PCB BANCORP

Shareholders and the Board of Directors of PCB Bancorp

Los Angeles, California

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of PCB Bancorp and Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Change in Accounting Principle

As discussed in Notes 1 and 4 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codifications No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the 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 financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the 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 and Provision for Credit Losses – Loans Carried at Amortized Cost

As described in Notes 1 and 4 to the financial statements and the explanatory paragraph above, on January 1, 2023 (“adoption date”), the Company adopted ASU 2016-13, Financial instruments – Credit Losses (Topic 326), under a modified retrospective approach, which required the Company to estimate expected credit losses for its financial assets carried at amortized cost utilizing the current expected credit loss (“CECL”) methodology. As of the adoption date, the Company reported a $26.0 million allowance for credit losses (“ACL”) under the CECL methodology on its loans carried at amortized cost. Upon adoption, the Company recorded a $2.7 million increase to the ACL, of which $1.1 million related to the ACL on loans. After adjusting for the net tax impact, a $1.9 million decrease was recorded in retained earnings through a cumulative-effect adjustment, of which approximately $0.8 million related to the ACL on loans.

The ACL on loans under the CECL methodology was a significant estimate recorded within the Company’s financial statements with a reported balance of $26.0 million and $27.5 million as of the adoption date and December 31, 2023, respectively, on amortized loans of $2.0 billion and $2.3 billion, respectively.

The Company’s discounted cash flow (“DCF”) methodology incorporates a probability of default (“PD”) and loss given default (“LGD”) modeling approach. PD and LGD assumptions are adjusted using economic forecast scenarios to calculate expected future credit losses over a one-year time horizon before reverting over one year to historical long-term average loss rates. Management utilizes past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company to estimate the PD and LGD assumptions. The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios, as well as determining the appropriate length of the forecast horizon. The Company utilizes the forecasted national unemployment and year-over-year change in national gross domestic product rates provided by the Federal Open Market Committee.

The Company adjusts the modeled ACL with internal and external qualitative factors not inherently considered in the quantitative component of the methodology. For each segment of loans collectively evaluated, a hypothetical worst-case scenario loss rate is calculated which is then used as the high watermark for the qualitative factors. The net difference between the worst-case scenario loss rate and the current period’s quantitative reserve rate is the maximum available qualitative reserve for a given segment. The required reserve for each segment is then determined based on the weighting of the qualitative category and the assignment of risk status rating for each qualitative category.

The audit procedures over the modeling techniques and assumptions selected by management and the qualitative factor methodology have been identified as a critical audit matter due to the high degree of auditor judgment and use of more experienced audit personnel and valuation specialists in procedures over the modeling techniques and assumptions. The development of the Company’s qualitative factor methodology involved significant management judgment and assumptions, which in turn involved a high degree of auditor judgment and significant audit effort, including the need to involve more experienced audit personnel.

The primary procedures we performed to address this critical audit matter included:

•Testing the design and operating effectiveness of controls over the estimate of the allowance for credit losses on loans, including controls addressing:

◦The appropriate application of management’s established methodology in accordance with generally accepted accounting principles;

◦The reasonableness of establishment of management’s qualitative factor methodology;

◦The reasonableness of management's judgments over qualitative factors;

◦Management's model validation, including an evaluation of the conceptual soundness of the ACL framework and significant management judgments and assumptions;

◦Management's review of the reasonableness and sensitivity of significant judgments and assumptions; and

◦Management's review of the directional consistency of judgments and assumptions with modeled or estimate results.

•Substantively testing management's process, including evaluating their judgments and assumptions, for developing the estimate of the allowance of credit losses on loans which included:

◦Evaluating and testing of management’s methodology and conceptual soundness of the DCF model, including the use of valuation specialists to assist with evaluating the model used in forecasting future economic conditions and testing of inputs into the model;

◦Evaluating the reasonableness of management’s significant judgments over the application of reasonable and supportable forecasts;

◦Evaluating the subjective assumptions within the quantitative discounted cash flow model;

◦Evaluating the reasonableness of management’s judgments over selection of qualitative factors;

◦Evaluating the procedures and results of the Company’s third-party model validation, as well as management’s responses to results; and

◦Evaluating of directional consistency of judgments and assumptions with modeled or estimate results.

/s/Crowe LLP

We have served as the Company’s auditor since 2016.

Los Angeles, California

March 12, 2024