Village Bank and Trust Financial : Reports Earnings for the Second Quarter of 2021

News Release

For Immediate Release

VILLAGE BANK AND TRUST FINANCIAL CORP.

REPORTS EARNINGS FOR THE SECOND QUARTER OF 2021

Midlothian, Virginia, July 29, 2021. Village Bank and Trust Financial Corp. (the "Company") (Nasdaq symbol: VBFC), parent company of Village Bank (the "Bank"), today reported unaudited results for the second quarter of 2021. Net income for the second quarter of 2021 was $3,294,000, or $2.24 per fully diluted share, compared to net income for the second quarter of 2020 of $2,335,000, or $1.61 per fully diluted share. For the six months ended June 30, 2021, net income was $7,191,000 or $4.90 per fully diluted share, compared to net income for the six months ended June 30, 2020 of $3,233,000, or $2.22 per fully diluted share.

"We are pleased with our second quarter results," commented Jay Hendricks, President and CEO. "Highlights from the quarter centered around loan forgiveness from the U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP"), robust mortgage activity, and a reserve release attributable to an improving economic outlook. Our commercial banking segment successfully generated core loan growth (excluding PPP) of approximately 5% and 7% for the quarter and year-to-date, respectively. We remain disciplined in managing our net interest margin ("NIM") as balance sheet liquidity continues to grow."

Financial Highlights

Highlights for the second quarter of 2021 are as follows:

	Three Months Ended	Six Months Ended
Metric	June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
Consolidated
Return on average equity	22.79%	20.12%	25.81%	14.36%
Return on average assets	1.85%	1.34%	2.05%	1.05%
Commercial Banking Segment
Return on average equity	17.54%	12.47%	17.32%	9.05%
Return on average assets	1.42%	0.83%	1.37%	0.66%
Net interest income to average assets	3.53%	2.78%	3.58%	2.97%
Provision to average assets	(0.28%)	0.17%	(0.14%)	0.23%
Noninterest income to average assets	0.41%	0.33%	0.41%	0.42%
Noninterest expense to average assets	2.41%	1.85%	2.36%	2.32%
Mortgage Banking Segment
Return on average equity	5.25%	7.65%	8.50%	5.31%
Return on average assets	0.43%	0.51%	0.67%	0.39%
Net income before tax to average assets	0.54%	0.65%	0.85%	0.49%

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Operating Results

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

GAAP Operating Results by Segment

	Q2 2021	Q1 2021	Q4 2020	Q3 2020	Q2 2020
Pre-tax earnings by segment
Commercial banking	$	3,236		$	2,998		$	2,056		$	1,377		$	1,876
Mortgage banking		961		2,035		1,900		1,569		1,124
Income before income tax expense		4,197			5,033		3,956		2,946		3,000
Commercial banking income tax expense		701		709		504		348		429
Mortgage banking income tax expense		202		427		400		329		236
Net income	$	3,294		$	3,897		$	3,052		$	2,269		$	2,335

Three months ended June 30, 2021 vs. three months ended June 30, 2020.

The Commercial Banking Segment posted net income of $2,535,000 for Q2 2021 compared to $1,447,000 for Q2 2020.

The following are variances of note for the three months ended June 30, 2021 compared to the three months ended June 30, 2020:

• NIM expanded by 82 basis points to 3.84% for Q2 2021 compared to 3.02% for Q2 2020. The expansion was driven by the following:

1. The yield on average earning assets expanded by 40 basis points, 4.19% for Q2 2021 vs. 3.79% for Q2 2020, primarily because of the recognition of income associated with the origination and forgiveness of PPP loans.

1. As of June 30, 2021, the Commercial Banking Segment had originated $185,137,000 in first round PPP loans and $77,539,000 in second round PPP loans. These loans carry a stated interest rate of 1.00% and the Commercial Banking Segment earns a fee from the SBA of 1% to 5% depending on the size of the loan. The fee is amortized, based on the term of the loans, through net income, net of deferred costs associated with the origination of these loans. During Q2 2021, the Commercial Banking Segment recognized $1,320,000 in SBA fee income, net of deferred costs through interest income as a result of normal amortization and the receipt of funds from loans forgiven by the SBA. In addition, the Commercial Banking Segment recognized $348,000 in interest income associated with these loans during Q2 2021. PPP income of $1,668,000, during Q2 2020, had a 19 basis points impact on the yield of average earnings assets. Adjusting solely for the impact of PPP income recognized during Q2 2021 our NIM would have been 3.56%.

