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Note 5 - Loans, Net of Allowance for Credit Losses
 6 Months Ended
Apr. 30, 2024
Statement Line Items [Line Items]  
Disclosure of loans and advances to customers [text block]

5.

Loans, net of allowance for credit losses:

 

The Bank organizes its lending portfolio into the following four broad asset categories: Point-of-Sale Loans and Leases, Commercial Real Estate Mortgages, Commercial Real Estate Loans, 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 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 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 Commercial Real Estate Mortgages (“CRE Mortgages”) asset category is comprised primarily of Residential Construction, Term, Insured and Land Mortgages. All of these loans are business-to-business loans with the underlying credit risk exposure being primarily consumer in nature given that the vast majority of the loans are related to properties that are designated primarily for residential use. The portfolio benefits from diversity in its underlying security in the form of a broad range of such collateral properties.

 

 

The Commercial Real Estate Loans (“CRE Loans”) asset category is comprised primarily of condominium corporation financing loans.

 

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.

 

Summary of loans and allowance for credit losses:

 

(thousands of Canadian dollars)

            
  

April 30

  

October 31

  

April 30

 
  

2024

  

2023

  

2023

 
             
             
             

Point-of-sale loans and leases

 $3,114,024  $2,879,320  $2,538,917 

Commercial real estate mortgages

  819,853   889,069   807,828 

Commercial real estate loans

  8,612   8,793   11,996 

Public sector and other financing

  56,671   55,054   46,350 
   3,999,160   3,832,236   3,405,091 
             

Allowance for credit losses

  (2,402)  (2,513)  (2,526)

Accrued interest

  21,700   20,681   16,890 
             

Total loans, net of allowance for credit losses

 $4,018,458  $3,850,404  $3,419,455 

 

 

The following table provides a summary of loan amounts, ECL allowance amounts, and expected loss (“EL”) rates by lending asset category:

 

  

As at April 30, 2024

  

As at October 31, 2023

 

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

  

Stage 1

  

Stage 2

  

Stage 3

  

Total

 

Point-of-sale loans and leases

 $3,104,388  $9,636  $-  $3,114,024  $2,873,078  $6,242  $-  $2,879,320 

ECL allowance

  207   -   -   207   100   -   -   100 

EL %

  0.01%  0.00%  0.00%  0.01%  0.00%  0.00%  0.00%  0.00%

Commercial real estate mortgages

 $688,250  $131,603  $-  $819,853  $717,755  $155,993  $15,321  $889,069 

ECL allowance

  1,643   299   -   1,942   1,699   523   -   2,222 

EL %

  0.24%  0.23%  0.00%  0.24%  0.24%  0.34%  0.00%  0.25%

Commercial real estate loans

 $8,612  $-  $-  $8,612  $8,793  $-  $-  $8,793 

ECL allowance

  58   -   -   58   42   -   -   42 

EL %

  0.67%  0.00%  0.00%  0.67%  0.48%  0.00%  0.00%  0.48%

Public sector and other financing

 $52,423  $4,248  $-  $56,671  $49,293  $5,761  $-  $55,054 

ECL allowance

  185   10   -   195   104   45   -   149 

EL %

  0.35%  0.24%  0.00%  0.34%  0.21%  0.78%  0.00%  0.27%

Total loans

 $3,853,673  $145,487  $-  $3,999,160  $3,648,919  $167,996  $15,321  $3,832,236 

Total ECL allowance

  2,093   309   -   2,402   1,945   568   -   2,513 

Total EL %

  0.05%  0.21%  0.00%  0.06%  0.05%  0.34%  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 (holdbacks) on loan and lease receivables included in the POS Financing portfolio (see note 8).

 

Allowance for credit losses

 

The Bank must maintain an allowance for expected credit losses that is adequate, in management’s opinion, to absorb all credit related losses in the Bank’s lending and treasury portfolios. The expected credit loss methodology requires the recognition of credit losses based on 12 months of expected losses for performing loans which is reflected in the Bank’s Stage 1 grouping. The Bank recognizes lifetime expected losses on loans that have experienced a significant increase in credit risk since origination which is reflected in the Bank’s Stage 2 grouping. While there is elevated credit risk in the Bank’s POS Financing portfolio as at the measurement date, management does not believe that this represents significant increase in credit risk in that portfolio and the majority of this portfolio remains in stage 1. Impaired loans require recognition of lifetime losses and is reflected in Stage 3 grouping.

