Company: SFBC
Filing Date: 2025-03-18
Form Type: 10-K
Source: 0001541119-25-000009
Chunk: 132

Company: Sound Financial Bancorp, Inc.
Filing Date: 2025-03-18
Form: 10-K
Item: Item 8
Chunk 132
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 reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses on loans balance was $8.5 million at December 31, 2024. The allowance for credit losses is maintained to provide for estimated losses expected to occur over the estimated remaining life of the asset. The Company uses relevant and reliable information from internal and external sources related to past events, current conditions, and a reasonable and supportable forecast. The quantitative component of the allowance is measured using a discounted cash flow model incorporating gross historical loss rates, adjusted for defaults, recoveries, expected prepayments, 

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and an economic forecast based on unemployment. Qualitative adjustments are used to estimate additional losses related to risks that are not captured in the quantitative analysis and are based on management’s evaluation of available internal and external data. 

We identified the auditing of the allowance for credit losses on loans, including management’s use of reasonable and supportable forecasts of future economic conditions in the discounted cash flow model, and the estimation of qualitative adjustments, both of which are used in the estimate, as a critical audit matter. Determination of the inputs used in the discounted cash flow model involve significant management judgment based on management’s consideration of the forecast of relevant economic conditions. Qualitative adjustments are based on management’s evaluation of available internal and external data and involves significant management judgment. Auditing management’s judgments relating to the determination of the inputs used in the discounted cash flow model and qualitative adjustments involved significant audit effort as well as especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures related to the critical audit matter included the following, among others:

•Evaluating