for securities losses to $6.36 million from $2.2 million and will report no earnings this year. Last year the company earned $5.4 million or $1.46 per share. The bank said it lost $1.3 million in the first eight months of this year.

Despite the earnings hit, Home still has equity capital amounting to 9.5% of assets. "Clearly we are not very happy about this, but we are still strongly capitalized," said James P. Staes, president and chief executive of Home Bank.

In July, BSD Bancorp Inc., San Diego, reported that its second-quarter earnings had plunged to $50,000, or one cent a share, from $1.18 million, or 32 cents a share, a year earlier. It blamed the drop on the writedown of two municipal bonds it bought in 1988 that were backed by First Executive Guaranteed Investment Contracts.

Vito J. Guarino, president and chief operating officer of BSD, said "we wish the disclosure had been better on these things."

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