 

Forward-looking Information

 

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. The macroeconomic indicator data utilized by the Bank for the purpose of sensitizing probability of default and loss given default 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 Moody’s Analytics’ baseline macroeconomic forecast trends this quarter include: the Bank of Canada cutting interest rates at the June policy meeting; the Canadian economy returning to modest growth in late 2024 and inflation approaching the Bank of Canada’s target by the third quarter of 2024; elevated debt service obligations strain household finances but result in only modest loan deterioration; high financing costs and low sales volumes cause home prices to contract over the course of the majority of year; the various military conflicts continue but do not escalate to other regional powers; supply-chain bottlenecks continue to ease which aids in moderating inflation; outbreaks of disease or illness have very little economic impact; and global oil prices stabilize with West Texas Intermediate in the high US $80 range until early 2025.

 

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 April 30, 2024 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 April 30, 2024:

 

(thousands of Canadian dollars)

                
  

Reported

  

100%

  

100%

  

100%

 
  

ECL

  

Upside

  

Baseline

  

Downside

 
                 

Allowance for expected credit losses

 $2,402  $1,392  $1,739  $2,632 

Variance from reported ECL

      (1,010)  (663)  230 

Variance from reported ECL (%)

      (42%)  (28%)  10%
                 

 

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended April 30, 2024:

 

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

 
                 

Point-of-sale loans and leases

                

Balance at beginning of period

 $65  $-  $-  $65 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  142   -   -   142 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  142   -   -   142 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $207  $-  $-  $207 
                 

Commercial real estate mortgages

                

Balance at beginning of period

 $1,656  $450  $-  $2,106 

Transfer in (out) to Stage 1

  110   (110)  -   - 

Transfer in (out) to Stage 2

  (53)  53   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (73)  (68)  -   (141)

Loan originations

  11   -   -   11 

Derecognitions and maturities

  (8)  (26)  -   (34)

Provision for (recovery of) credit losses

  (13)  (151)  -   (164)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $1,643  $299  $-  $1,942 
                 

Commercial real estate loans

                

Balance at beginning of period

 $55  $-  $-  $55 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  3   -   -   3 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  3   -   -   3 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $58  $-  $-  $58 
                 

Public sector and other financing

                

Balance at beginning of period

 $134  $26  $-  $160 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  38   (16)  -   22 

Loan originations

  13   -   -   13 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  51   (16)  -   35 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $185  $10  $-  $195 
                 

Total balance at end of period

 $2,093  $309  $-  $2,402 

 

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended April 30, 2023:

 

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

 
                 

Point-of-sale loans and leases

                

Balance at beginning of period

 $583  $-  $-  $583 

Transfer in (out) to Stage 1

  32   (32)  -   - 

Transfer in (out) to Stage 2

  (118)  118   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  130   (86)  -   44 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  44   -   -   44 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $627  $-  $-  $627 
                 

Commercial real estate mortgages

                

Balance at beginning of period

 $1,517  $74  $-  $1,591 

Transfer in (out) to Stage 1

  17   (17)  -   - 

Transfer in (out) to Stage 2

  (88)  88   -   - 

Transfer in (out) to Stage 3

  -   (13)  13   - 

Net remeasurement of loss allowance

  159   (7)  (13)  139 

Loan originations

  63   -   -   63 

Derecognitions and maturities

  (21)  (5)  -   (26)

Provision for (recovery of) credit losses

  130   46   -   176 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $1,647  $120  $-  $1,767 
                 

Commercial real estate loans

                

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

  2   -   -   2 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  2   -   -   2 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $59  $-  $-  $59 
                 

Public sector and other financing

                

Balance at beginning of period

 $55  $3  $-  $58 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (1)  -   -   (1)

Loan originations

  16   -   -   16 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  15   -   -   15 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $70  $3  $-  $73 
                 

Total balance at end of period

 $2,403  $123  $-  $2,526 

 

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the six months ended April 30, 2024:

 

 

 

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

 
                 

Point-of-sale loans and leases

                

