American Business Bank : 2nd Quarter Report 2023

AMERICAN BUSINESS BANK REPORTS SECOND QUARTER EARNINGS

Non-Interest Bearing Deposits Grow $50 million or 12% Annualized in Second Quarter

Second Quarter 2023 Highlights

• Total deposits grew $178 million or 6% over prior quarter
• Non-interestbearing demand deposits grew $50 million and represent 54% of total deposits
• Total loans increased $22 million or 1% over prior quarter
• Net yield on interest earning assets increased 10 basis points over the prior quarter
• Total borrowings decreased $166 million or 34% over prior quarter
• Net income for six months increased $1.1 million or 5%, over prior year
• Tangible book value per share increased by $0.29 to $31.37 over prior quarter
• Nonperforming assets to total assets of 0.15%
• Phil Feghali named President and Jeff Munson named Chief Credit Officer
• Continued status as well-capitalized,the highest regulatory category

Los Angeles, California, July 28, 2023. AMERICAN BUSINESS BANK(OTCQX: AMBZ) today reported net income of $9.3 million or $1.01 per fully diluted share for the quarter ended June 30, 2023 compared to $13.1 million or $1.42 per fully diluted share for the quarter ended March 31, 2023, and $11.4 million or $1.24 per fully diluted share for the quarter ending June 30, 2022, representing declines of 29% and 18%, respectively. The second quarter of 2022 included net income associated with the PPP program of $1.2 million or $0.14 per fully diluted share.

Net income for the first half of 2023 was $22.4 million or $2.43 per fully diluted share, an increase of $1 million or 5%, from the $21.4 million net income or $2.33 per fully diluted share for the first half of the prior year. The first half of 2022 included net income associated with the PPP program of $2.6 million or $0.28 per fully diluted share.

"Our deep relationships within the markets we serve yielded a significant increase in deposits this quarter. In fact, for the second quarter and first six months of 2023, we solicited and won new business that exceeded both the customer count and deposit balances opened in the previous comparable periods and we have a strong deposit pipeline of new customers for the last half of the year. Our proven business model continues to highlight that good businesses need strong banking relationships and yearn for effective relationship managers to provide exceptional service. Many of our clients routinely need lines of credit to operate and other credit vehicles which we continue to provide. Other banks may have pulled back from loan production, but we continue to meet the lending needs of clients with our strong liquidity position. Additional growth in deposits has come from existing relationships who opted to move some of their deposits into US government bonds when the gap between deposit rates and Treasury rates expanded. Some of these balances have returned to the balance sheet as deposits in the form of CD's. These efforts have resulted in improvement and stabilization in our cost of deposits and a significant reduction in borrowings.

"In light of our enviable credit culture and history, we continually monitor our portfolio for negative market trends. Today those concerns are in commercial real estate office buildings and entertainment industry

businesses. We possess limited exposure to office loans of which the majority are owner-occupied, substantially all are three stories or under and are all located in suburban markets. It is clear that the overall Los Angeles economy will be impacted by the labor actions of the writers and actors. As the Bank has no exposure to production companies, we are keeping an eye on the limited exposure to customers that provide services to the industry. During the quarter we recognized a $170,000 charge off of the unguaranteed portion of an SBA loan.

"Despite the headwinds experienced by the banking industry during the year, the team exceeded earnings in the first of half of 2023 as compared to last year even without the benefit of PPP related earnings recorded in 2022. This further demonstrates the stability of the Bank's business model with a diversified and loyal customer base," commented Leon Blankstein, ABB's CEO and Director.

For the quarter ending June 30, 2023, net interest income was $28.7 million, a 10% decrease over the first quarter of 2023. Interest income on loans increased by $1.5 million due to loan growth and higher interest rates which was offset by an increase in interest expense of $4.8 million due to an increase in the cost of deposits and higher average borrowings. For the quarter ending June 30, 2023, the cost of deposits was 0.73% representing an increase of 0.40% compared to the quarter ending March 31, 2023. The provision for loan losses was $1.5 million in the quarter based on loan growth, a loan charge off and an increase in qualitative factors; furthermore a component was $0.2 million for the reserve for unfunded loan commitments. The allowance for loan losses as a percentage of loans was 1.09% at June 30, 2023.

