Village Bank and Trust Financial : Reports Earnings for the Fourth Quarter of 2022

News Release

For Immediate Release

VILLAGE BANK AND TRUST FINANCIAL CORP.

REPORTS EARNINGS FOR THE FOURTH QUARTER OF 2022

Midlothian, Virginia, January 27, 2023. Village Bank and Trust Financial Corp. (the "Company") (Nasdaq symbol: VBFC), parent company of Village Bank (the "Bank"), today reported unaudited results for the fourth quarter of 2022. Net income for the fourth quarter of 2022 was $2,162,000, or $1.46 per fully diluted share, compared to net income for the fourth quarter of 2021 of $2,363,000, or $1.61 per fully diluted share. For the year ended December 31, 2022, net income was $8,305,000, or $5.62 per fully diluted share, compared to net income for the year ended December 31, 2021, of $12,453,000, or $8.48 per fully diluted share.

Jay Hendricks, President and CEO, commented, "We are pleased with our results for 2022. For the year, we produced a 13.54% consolidated return on average equity, with the Commercial Banking Segment producing a 14.31% return on average equity while also maintaining strong asset quality. Growth in the Commercial Banking Segment's earnings allowed us to compensate for reduced contributions from the U.S. Small Business Administration's Paycheck Protection Program income and our mortgage segment."

"Core loans in our Commercial Banking Segment grew 8.97% annually but were flat for the quarter as we began to observe borrower reluctance given rising interest rates, inflation and economic uncertainty. Deposits contracted 3.30% annually and 7.40% during the quarter due to a combination of businesses and consumers spending down their pandemic savings and investment oriented cash seeking yield as rates increased."

"Our Mortgage Banking Segment continues to be impacted by housing affordability and inventory issues that are compounded by rising rates. We continue to take prudent steps to offset the reduced mortgage banking segment earnings while we navigate the challenges of the current economic environment."

"Our focus remains on core relationship growth, disciplined management of our net interest margin and asset mix, navigating the weak mortgage environment and remaining vigilant on credit quality. While higher rates are good for net interest income, they are placing increased pressure on deposit pricing. We are well positioned for the higher rate environment and will address the continued rise in rates through our disciplined approach to balance sheet management and prudent risk taking."

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Operating Results

The following table presents quarterly results for the indicated periods (in thousands):

GAAP Operating Results by Segment

		Q4 2022			Q3 2022			Q2 2022			Q1 2022			Q4 2021
Pre-tax earnings (loss) by segment
Commercial banking	$ 3,070	$	2,688	$	2,677	$	2,459	$	2,433
Mortgage banking		(388)			(27)			68			(252)			559
Income before income tax expense (benefit)	2,682			2,661			2,745			2,207			2,992
Commercial banking income tax expense	602			514			540			460			512
Mortgage banking income tax expense (benefit)		(82)			(6)			15			(53)			117
Net income	$ 2,162	$	2,153	$	2,190	$	1,800	$	2,363

Three months ended December 31, 2022 vs. three months ended December 31, 2021.

The Commercial Banking Segment posted net income of $2,468,000 for Q4 2022 compared to $1,921,000 for Q4 2021.

The following are variances of note for the three months ended December 31, 2022 compared to the three months ended December 31, 2021:

• Net interest margin ("NIM") expanded by 47 basis points to 4.03% for Q4 2022 compared to
  3.56% for Q4 2021. The expansion was driven by the following:

1. The yield on our earning assets increased by 54 basis points, 4.35% as of Q4 2022 compared to 3.81% as of Q4 2021. The increase in our yield on earning assets is a result of improvement in our earning asset mix as well as the impact of the rise in interest rates during 2022.

1. Total U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") income recorded by the Commercial Banking Segment was $4,700 for Q4 2022 compared to $1,069,000 for Q4 2021.

