bank rates

How Do You Know Your CD Rates Are Safe?

Safety ratings can help you judge a bank's strength.The short answer to the question in the headline is you don’t.

But you can give yourself some measure of protection.

With last month’s failure of Tennessee Commerce Bank, which had offered the top nationally available 60-month CD rates at the time it was seized, we thought we’d take a closer look at bank ratings.

While your deposits are insured in case of bank failure, your CD rates are not guaranteed. The bank that takes over your deposit is allowed to reduce your interest rate.

That means the good rates of three years ago can turn into the terrible rates of today — in an instant.

Shortly after Tennessee Commerce was taken over by Louisville, Ky.-based Republic Bank & Trust, the new owners informed CD holders their rates would be cut.

While you can’t control whether a new bank or credit union cuts rates on existing CDs when it takes over following a failure, you can minimize the potential that the institution where you’re depositing money will fail.

The ratings offered by Bankrate.com can help guide you.

At the time it failed, Tennessee Commerce carried one (out of five) stars on Bankrate’s Safe & Sound rating system.

The Nashville Business Journal cited the bank’s loan portfolio — including equipment loans and leases — as a reason for why it failed.

Indeed, the Bankrate rating was critical of the bank’s portfolio, noting in September: “(T)his bank exhibited a significantly below average condition, characterized by substantially lower than normal overall, sustainable profitability, very questionable asset quality, well below standard capitalization and much lower than normal liquidity.”

So, how do the current occupants of the CD Rates Leaderboard stack up?

AloStar Bank of Commerce is a relatively new bank formed in April 2011. It acquired the assets of Nexity Bank, which the FDIC seized. AloStar has not been rated by Bankrate.

AmTrust Direct is the online division of Cleveland-based AmTrust Bank, a division of New York Community Bank. New York Community Bank holds four out of five stars.

Broadway Federal Bank has five branches in Los Angeles and Inglewood, Calif. It holds a one-star rating.

CIT Bank is the online consumer bank of CIT Group Inc., which offers financing to small businesses and middle-market companies. CIT Bank holds a four-star rating.

Doral Bank Direct is the online bank of Doral Bank, the leading community bank in Puerto Rico, with eight U.S. branches in Florida and New York City. Doral Bank holds a one-star rating.

KeySource Commercial Bank has a single branch in Durham, N.C., and holds a three-star rating.

Virtual Bank is the online division of Sabadell United Bank, based in Miami. Sabadell holds a three-star rating.

All of these banks are FDIC-insured.

Again, these ratings aren’t guarantees about the future financial health of a bank or credit union. But they are a handy guide.

A number of readers have told us they set a star threshold below which they won’t buy CDs from a bank.

Click here to check the “Safe & Sound” ratings for virtually any bank or credit union.

You’ll also find detailed financial information for each bank or credit union.

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