Balance at beginning of period

 $100  $-  $-  $100 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  107   -   -   107 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  107   -   -   107 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $207  $-  $-  $207 
                 

Commercial real estate mortgages

                

Balance at beginning of period

 $1,699  $523  $-  $2,222 

Transfer in (out) to Stage 1

  232   (232)  -   - 

Transfer in (out) to Stage 2

  (162)  162   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  (106)  (111)  -   (217)

Loan originations

  77   -   -   77 

Derecognitions and maturities

  (97)  (43)  -   (140)

Provision for (recovery of) credit losses

  (56)  (224)  -   (280)

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $1,643  $299  $-  $1,942 
                 

Commercial real estate loans

                

Balance at beginning of period

 $42  $-  $-  $42 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  5   -   -   5 

Loan originations

  11   -   -   11 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  16   -   -   16 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $58  $-  $-  $58 
                 

Public sector and other financing

                

Balance at beginning of period

 $104  $45  $-  $149 

Transfer in (out) to Stage 1

  18   (18)  -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  50   (17)  -   33 

Loan originations

  13   -   -   13 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  81   (35)  -   46 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $185  $10  $-  $195 
                 

Total balance at end of period

 $2,093  $309  $-  $2,402 

 

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the six months ended April 30, 2023:

 

(thousands of Canadian dollars)

 

Stage 1

  

Stage 2

  

Stage 3

  

Total

 
                 

Point-of-sale loans and leases

                

Balance at beginning of period

 $545  $-  $-  $545 

Transfer in (out) to Stage 1

  70   (70)  -   - 

Transfer in (out) to Stage 2

  (172)  172   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  184   (102)  -   82 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  82   -   -   82 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $627  $-  $-  $627 
                 

Commercial real estate mortgages

                

Balance at beginning of period

 $1,150  $137  $-  $1,287 

Transfer in (out) to Stage 1

  79   (79)  -   - 

Transfer in (out) to Stage 2

  (118)  118   -   - 

Transfer in (out) to Stage 3

  -   (13)  13   - 

Net remeasurement of loss allowance

  422   (38)  (13)  371 

Loan originations

  149   -   -   149 

Derecognitions and maturities

  (35)  (5)  -   (40)

Provision for (recovery of) credit losses

  497   (17)  -   480 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $1,647  $120  $-  $1,767 
                 

Commercial real estate loans

                

Balance at beginning of period

 $54  $-  $-  $54 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  5   -   -   5 

Loan originations

  -   -   -   - 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  5   -   -   5 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $59  $-  $-  $59 
                 

Public sector and other financing

                

Balance at beginning of period

 $17  $1  $-  $18 

Transfer in (out) to Stage 1

  -   -   -   - 

Transfer in (out) to Stage 2

  -   -   -   - 

Transfer in (out) to Stage 3

  -   -   -   - 

Net remeasurement of loss allowance

  10   2   -   12 

Loan originations

  43   -   -   43 

Derecognitions and maturities

  -   -   -   - 

Provision for (recovery of) credit losses

  53   2   -   55 

Write-offs

  -   -   -   - 

Recoveries

  -   -   -   - 

Balance at end of period

 $70  $3  $-  $73 
                 

Total balance at end of period

 $2,403  $123  $-  $2,526 

 

 

Credit quality:

 

The Bank assigns a risk rating to each lending asset comprising its lending portfolio. A risk rating is assigned as a function of each new credit application, annual review or an amendment to a facility. The risk rating considers the credit risk attributes of the lending asset, structure, individual borrower circumstances as well as local, regional and global macroeconomic and market conditions. The Bank aggregates its risk rating assignments into the following three broad categories:

 

i) Satisfactory – The borrower and lending asset valuation are of acceptable credit quality.

 

ii) Watchlist – The borrower or the lending asset valuation exhibits potential credit weakness or a downward trend which, if not mitigated, will potentially weaken the Bank’s position. The lending asset requires close supervision.

 

iii) Classified – The collection of the structural payment and/or the full repayment of the lending asset is uncertain.

 

As of April 30, 2024, 97% ( October 31, 2023 – 99%) of the Bank’s lending assets were categorized Satisfactory. There was no material change in the Bank’s processes for managing credit risk during the current quarter.