For the six months ended June 30, 2023, net income was $22.4 million or $2.43 per fully diluted share compared to $21.4 million or $2.33 per fully diluted share for the six months ended June 30, 2022. This was primarily due to an increase of $378 million in average core loans with higher yields offset by an increase in average borrowings of $302 million with higher costs and an increase in the cost of interest- bearing deposits.

Net Interest Margin

Net interest margin for the second quarter of 2023 decreased to 2.99% from 3.38% for the first quarter of 2023 due to an increase in the cost of interest-bearing liabilities which was partially offset by higher loan yields. Net interest margin for the second quarter of 2023 decreased to 2.99% from 3.21% for the second quarter of 2022 due to a change in the mix of liabilities from low cost deposits to high cost short-term borrowings. As of June 30, 2023, 65% of the loan portfolio was fixed rate. Of the variable rate loans, approximately half are indexed to prime of which $341 million are adjustable within 90 days of a change in prime. For the month of June 2023, the net interest margin was 2.96%.

Net Interest Income

For the quarter ended June 30, 2023, net interest income declined by $3.3 million, or 10%, compared to the first quarter of 2023 and by $1.2 million, or 4%, compared to the second quarter of 2022. The decrease compared to the prior quarter is due to an increase in the cost of interest-bearing deposits and higher average borrowings during the quarter. The decrease compared to prior year quarter is due to a change in the mix of liabilities from low cost deposits to high cost short-term borrowings offset by the Bank's strong core loan growth and increases in market rates on loans. The following table reflects the effect of PPP related income in 2022 for comparison purposes. The remaining $2 million balance of PPP loans are expected to be held to term.

		As of or For the				As of or For the
		Six Months Ended:			Three Months Ended:
		June		June			June		March		June
(Figures in $000s, except per share amounts)		2023		2022			2023		2023		2022
PPP Total Loans, net	$	2,039	$	22,931	$	2,039	$	6,659	$	22,931
Total PPP loan income	$	130	$	3,637	$	50	$	81	$	1,762
Total PPP loan income after tax	$	92	$	2,565	$	35	$	57	$	1,242
Total PPP loan income after tax per
share - diluted	$	0.01	$	0.28	$	0.00	$	0.01	$	0.14

Non-Interest Income

The decrease in non-interest income from the prior quarter is due to reduced gains on sale of SBA loans offset by an increase of the valuation of COLI policies that are invested in mutual funds. The increase in non-interest income compared to the prior year quarter is primarily due to the higher valuation of COLI policies and gain on sale of SBA loans.

Non-Interest Expense

For the quarter ending June 30, 2023, total non-interest expense increased $0.5 million compared to the prior quarter and $2.6 million compared to the prior year quarter primarily due to increases in salaries and employee benefits. The efficiency ratio increased to 54% for the second quarter of 2023 compared to 47% for the first quarter of 2023 and 45% for the second quarter of 2022.

There were 231 full time equivalent employees at June 30, 2023 compared to 205 a year ago and 224 at March 31, 2023. The Bank has 42 relationship managers in eight offices representing an increase of one from both a year ago and the prior quarter.

For the six months ended June 30, 2023, non-interest expense increased $4.1 million or 14% compared to the same period a year ago, mainly due to increases in salaries and employee benefits.

Income Taxes

The effective income tax rate was 27.6% for quarter ended June 30, 2023, 27.1% for the quarter ended March 31, 2023, 27.0% for the year ended December 31, 2022 and is currently estimated to be between 27%-28% for 2023.

Balance Sheet

For the quarter ended June 30, 2023, total core loans, excluding PPP loans, increased $26 million, or 1%. The majority of this growth was in owner-occupied commercial real estate (CRE) loans. The largest origination was in an Industrial Manufacturing single tenant building. Commercial and industrial (C&I) loans increased by $7 million despite a reduction in line utilization. At June 30, 2023, the utilization rate for the Bank's commercial lines of credit decreased to 26% from 29% at March 31, 2023.

