Company: SFBC
Filing Date: 2025-03-18
Form Type: 10-K
Source: 0001541119-25-000009
Chunk: 104

Company: Sound Financial Bancorp, Inc.
Filing Date: 2025-03-18
Form: 10-K
Item: Item 7
Chunk 104
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 using relevant and reliable information from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimate of expected credit losses. Segments are based upon federal call report segmentation.

We continuously evaluate and update our critical accounting estimates and judgments based on changing conditions. As part of our ongoing enhancement of the ACL methodology, during the year ended December 31, 2024, we made additional improvements to the loss model. This included a qualitative adjustment related to our loan review process and  how we adjust 

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for the qualitative component using a scorecard to guide management’s analysis. This change in the ACL is considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively.

While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported on the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond our control, such as changes in projected economic conditions, real estate markets or particular industry conditions, which may materially impact asset quality and the adequacy of the ACL and thus the resulting provision for credit losses.

Our ACL analysis is prepared utilizing a qualitative scorecard framework, which establishes bounds for the estimation of loss between a minimum (“Low Watermark”) and a maximum (“High Watermark”) for each segment. The Low Watermark indicates zero credit losses. The High Watermark is established by utilizing the same historical loss rate model used to establish modified loss rates, assuming a worse-case economic scenario. Risk levels are categorized as minor, moderate, major, no change, and improvement, segmenting the gap between the Low Watermark and High Watermark.

In evaluating the results of the sensitivity analysis, the qualitative factor adjustment provided the largest change in the ACL.  If all qualitative factors were adjusted from the base model to the High Watermark, the estimated ACL on loans would increase to $25.2 million (2.82%). However, considering all relevant information, management estimated pooled loan losses to range between the base model of $6.1 million (0.69%) and, with all qualitative factors assigned a minor risk level, $12.5 million (1.40%). This evaluation included an assessment of changes to business risks and alignment with the Company’s overall strategy and objectives. Management determined that the Company’s overall strategy and objectives remained