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Portfolio Risk & CECL

How Automating the Incurred Loss Model Eased the CECL Transition for The Bank of San Antonio

Outgrowing Excel

Choosing a customer-driven vendor to automate the allowance

Like many financial institutions, The Bank of San Antonio had relied on Excel to calculate its allowance for credit losses (ACL). But the bank was growing quickly, and Andrew Reid, Executive Vice President and Chief Credit Officer at The Bank of San Antonio, recognized that it may not be the most efficient tool as the bank got bigger. “What happens when we’re a $1 billion bank? Or $1.5 billion? How are we going to manage that,” Reid thought. After exploring several vendors for ALLL and incurred losses, The Bank of San Antonio selected the Sageworks ALLL Solution from Abrigo. The bank was particularly impressed with Abrigo’s commitment to customer service, which closely aligned with their own values. “Abrigo’s mindset is very similar to ours – very customer-driven and customer-focused,” Reid said.

In addition to leveraging the Sageworks ALLL Solution, The Bank of San Antonio subsequently implemented the Sageworks Stress Testing Solution by Abrigo as well. By automating the incurred loss model and stress testing, the bank captured and stored the majority of its loan data nightly. This became a huge asset when The Bank of San Antonio began considering its methodology option for the current expected credit loss (CECL) standard. In March 2018, the bank entered into a new agreement with Abrigo to help with the transition to CECL.

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“The data was not as big of an issue for us as we expected it to be since we were running the incurred loss model and Abrigo was already capturing our data – we were ahead of that.”
Andrew Reid, Executive Vice President and Chief Credit Officer

'We're Up and Running'

Data doesn't have to be daunting

By automating the incurred loss model, the bank staff needed very little additional data for the model.

“The data was not as big of an issue for us as we expected it to be since we were running the incurred loss model and Abrigo was already capturing our data – we were ahead of that,” Reid said. “The other thing that helped us was that we were using the Sageworks Stress Testing model. Because of that, we were already putting in additional data on debt service coverage, so when Abrigo ran our CECL data assessment, there wasn’t a lot of information that we had to go back and fill in.”

By September 2018, the bank had its first results and now runs parallel calculations quarterly – well ahead of their 2023 effective date (the bank’s effective date for CECL was originally January 2022, but after the Financial Accounting Standards Board’s proposed delay, non-SEC filing institutions and small reporting companies now have until 2023 to comply).

“I think that it’s phenomenal to see where we started from, to deciding that we were going to do this CECL model, and now we’re up and running on it,” Reid said. “Meanwhile, I know there are some banks that haven’t even started.”

Another benefit of getting a head start on CECL is the ability to communicate the implications of the new standard and the strategies behind it with the bank’s audit committee, board, and stakeholders.

“In September, we were able to provide our full report of our ALLL and were able to go through the details of it, how we arrived at it, our Q factors, some of our concerns, and then we presented the CECL model in comparison,” said Reid. “As we go down the road now, and as we implement, all of our directors will be well-versed on it and what we’re doing.”

While the transition to CECL can be daunting, Reid has found several silver linings. “It’s a lot to digest,” he said, “but the other side of it is, why wouldn’t we want to do this if it’s going to give us a better understanding of where the risk is in our portfolio?” He also appreciates Abrigo’s ability to make CECL simple. “If there’s one thing that I can say about Abrigo, it’s that they have taken the complications out of it.” From advising the bank on which model to leverage to providing printouts and talking points to help communicate the standard to the board, Abrigo has helped to simplify CECL as much as possible.

“I think the worst thing that we can do right now is just kick the can down the road. You need to do something. Don’t just wait. It’s too important.”
Andrew Reid, Executive Vice President and Chief Credit Officer

CECL Deadline Approaching

Transition has been "highly successful."

For non-SEC filing institutions that now have an additional year and small reporting companies that have two additional years until the 2023 CECL effective date, it might be tempting to put off the transition, but banks likely have less time than they think. When should a bank start? Timing will vary for every financial institution depending on the bank’s resources, data availability, and data quality. Since The Bank of San Antonio automated the incurred loss model and stress testing, the institution was set up to begin switching over to CECL more quickly. At this time, the bank will have ample time to tweak and adjust their models before their 2023 CECL effective date. Reid recommends institutions build at least a full 12-month cycle of running parallel calculations into their implementation project plan.

“I think the worst thing that we can do right now is just kick the can down the road. You need to do something,” Reid warns. “Don’t just wait. It’s too important.”

The Bank of San Antonio’s transition to CECL has been “highly successful,” and they are currently running their CECL model in parallel with their incurred loss model.

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