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Note 4 - Loans
 3 Months Ended
Jan. 31, 2022
Statement Line Items [Line Items]  
Disclosure of loans and advances to customers [text block]

4.         Loans:

 

The Bank organizes its lending portfolio into the following four broad asset categories: Commercial Real Estate Mortgages, Commercial Real Estate Loans, Point of Sale Loans and Leases, and Public Sector and Other Financing. These categories have been established in the Bank’s proprietary, internally developed asset management system and have been designed to catalogue individual lending assets as a function primarily of their key risk drivers, the nature of the underlying collateral, and the applicable market segment.

 

The Commercial Real Estate Mortgages (“CRE Mortgages”) asset category is comprised of Commercial and Residential Construction Mortgages, Commercial Term Mortgages, Commercial Insured Mortgages and Land Mortgages. While all of these loans would be considered commercial loans or business-to-business loans, the underlying credit risk exposure is diversified across both the commercial and retail market segments, and further, the portfolio benefits from diversity in its underlying security in the form of a broad range of collateral properties.

 

The Commercial Real Estate Loans (“CRE Loans”) asset category is comprised primarily of Condominium Corporation Financing loans.

 

The Point of Sale Loans and Leases (“POS Financing”) asset category is comprised of Point of Sale Loan and Lease Receivables acquired from the Bank’s broad network of origination and servicing partners as well as Warehouse Loans that provide bridge financing to the Bank’s origination and servicing partners for the purpose of accumulating and seasoning practical volumes of individual loans and leases prior to the Bank purchasing the cashflow receivables derived from same.

 

The Public Sector and Other Financing (“PSOF”) asset category is comprised primarily of Public Sector Loans and Leases, a small balance of Corporate Loans and Leases and Single Family Residential Conventional and Insured Mortgages.

 

a) Summary of loans and allowance for credit losses:

 

(thousands of Canadian dollars)

            
  

January 31

  

October 31

  

January 31

 
  

2022

  

2021

  

2021

 
             
             
             

Commercial real estate mortgages

 $722,829  $757,576  $712,256 

Commercial real estate loans

  14,600   26,569   31,663 

Point of sale loans and leases

  1,439,781   1,279,576   1,008,029 

Public sector and other financing

  31,247   32,587   36,612 
   2,208,457   2,096,308   1,788,560 
             

Allowance for credit losses

  (1,455)  (1,453)  (1,832)

Accrued interest

  8,636   8,195   6,996 
             

Total loans, net of allowance for credit losses

 $2,215,638  $2,103,050  $1,793,724 

 

The following table provides a summary of loan amounts, expected credit loss allowance amounts, and expected loss rates by lending asset category:

 

  

As at January 31, 2022

  

As at October 31, 2021

 

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

  

Stage 1

  

Stage 2

  

Stage 3

  

Total

 

Commercial real estate mortgages

 $667,949  $54,880  $-  $722,829  $694,869  $62,707  $-  $757,576 

ECL allowance

  949   96   -   1,045   980   134   -   1,114 

EL %

  0.14%  0.17%  0.00%  0.14%  0.14%  0.21%  0.00%  0.15%

Commercial real estate loans

 $14,600  $-  $-  $14,600  $26,569  $-  $-  $26,569 

ECL allowance

  36   -   -   36   45   -   -   45 

EL %

  0.25%  0.00%  0.00%  0.25%  0.17%  0.00%  0.00%  0.17%

Point of sale loans and leases

 $1,437,391  $2,390  $-  $1,439,781  $1,277,011  $2,565  $-  $1,279,576 

ECL allowance

  370   -   -   370   275   -   -   275 

EL %

  0.03%  0.00%  0.00%  0.03%  0.02%  0.00%  0.00%  0.02%

Public sector and other financing

 $31,168  $79  $-  $31,247  $32,507  $80  $-  $32,587 

ECL allowance

  4   -   -   4   16   3   -   19 

EL %

  0.01%  0.00%  0.00%  0.01%  0.05%  3.75%  0.00%  0.06%

Loans

 $2,151,108  $57,349  $-  $2,208,457  $2,030,956  $65,352  $-  $2,096,308 

Total ECL allowance

  1,359   96   -   1,455   1,316   137   -   1,453 

Total EL %

  0.06%  0.17%  0.00%  0.07%  0.06%  0.21%  0.00%  0.07%

 

The Bank’s maximum exposure to credit risk is the carrying value of its financial assets. The Bank holds security against the majority of its loans in the form of mortgage interests over property, other registered securities over assets, guarantees or cash reserves on loan and lease receivables included in the POS Financing portfolio (see note 7).