• 1. The cost of interest bearing liabilities increased by 11 basis points to 0.55% for Q4 2022 compared to 0.44% for Q4 2021. The increase in our cost of funds was driven by an increase in the rate paid on variable rate debt as a result of the rising rate environment and market pressures on rates on deposit products. While the rate paid on time deposits decreased 30 basis points to 0.54% for Q4 2022 compared to 0.84% for Q4 2021, the rate paid on money market deposit accounts increased 22 basis points to 0.44% for Q4 2022 compared to 0.22% for Q4 2021.
• The Commercial Banking Segment did not record a provision for loan loss for Q4 2022 or Q4 2021. The lack of a provision for loan loss, during Q4 2022, was driven by stable macroeconomic conditions and credit quality remaining strong. While current economic challenges due to higher inflation and the speed at which interest rates are rising remain a risk to credit quality, we believe our current level of allowance for loan losses is sufficient.

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• The Commercial Banking Segment posted noninterest income of $825,000 for Q4 2022 compared to $812,000 for Q4 2021. The increase in noninterest income was driven by an increase in interchange fee income as consumer and business spending remained elevated during the quarter.
• The Commercial Banking Segment posted noninterest expense of $4,699,000 for Q4 2022 compared to $4,610,000 for Q4 2021. The increase in noninterest expense was driven by increased staffing costs and the impact of rising inflation on our expense base.

The Mortgage Banking Segment posted a net loss of $306,000 for Q4 2022 compared to net income of $442,000 for Q4 2021. Mortgage originations were $23,500,000 for Q4 2022, down 59.65% from $58,234,000 for Q4 2021. The drop in mortgage originations during Q4 2022 is the result of the sharp rise in mortgage rates during 2022 and the historically low inventory of homes for sale. As a result of the sharp drop in origination volume, the Mortgage Banking Segment has taken steps to right size its expense structure to minimize the impact to earnings.

Year ended December 31, 2022 vs. year ended December 31, 2021.

The Commercial Banking Segment posted net income of $8,778,000 for the year ended December 31, 2022, compared to $8,883,000 for the year ended December 31, 2021.

The following are variances of note for the year ended December 31, 2022 compared to the year ended December 31, 2021:

• NIM compressed by nine basis points to 3.67% for the year ended December 31, 2022 compared to 3.76% for the year ended December 31, 2021. The compression was driven by the following:

1. The Commercial Banking Segment recorded PPP fee income, net of deferred costs, of $977,000 for the year ended December 31, 2022 compared to $4,993,000 for the year ended December 31, 2021, through interest income as a result of normal amortization and the receipt of funds from PPP loans forgiven by the SBA. In addition, the Commercial Banking Segment recorded interest income associated with PPP loans of $81,000 for the year ended December 31, 2022 compared to $1,040,000 for the year ended December 31, 2021. Total income associated with PPP loans was $1,058,000 for the year ended December 31, 2022 compared to $6,033,000 for the year ended December 31, 2021.

1. The yield on our earnings assets decreased by 16 basis points, 3.92% for the year ended December 31, 2022 compared to 4.08% for the year ended December 31, 2021. The decrease in our yield on earning assets for the year ended December 31, 2022, was a result of the shift in our earning asset mix which was driven by an increase in our liquid assets (i.e. interest bearing due from other institutions and investment securities) due to the reduction in the PPP loan balances because of loan forgiveness, which was partially offset by growth in the core loan portfolio. The rise in interest rates during the

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year ended December 31, 2022 helped to offset the impact of the increased liquid assets.

