All the precautions were taken -- or so Irwin B. Epstei thought.
Mr. Epstein had banked at Yorkridge-Calvert Savings and Loan Association for more than 20 years. Although his one-year CD was only a few months old when federal regulators took over the failed thrift at the end of 1989, he believed he would not lose a dime.
The liquor store owner kept no more than $100,000 in his #F certificate of deposit and received interest payments by check each month so that his balance would remain at the federally insured level.
But he got caught anyway, and more than $700 later, a painful lesson was learned.
At the end of September, the Resolution Trust Corp., the federal agency formed to dispose of the nation's insolvent thrifts, sold Yorkridge-Calvert to Household Bank FSB.
Before the sale took place, the RTC mailed Mr. Epstein his interest payment. But because federal insurance only covers up to $100,000 and because it was too late to stop payment on the $700 check, regulators said his new balance on the CD was $99,300, Mr. Epstein said. Not only was his principal reduced, but he still had to pay taxes on the ill-timed interest payment.
"They did say something to me at one time," he said. "But I didn't think they would pull that trick on me at the last hour."
What happened to Mr. Epstein was only a small and unlikely wrinkle involving the ins and outs of CD buying. But it is one that experts say illustrates why consumers must know where their money is going and what strings will be attached when they want it back.
And with interest rates falling and problem loans taking a heavy toll on the health of many local banks, the decision to lock thousands of dollars into a CD becomes increasingly dicey.
How are consumers to know what banks and which CD's are best for them?
Banking experts and consumer watchdog groups say it is relatively easy: Know the guidelines and ask questions.
INTEREST: The interest rates paid on CDs vary not just from bank to bank but from region to region. While higher rates can signal some degree of financial difficulty at the savings institution, they do not necessarily mean that the institution is in trouble, said Hugo H. Ottolenghi, editor of 100 Highest Yields, a weekly newsletter that tracks CD rates throughout the country.
Despite the real estate problems confronting the Washington region, the competition for deposits had driven up CD rates long before the recession began taking its toll. The Washington area has repeatedly ranked as the highest-paying region for CD's in ++ the country, according to Mr. Ottolenghi's publication.
Another component to interest rates is how often the interest is compounded -- daily, weekly, monthly, etc. By checking the effective annual yield -- the amount that the compounded interest will pay by the end of the period -- consumers can get a better reading on their expected earnings. Customers should also ask whether the bank offers higher rates if other accounts -- such as checking or savings -- are opened.
In addition, for CDs of a year or less, the interest can be deferred until the CD matures, many times pushing any interest income into the next tax year, Mr. Ottolenghi said.
SAFETY: Interest-rate shopping should not be the only consideration when buying a CD. The safety of the investment -- especially if it is more than $100,000 -- should also be noted.
One way of gauging the relative safety of the CD is by considering the financial strength of the institution that stands behind it.
There are various ratings available to customers that show the relative health of banks and savings and loans. One commonly cited evaluation (see chart, 1F) is prepared by the Standard & Poor's Corp., a New York-based credit-rating agency.
"We don't look at pricing," explained Sheila D. Davis, a ratings analyst with S&P; who tracks many Baltimore-area banks. "The ratings strictly reflect the credit quality of the different companies. Each company has their different strengths and weaknesses, and you have to take that into account."
DURATION: While the issue of safety is secondary to many consumers, thanks to the federal deposit insurance, it should be especially considered in any purchase of a CD that matures in more than a few years, Mr. Ottolenghi said.
Should the worst happen and a bank is taken over by federal regulators, the effect on a CD and its accrued interest -- assuming it is less than $100,000 -- is minimal but real. The money is protected by the Federal Deposit Insurance Corp. and remains available to the customer, but the contract protecting the interest rate is ended and could be restated to a lower yield, according to Caryl A. Austrian, a spokeswoman with the FDIC.
Customers have two weeks after the regulators step in to remove their money without penalty before the account is rolled over into a new CD, Ms. Austrian said.
Because rates could fall in the meantime, Mr. Ottolenghi recommends that deposits at weaker banks be kept to shorter terms. CDs with longer maturities should either be avoided, if a consumer believes interest rates will rise, or should be placed in healthier institutions, he said.
"I don't think safety is a big issue as long as you keep deposits under $100,000," Robert M. Krughoff, president of Washington Consumers' Checkbook magazine, said. "The problem with the banks going under in terms of these CDs is that you may lose your locked-in rate. That's not such a disaster except there's an opportunity cost there."
EARLY WITHDRAWALS AND PAYMENTS: If interest rates rise or a financial emergency occurs, customers should also be aware of what early withdrawal penalties the bank imposes. The size of the penalty is almost as varied as the number of banks offering CDs. There are no regulations that cover what sort of penalty can be charged, even if it means reducing the amount of principal the customer would get back.
Some banks offer customers a chance to withdraw their funds with no penalty. Some offer partial withdrawals with no penalty. Some allow customers to add to their CDs in mid-stream.
In all cases, these experts warned, make sure the added freedom does not come at the expense of the interest rates being offered.
ROLLOVERS: "You have to think not just about the beginning but what will you do at the end when it comes due," Mr. Ottolenghi said.
All CDs come to an end, and what happens then must be discussed between the customer and the bank. Some banks automatically take the money from the maturing CD and roll it over into a new CD, while others will contact the customer before taking any action. Whether the bank notifies the customer when the CD matures and how long it will wait before moving it into a new CD should be decided beforehand.
Ratings at a glance
These ratings, created by Standard & Poor's Corp. for certificates of deposits at banks in the local market, demonstrate the credit quality of the banking institution issuing the CDs as measured by the credit-rating agency.
Rating #1 is for CDs with a maturity of a year or more and are based on a sliding scale from AAA to CCC. A rating between AAA and BBB is considered investment grade, while BB to CCC is considered speculative grade. Also, AAA is higher than AA and A is higher than BBB.
Rating #2 is for CDs less than a year long and runs on a sliding XTC scale of A-1 to D. A-1 to A-3 is investment grade, while B to D is speculative.
A plus or minus reflects the relative standing within a broader rating group.
Bank .. .. .. .. .. #1 .. .. ..#2
American Security ..BB.. .. .. B
Bank of Baltimore ..BBB-.. .. .A-3
Crestar Bank .. .. .BBB+ .. .. A-2
1st American/Md.. ..BB.. .. .. B
1st National of Md..A .. .. .. A-1
Maryland National.. BB .. .. ..B
Mercantile .. .. .. AA- .. .. .A-1+
Signet Bank (Md.).. BBB-.. .. .A-3
Sovran Bank (Md.).. A+ .. .. ..A-1
SOURCE: Standard & Poor's Corp.