 

Allowance for Credit Losses

 

The Bank must maintain an allowance for expected credit losses (“ECL”) that is adequate, in management’s opinion, to absorb all credit related losses in the Bank’s lending and treasury portfolios. Under IFRS 9 the Bank’s ECL is estimated using the expected credit loss methodology and is comprised of expected credit losses recognized on both performing loans, and non-performing, or impaired loans even if no actual loss event has occurred.

 

Assessment of significant increase in credit risk (“SICR”)

 

At each reporting date, the Bank assesses whether or not there has been a SICR for loans since initial recognition by comparing, at the reporting date, the risk of default occurring over the remaining expected life against the risk of default at initial recognition.

 

SICR is a function of the loan’s internal risk rating assignment, internal watchlist status, loan review status and delinquency status which are updated as necessary in response to changes including, but not limited to, changes in macroeconomic and/or market conditions, changes in a borrower’s credit risk profile, and changes in the strength of the underlying security, including guarantor status, if a guarantor exists.

 

Quantitative models may not always be able to capture all reasonable and supportable information that may indicate a SICR. As a result, qualitative factors may be considered to supplement such a gap.

 

Examples include changes in adjudication criteria for a particular group of borrowers or asset categories or changes in portfolio composition, and more specifically changes attributable to the continued impact of COVID-19 on the Canadian economy and the Bank’s business.

 

Expected credit loss model - Estimation of expected credit losses

 

Expected credit losses are an estimate of a loan’s expected cash shortfalls discounted at the effective interest rate, where a cash shortfall is the difference between the contractual cash flows that are due to the Bank and the cash flows that the Bank actually expects to receive.

 

Forward-Looking Information

 

The Bank incorporates the impact of future economic conditions, or more specifically forward-looking information into the estimation of expected credit losses at the credit risk parameter level. This is accomplished via the credit risk parameter models and proxy datasets that the Bank utilizes to develop probability of default, (“PD”) and loss given default, (“LGD”) term structure forecasts for its loans. The Bank has sourced credit risk modeling systems and forecast macroeconomic scenario data from Moody’s Analytics, a third party service provider for the purpose of computing forward-looking credit risk parameters under multiple macroeconomic scenarios that consider both market-wide and idiosyncratic factors and influences. These systems are used in conjunction with the Bank’s internally developed ECL models. Given that the Bank has experienced very limited historical losses and, therefore, does not have available statistically significant loss data inventory for use in developing internal, forward looking expected credit loss trends, the use of unbiased, third party forward-looking credit risk parameter modeling systems is particularly important for the Bank in the context of the estimation of expected credit losses.

 

The Bank utilizes macroeconomic indicator data derived from multiple macroeconomic scenarios in order to mitigate volatility in the estimation of expected credit losses, as well as to satisfy the IFRS 9 requirement that future economic conditions are to be based on an unbiased, probability-weighted assessment of possible future outcomes. More specifically, the macroeconomic indicators set out in the macroeconomic scenarios are used as inputs for the credit risk parameter models utilized by the Bank to sensitize the individual PD and LGD term structure forecasts to the respective macroeconomic trajectory set out in each of the scenarios (see Expected Credit Loss Sensitivity below). Currently the Bank utilizes upside, downside and baseline forecast macroeconomic scenarios, and assigns discrete weights to each for use in the estimation of its reported ECL. The Bank has also applied expert credit judgement, where appropriate, to reflect, amongst other items, uncertainty in the Canadian macroeconomic environment attributable to the continued impact of COVID-19.

 

The macroeconomic indicator data utilized by the Bank for the purpose of sensitizing PD and LGD term structure data to forward economic conditions include, but are not limited to: real GDP, the national unemployment rate, long term interest rates, the consumer price index, the S&P/TSX Index and the price of oil. These specific macroeconomic indicators were selected in an attempt to ensure that the spectrum of fundamental macroeconomic influences on the key drivers of the credit risk profile of the Bank’s balance sheet, including: corporate, consumer and real estate market dynamics; corporate, consumer and SME borrower performance; geography; as well as collateral value volatility, are appropriately captured and incorporated into the Bank’s forward macroeconomic sensitivity analysis.

