CD Interest

If you have a CD for 5 years with interest paid at maturity must you pay out interest annually?

In this case the customer does not receive the funds directly.
The interest is posted to the principle amount of the CD. Must you provided a 1099 INT if the interest is posted to the principle amount or do you need not provide a 1099?
I need something to provide to management to resolve this issue.

You have to look to your account agreement to determine when and how to pay the interest (annually or at maturity; add to principal or pay out). Reg DD Section 230.7 governs the compounding and crediting of interest, but specifically "does not require institutions to compound or credit interest at any particular frequency." If the interest is not credited until maturity, that is when you would issue the 1099. If the interest is credited annually (no matter which method you use for crediting) you would issue an annual 1099 for the amount credited that year.

Many banks elect to pay interest at least annually to avoid having to issue 1099-OIDs to report interest earned (but not credited). We found that many consumers were confused about these and we had a few fail to file on their taxes (and suddenly it was our fault?). We decided that it was just easier to pay interest at least annually. Customers understand 1099-INTs much better since they actually received the interest.