1. The cost of interest bearing liabilities dropped by 56 basis points to 0.59% for Q2 2021 compared to 1.15% for Q2 2020, as a result of the Commercial Banking Segment's continued efforts to build low cost relationship deposits and its disciplined approach to deposit pricing. Low cost relationship deposits (i.e. interest

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checking, money market, and savings) grew by $69,538,000, or 30.07%, from Q2 2020, while higher cost time deposits decreased by $51,572,000, or 37.89%, from Q2 2020. We were able to decrease the cost of money market deposit accounts by 50 basis points, 0.28% for Q2 2021 vs. 0.78% for Q2 2020, and time deposits accounts by 46 basis points, 1.17% for Q2 2021 vs. 1.63% for Q2 2020. We believe that there continues to be opportunities through our funding mix and pricing strategies to lower our cost of funds further.

• The Commercial Banking Segment recorded a recovery of provision expense of $500,000 for Q2 2021 compared to a provision expense of $300,000 for Q2 2020. The recovery of provision for Q2 2021 resulted from a reduction in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. The provision expense for Q2 2020 was the result of an increase in the qualitative factors driven by economic uncertainty surrounding the COVID-19 pandemic. While the Delta variant of the COVID-19 virus remains 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 $733,000 for Q2 2021 compared to $571,000 for Q2 2020. The increase in noninterest income was driven primarily by an increase in interchange fee income as macroeconomic conditions continued to improve and consumer spending picked up during the quarter.
• The Commercial Banking Segment posted noninterest expense of $4,287,000 for Q2 2021 compared to $3,232,000 for Q2 2020. The increase in noninterest expense was driven primarily by the deferral of $1,052,000 in salary and benefits costs during Q2 2020 compared to the deferral of $88,900 during Q2 2021 associated with the volume related to the origination of PPP loans during those periods.

The Mortgage Banking Segment posted net income of $759,000 for Q2 2021 compared to $888,000 for Q2 2020. Mortgage originations were $73,145,000 for Q2 2021, down 16.6% from $87,733,000 for Q2 2020. The Mortgage Banking Segment continues to maintain a strong pipeline of purchase money loans going into the second half of 2021. Mortgage rates experienced a slight rise during the first half of 2021 which has softened the refinance market; however, the bigger risk to mortgage earnings is the historically low inventory of homes for sale.

Six months ended June 30, 2021 vs. six months ended June 30, 2020.

The Commercial Banking Segment posted net income of $4,824,000 for the six months ended 2021 compared to $2,038,000 for the six months ended 2020.

The following are variances of note for the six months ended June 30, 2021 compared to the six months ended June 30, 2020:

• NIM expanded by 63 basis points to 3.88% for the six months ended June 30, 2021 compared to 3.25% for the six months ended June 30, 2020. The expansion was driven by the following:

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1. The yield on average earning assets expanded by 12 basis points, 4.25% for Q2 2021 vs. 4.13% for Q2 2020, primarily because of the impact of the recognition of income associated with the origination and forgiveness of PPP loans.

1. During the six months ended June 30, 2021, the Commercial Banking Segment recognized $2,825,000 in PPP fee income, net of deferred costs through interest income as a result of normal amortization and the receipt of funds from loans forgiven by the SBA. In addition, the Commercial Banking Segment recognized $728,000 in interest income associated with these loans during the six months ended June 30, 2021. PPP income of $3,563,000, during the six months ended June 30, 2020, had a 24 basis points impact on the yield of average earnings assets. Adjusting solely for the impact of PPP income recognized during the six months ended June 30, 2021 our NIM would have been 3.54%, which is consistent with our NIM prior to the onset of the COVID-19 pandemic.