 

Key assumptions driving the macroeconomic forecast trends this quarter include: the rate of decline of new case counts of the Omicron variant and the relaxation of public health restrictions as a function of same, the timing and magnitude of the Bank of Canada’s (“BoC”) first overnight rate increase as well as the number and magnitude of additional, anticipated increases over the course of 2022 and beyond, the resiliency of consumer spending in a rising rate environment, the mitigation of the current high rate of inflation as a function of the resolution of existing supply-chain bottlenecks, the trajectory of oil and gasoline prices, tighter monetary policy and a shrinking BoC balance sheet, the continued rate of job growth, the impact of more specific eligibility requirements associated with the federal government’s remaining stimulus programs, and the level and duration of historically high housing prices.

 

Management developed ECL estimates using credit risk parameter term structure forecasts sensitized to individual baseline, upside and downside forecast macroeconomic scenarios, each weighted at 100%, and subsequently computed the variance of each to the Bank’s reported ECL as at January 31, 2022 in order to assess the alignment of the Bank’s reported ECL with the Bank’s credit risk profile, and further, to assess the scope, depth and ultimate effectiveness of the credit risk mitigation strategies that the Bank has applied to its lending portfolios (see Expected Credit Loss Sensitivity below).

 

Expected Credit Loss Sensitivity:

 

The following table presents the sensitivity of the Bank’s estimated ECL to a range of individual macroeconomic scenarios, that in isolation may not reflect the Bank’s actual expected ECL exposure, as well as the variance of each to the Bank’s” reported ECL as at January 31, 2022:

 

(thousands of Canadian dollars)

                
  

Reported

   100%  100%  100%
  

ECL

   Upside   Baseline   Downside 
                 

Allowance for expected credit losses

 $1,455  $898  $1,193  $1,675 

Variance from reported ECL

      (557)  (262)  220 

Variance from reported ECL (%)

      (38%)  (18%)  15%
                 

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended January 31, 2022:

             

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

 
                 

Commercial real estate mortgages

                

Balance at beginning of period

 $980  $134  $-  $1,114 

Transfer in (out) to Stage 1

  14   (14)  -   - 

Transfer in (out) to Stage 2

  (4)  4   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (28)  (24)  -   (52)

Loan originations

  80   -   -   80 

Derecognitions and maturities

  (93)  (4)  -   (97)

Provision for (recovery of) credit losses

  (31)  (38)  -   (69)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $949  $96  $-  $1,045 
                 

Commercial real estate loans

                

Balance at beginning of period

 $45  $-  $-  $45 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (9)  -   -   (9)

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  (9)  -   -   (9)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $36  $-  $-  $36 
                 

Point of sale loans and leases

                

Balance at beginning of period

 $275  $-  $-  $275 

Transfer in (out) to Stage 1

  38   (38)  -   - 

Transfer in (out) to Stage 2

  (58)  58   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  115   (20)  -   95 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  95   -   -   95 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $370  $-  $-  $370 
                 

Public sector and other financing

                

Balance at beginning of period

 $16  $3  $-  $19 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (11)  (3)  -   (14)

Loan originations

  -   -   -   - 

Derecognitions and maturities

  (1)  -   -   (1)

Provision for (recovery of) credit losses

  (12)  (3)  -   (15)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $4  $-  $-  $4 
                 

Total balance at end of period

 $1,359  $96  $-  $1,455 

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended January 31, 2021:

             

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

 
                 

Commercial real estate mortgages

                

Balance at beginning of period

 $1,174  $192  $-  $1,366 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  (2)  2   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  67   10   -   77 

Loan originations

  146   -   -   146 

Derecognitions and maturities

  (39)  (37)  -   (76)

Provision for (recovery of) credit losses

  172   (25)  -   147 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $1,346  $167  $-  $1,513 
                 

Commercial real estate loans

                

Balance at beginning of period

 $137  $-  $-  $137 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (65)  -   -   (65)

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  (65)  -   -   (65)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $72  $-  $-  $72 
                 

Point of sale loans and leases

                

Balance at beginning of period

 $215  $-  $-  $215 

Transfer in (out) to Stage 1

  20   (20)  -   - 

Transfer in (out) to Stage 2

  (44)  44   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  16   (24)  -   (8)

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  (8)  -   -   (8)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $207  $-  $-  $207 
                 

Public sector and other financing

                

Balance at beginning of period

 $57  $-  $-  $57 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (17)  -   -   (17)

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  (17)  -   -   (17)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $40  $-  $-  $40 
                 

Total balance at end of period

 $1,665  $167  $-  $1,832 

 

b) Impaired loans:

 

At January 31, 2022, impaired loans were $nil ( October 31, 2021 - $nil).