• 1. The cost of interest bearing liabilities dropped by ten basis points to 0.44% for the year ended December 31, 2022 compared to 0.54% for the year ended December 31, 2021, because of the shift in our deposit mix from higher cost time deposits to lower cost relationship deposits. While we saw a reduction in our cost of interest bearing liabilities during the year, during the latter half of 2022 we started to experience a greater pressure on deposit pricing as a result of the rising rate environment and market pressures.
• The Commercial Banking Segment recorded a recovery of provision for loan loss expense of $300,000 and $500,000 for the year ended December 31, 2022 and December 31, 2021, respectively. The recovery of provision for loan loss expense, during the year ended December 31, 2022 and December 31, 2021, resulted from reductions in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. While current economic challenges due to higher inflation and the speed at which interest rates are rising remain a risk to credit quality, we believe our current level of allowance for loan losses is sufficient.
• The Commercial Banking Segment posted noninterest income of $3,335,000 for the year ended December 31, 2022 compared to $3,001,000 for the year ended December 31, 2021. The increase in noninterest income was driven by an increase in fee income as consumer and business spending picked up during the year ended December 31, 2022, and the recognition of $79,000 in gains on the sale of SBA loan guarantee strips during the year ended December 31, 2022, compared to no gains during the year ended December 31, 2021.
• The Commercial Banking Segment posted noninterest expense of $18,209,000 for the year ended December 31, 2022 compared to $17,256,000 for the year ended December 31, 2021. The increase in noninterest expense was primarily driven by the deferral of $580,300 in salary and benefits costs during the year ended December 31, 2021 associated with the volume of PPP loan originations during that period.

The Mortgage Banking Segment posted a net loss of $473,000 for the year ended December 31, 2022 compared to net income of $3,570,000 for the year ended December 31, 2021. Mortgage originations were $162,436,000 for the year ended December 31, 2022, down 45.60% from $298,605,000 for the year ended December 31, 2021. The drop in mortgage originations during the year ended December 31, 2022, is the result of the sharp rise in mortgage rates and the historically low inventory of homes for sale. As a result of the sharp drop in origination volume, the Mortgage Banking Segment has taken steps to right size its expense structure to minimize the impact to earnings.

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Pre-TaxPre-Provision Earnings by Segment

The following table presents the pre-tax,pre-provision ("PTPP") earnings by segment for the indicated periods (in thousands):

Pre-Tax Earnings by Segment

	YE 2022		YE 2021		Q4 2022		Q3 2022	Q2 2022		Q1 2022		Q4 2021
Pre-Tax Earnings by Segment
Commercial banking - PTPP (ex. PPP)(1)	$	9,535	4,822	$ 3,065	$ 2,762		$	2,189	$	1,519	$	1,364
Commercial banking - PPP Income		1,059	6,033	5	26			488			540			1,069
Commercial banking income before provision for (recovery of)
loan losses and income tax expense		10,594	10,855	3,070	2,788			2,677			2,059			2,433
Mortgage banking income (loss) before income tax expense
(benefit)		(599)	4,518	(388)	(27)			68			(252)			559
Income before provision for (recovery of) loan losses and income
tax expense		9,995	15,373	2,682	2,761			2,745			1,807			2,992
Provision for (recovery of) loan losses		(300)	(500)		-	100			-			(400)			-
GAAP income before income tax expense	$	10,295	$ 15,873	$ 2,682	$ 2,661		$	2,745	$	2,207	$	2,992

1. Non-GAAPfinancial measure.

The Commercial Banking Segment recorded PTPP earnings of $3,070,000 for Q4 2022 compared to $2,433,000 for Q4 2021. For the year ended December 31, 2022, PTPP earnings were $10,594,000, compared to $10,855,000 for the year ended December 31, 2021.

Excluding income from PPP loans, the Commercial Banking Segment's Q4 2022 PTPP earnings grew $1,701,000, or 124.72%, from Q4 2021 and the year ended December 31, 2022 PTPP earnings grew $4,713,000, or 97.74%, from the year ended December 31, 2021. The growth in the Commercial Banking Segment's PTPP earnings was the result of growth in the core loan portfolio and the investment portfolio and the reduction in our cost of interest bearing liabilities.

The Company believes that reporting PTPP earnings, excluding income from PPP loans, provides a useful illustration of the Company's core operating performance over the reported periods. PTPP earnings, excluding PPP loans, is determined by methods other than in accordance with U.S. generally accepted accounting principles ("GAAP"). Non-GAAP measures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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