• 1. The cost of interest bearing liabilities dropped by 65 basis points to 0.62% for the six months ended June 30, 2021 compared to 1.27% for the six months ended June 30, 2020, as a result of the Commercial Banking Segment's continued efforts to build low cost relationship deposits and its disciplined approach to deposit pricing. Low cost relationship deposits (i.e. interest checking, money market, and savings) grew by $69,538,000, or 30.07%, from June 30, 2020, while higher cost time deposits decreased by $51,572,000, or 37.89%, from June 30, 2020.We were able to decrease the cost of money market deposit accounts by 49 basis points, 0.31% for the six months ended June 30, 2021 vs. 0.80% for the six months ended June 30, 2020, and time deposits accounts by 56 basis points, 1.21% for the six months ended June 30, 2021 vs. 1.77% for the six months ended June 30, 2020. We believe that there continues to be opportunities through our funding mix and pricing strategies to lower our cost of funds further.
• The Commercial Banking Segment recorded a recovery of provision expense of $500,000 for the six months ended June 30, 2021 compared to a provision expense of $700,000 for the six months ended June 30, 2020. The recovery of provision for the six months ended June 30, 2021 resulted from a reduction in the qualitative factors which was driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. The provision expense for the six months ended June 30, 2020 was the result of an increase in the qualitative factors driven by economic uncertainty surrounding the COVID-19 pandemic. While the Delta variant of the COVID-19 virus remains 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 $1,456,000 for the six months ended June 30, 2021 compared to $1,304,000 for the six months ended June 30, 2020. The increase in noninterest income was driven primarily by an increase in interchange fee income as macroeconomic conditions continued to improve and consumer spending picked up during the quarter.

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• The Commercial Banking Segment posted noninterest expense of $8,276,000 for the six months ended June 30, 2021 compared to $7,149,000 for the six months ended June 30,
  2020. The increase in noninterest expense was driven primarily by the following:

1. The deferral of $1,052,000 in salary and benefits costs during the six months ended

June 30, 2020 compared to the deferral of $580,300 during the six months ended June 30, 2021 associated primarily with the volume of originations of PPP loans during those periods.

1. The recognition of the gain on sale of OREO totaling $7,800 for the six months ended June 30, 2021 compared to a gain $175,000 for the six months ended June

30, 2020.

1. The accrual of $126,300 for an expected loss on the prior sale of an SBA loan that defaulted during the six months ended June 30, 2021.

The Mortgage Banking Segment posted net income of $2,367,000 for the six months ended June 30, 2021 compared to $1,195,000 for the six months ended June 30, 2020. Mortgage originations were $164,349,000 for the six months ended June 30, 2021, up 15.7% from $142,105,000 for the six months ended June 30, 2020. The Mortgage Banking Segment continues to take advantage of the accommodative rate environment while maintaining a strong pipeline of purchase money loans going into the second half of 2021. Mortgage rates experienced a slight rise during the first half of 2021 which has softened the refinance market; however, the bigger risk to mortgage earnings is the historically low inventory of homes for sale.

Loans and Asset Quality

The following table provides the composition of our gross loan portfolio at the dates indicated (in thousands):

	Gross Loans Outstanding
Loan Type			Q2 2021	Q1 2021	Q4 2020	Q3 2020	Q2 2020
C&I + Owner occupied commercial real estate	$	151,444		$ 149,289	$ 144,198	$ 134,799		$ 138,121
PPP Loans			97,617		159,769	136,674	185,137	184,478
Nonowner occupied commercial real estate			140,182		134,646	131,440	127,396	129,943
Acquisition, development and construction			44,073		29,600	29,569	33,337	31,876
Total commercial loans			433,316		473,304	441,881	480,669	484,418
Consumer/Residential			86,533		86,817	86,580	85,766	88,863
Student			28,601		29,062	29,657	30,656	31,594
Other			3,214	2,994	2,885	2,998	3,118
Total loans		$	551,664		$ 592,177	$ 561,003	$ 600,089		$ 607,993

Total loans, excluding PPP loans, increased by $21,639,000, or 5.00%, from Q1 2021, and increased by $30,532,000, or 7.21%, from Q2 2020. Variances of note are as follows:

• The core commercial loan portfolio grew by $22,164,000, or 7.07%, from Q1 2021 and increased by $35,759,000, or 11.92%, from Q2 2020. Core loan growth was a product of our continued success in capitalizing on new PPP relationships, as well as improving economic activity. While we are seeing growth throughout the portfolio, Q2 2021 growth was primarily attributable to non-speculativeowner-occupied construction. Our pipeline

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