		June 30,			March 31,
		2023			2023
(Figures in $000s)
RE - Owner Occupied	$	1,076,604	$	1,051,637
RE - Non Owner Occupied		697,764			692,437
Construction & Land		51,226			57,823
Total CRE Loans	$	1,825,594	$	1,801,897

Investment securities decreased during the second quarter of 2023 to $1.23 billion consisting of 47% in held-to-maturity (HTM) securities. As of June 30, 2023, the duration of the available-for-sale (AFS) securities portfolio increased to 5.6 years from 5.5 years as of March 31, 2023. Accumulated other comprehensive loss on AFS securities increased to $78.7 million as of June 30, 2023 from $72.0 million as of March 31, 2023 as market rates relevant to securities pricing increased. The duration on the held-to- maturity portfolio which holds a significant amount of municipal securities is 7.4 years. As of June 30, 2023, the unrealized after tax loss on HTM securities was $74 million.

During the second quarter of 2023, deposits grew steadily throughout the quarter increasing by $178 million to $3.3 billion. The Bank obtained new customer relationships as measured by the $50 million increase in non-interest-bearing deposits. Certificates of deposits increased by $100 million partially due to an increase in CDARS™ reciprocal which was previously one-way sell. The Bank has no brokered deposits. The Bank has not lost any relationships due to the recent turbulence in the banking industry. The Bank's off balance sheet products of treasury securities held for clients declined by $52 million during the second quarter of 2023 to $226 million.

During the second quarter of 2023, total assets increased $23.5 million, or 0.6%, total loans grew $21.7 million, or 0.9%, total deposits increased by $178 million, or 24% annualized, and borrowings declined by $166 million. Borrowings have continued to decline in July.

The Bank has increased its borrowing capability since March 31, 2023 by pledging additional securities under the Federal Reserve Bank (FRB) Term Funding Program. Under this program, the FRB discount window and with loans pledged at the Federal Home Loan Bank of San Francisco, the Bank has $1.8 billion in borrowing capacity as of June 30, 2023.

At June 30, 2023, the tangible common equity ratio was 7.25%, benefitting from year to date net income, adoption of CECL ($2.7 million) and a lower accumulated other comprehensive loss, as compared to year end.

Asset Quality

The following table presents asset quality overview as of the dates indicated:

			June 30,				March 31,
			2023				2023
(Figures in $000s)
Non-performing assets (NPA)	$	5,788	$	6,000
Loans 90+ Days Past Due and Still Accruing			-				-
Total NPA		$	5,788		$	6,000
NPA as a % of total assets			0.15%				0.15%
Past Due as a % of total Loans			0.00%				0.03%
Criticized as a % of total Loans			4.56%				2.60%
Classified as a % of total Loans			0.25%				0.26%

During the second quarter, non-performing assets (NPAs) decreased by $0.2 million to $5.8 million mainly due to a partial charge off of one C&I loan relationship. As of June 30, 2023, NPAs have a $544 thousand allowance on individually evaluated loans related to six C&I non-performing loan relationships of which

the majority have a partial guarantee by the state of California or the SBA. Criticized loans increased primarily due to three different unrelated onetime events.

The following table represents the allowance for credit losses for loans as of and for the dates and periods indicated:

		Three Months Ended			Six Months Ended
		June 30,			March 31,			June 30,			June 30,
		2023			2023			2023			2022
(Figures in $000s)											25,062
Balance, beginning of period	$	26,073	$	29,635	$	29,635	$
Cumulative effect of change in accounting principle -
CECL		-			(3,885)			(3,885)			-
Charge-offs		(179)			-			(179)			-
Recoveries		10			10			20			36
Net (charge-offs) / recoveries	$	(169)		$	10		$	(159)		$	36
Provision		1,268			313			1,581			2,510
Balance, end of period	$	27,172		$	26,073		$	27,172		$	27,608
Allowance as a % of loans		1.09%			1.05%			1.09%			1.24%

The allowance for credit losses increased to $27 million during the second quarter of 2023 primarily as a result of an increase in qualitative factors. There were $179,000 in charge offs in the second quarter of 2023 compared to $23,000 during the prior year. The Bank has one $239 thousand restructured loan involving a borrower experiencing financial difficulty. The Bank adopted CECL as of January 1, 2023, thus 2022 was under a different accounting method.