BofA doubled held-to-maturity book in 2020

The bank moved mortgage bonds into HTM throughout the year

The amount of buy-to-hold debt stored at Bank of America doubled in 2020, partly as a result of the firm moving mortgage-backed securities out of its available-for-sale (AFS) book over the course of the year.

The bank’s held-to-maturity (HTM) portfolio reached $438.2 billion in size as of end-December, up almost 30% on three months prior and 103% on a year ago. In contrast, the AFS book amounted to $228.2 billion, up less than half a percentage point quarter on quarter and down just over 1% year on year. Other debt held at fair value amounted to $11.7 billion, up from $10.6 billion at end-2019.

The growth of the HTM book largely took place over the second half of the year. But BofA also directly transferred $44.4 billion of mortgage bonds from AFS to HTM in Q1 and another $16.2 billion in Q2.

 

The bank’s debt securities portfolio overall ballooned 45% to $684.9 billion in 2020. HTM instruments made up just 46% of the total at end-2019 and 64% a year later.

What is it?

A bank’s securities holdings are typically classified in one of three ways. Held-to-maturity securities are those it intends to keep on its books over the long-term. Trading assets are those it plans to sell for a profit. Available-for-sale assets occupy a middle ground, meaning they can be either held to expiry or sold.

These classifications matter as they dictate how the securities are valued for accounting purposes. AFS and trading securities are marked-to-market, meaning their values fluctuate depending on what a potential buyer is willing to pay for them. HTM securities, in contrast, are accounted for at book value, meaning their values are fixed at what they were worth when the bank first acquired them.

Marked-to-market unrealised gains or losses on AFS securities are generally counted as accumulated other comprehensive income (AOCI) in banks’ accounting statements. Top banks in the US have to adjust their book equity for AOCI fluctuations, meaning these affect their regulatory capital ratios.

Why it matters

Bank of America executives stated on an earnings call today (January 19) that the firm pushed excess deposits accrued over Q4 into securities, about $100 billion into mortgage bonds and US Treasuries alone. One reason was to bolster portfolio yield. Safe debt securities can generate more of a return than excess reserves, after all.

Typically, these would be placed in the AFS portfolio so that they could be utilised as a liquidity buffer if needed. But right now BofA is awash in liquidity, with easy-to-sell assets of $943 billion – more than enough to handle a future cash crunch. Therefore the bank can afford to shunt these newly-acquired securities into its HTM book instead, sacrificing their liquidity value but benefiting from a reduction in AOCI.

Bank of America isn’t the only Wall Street lender to take this approach. JP Morgan’s HTM portfolio quadrupled in size to $201.8 billion over 2020, also in part because of a migration of mortgage bonds out of AFS.

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