Dear Dr. Don,
Recently, Community National Bank in Florida failed. I had a five-year CD with them earning 6 percent. The new bank, Stearns, will not honor the remaining term of my CD at the 6 percent rate. Is this correct? It is very upsetting. I am three years into the CD and counted on that income.
— Lynda Lower

Dear Lynda,
When protecting insured deposits, the Federal Deposit Insurance Corp. sometimes sells the deposit base to another bank rather than come up with cash payments to the insured depositors of the failed bank. That’s what happened in your situation.

Stearns took over the deposit accounts of Community National. You can find out more about the takeover by reading the FDIC press release, “Stearns Bank, National Association, St. Cloud, Minnesota, Assumes All of the Deposits of Community National Bank of Sarasota County, Venice, Florida.”

Your concern, however, is in being able to continue earning 6 percent on your certificate of deposit. Unfortunately, the FDIC insurance fund doesn’t guarantee future earnings, just past earnings up to the date of the bank’s takeover.

It’s the decision of the acquiring institution whether or not to pay interest on the acquired deposits at the original contract rates. In many cases, struggling banks offer high rates to attract depositors. Healthy banks don’t have any need to pay above market rates for their deposit base and often they won’t, reducing the interest earned on the remaining term of the deposit.

The FDIC Web page, “When a Bank Fails — Facts for Depositors, Creditors, and Borrowers,” explains what can happen to the interest rate when an acquiring bank takes over a failed bank’s deposits. Here’s an excerpt from that page:

How does a bank closing affect interest accruing on my deposits?

The FDIC’s insurance coverage includes principal and interest through the date of the bank failure up to applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. If an open bank acquires deposits from the failed bank, the acquiring bank becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank. The acquiring bank may change the interest rate on the acquired deposits, but the depositor may withdraw their insured funds without penalty if they chose to do so. If no acquiring bank is found for the deposits and the FDIC pays the depositors directly for their insured amounts, interest does not accrue past the date of failure.

You have the right to cash in your CD without penalty, but you don’t have the right to keep earning 6 percent on your deposit. I understand that you’ll have a hard time replacing that yield, but the good news is that the deposit insurance worked as promised.

Use Bankrate’s “Compare CDs & Investment Rates” feature to find a new home for your deposit. I recently did so, and you’re not going to be able to replace that 6 percent rate. However, you can earn 3.5 percent annual percentage yield on a five-year CD.

You can also check the safety of your bank using Bankrate’s Safe & Sound.

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