Pickering, C. J., Independent Banker
Weighing the pluses and minuses of Held-to-Maturity versus Available-for-Sale
he question is whether to shift certain bank portfolio securities from Held-to-Maturity to Availablefor-Sale. Securities classified as HTM must be held to maturity except under very specific and limited conditions. Securities classified as AFS can be sold at any time. The market value changes in securities classified as AFS must be shown as adjustments to capital in the bank's reports to shareholders, while the market value changes in securities classified as HTM do not have to be reported.
This month's column looks at transferring HTM securities to AFS to gain flexibility in managing the bank's portfolio.
A LITTLE HISTORY
Financial Accounting Standard 115 was issued in 1993. It required banks to classify their securities into one of three categories:
Held-to-Maturity-The bank should have the intent and ability to hold these securities to maturity;
Trading Securities-The bank can trade securities in this account in response to short-term price movements (30 minutes to 30 days); and
Available-for-Sale-The bank can actively manage securities in this account in response to changes in interest rates, prepayment speeds, liquidity or asset-liability needs.
Initially, the regulators thought that market value changes in AFS securities should be marked-to-market through the bank's Tier 1 capital account. That is, any change in AFS securities' market values would show up as a net addition or reduction in the bank's regulatory capital.
However, after due consideration, the regulators decided to view FAS 115 as an accounting event. This means that changes in the market values of securities classified as HTM are as important in an examiner's eyes as are the changes of market values in securities classified as AFS.
For those bankers who want to manage securities in their HTM account, FAS 115 specifies a few conditions under which securities can be sold or transferred to AFS from HTM (see the end of this column to order additional information on these options):
Transfers can be made if and when the bank adopts SFAS 133 (Accounting for Derivative Instruments and Hedging Activities); Transfers can be made after the occurrence of certain isolated, nonrecurring and unusual events-for example, significant changes in regulations, capital requirements or risk weights;
HTM sales can be made if the security maturity or call date is so certain and so near that changes in market interest rates would not have a significant impact on the security's value; and
HTM sales can be made if the bank has already collected at least 85 percent of the principal outstanding at acquisition.
MOVING HTM SECURITIES
Many bankers have discovered a major disadvantage in having any security in HTM. HTM securities cannot be used to help the bank with unforeseen liquidity needs or with bond swap opportunities or with any other active investment management techniques. …