A Letter from the President

During the first and second quarters the Bank was again a leader in round two of the SBA Paycheck Protection Program (PPP) employing a cloud based application and forgiveness platform and dedicated staff to extend over $45 million in loans to both existing and new customers. This effort solidified existing business relationships and created a number of new business opportunities for the future. We also continued to work with borrowers in severely impacted industries granting deferrals under the CARES Act which I am pleased to indicate all returned to their contractual repayment schedules during the year.

Throughout the year the Bank focused on systematically rolling out and refining deposit account features, mobile access, digital payment options and cash management solutions, enhanced security features such as debit card controls and Positive Pay for businesses all made possible by the 2020 FIS core system conversion. These activities were well received by both our retail and business customers and we experienced exponential growth in digital utilization reflecting an increased preference for remote banking options. NCB also continued to build upon our community ties and relationships focusing on financial support for community non-profits which again included five generous year-end contributions in lieu of holding the Bank’s annual Holiday Open House.

In March management took a major step in positioning the Bank for future growth by obtaining the necessary approvals for the formation of National Capital Bancorp, Inc. to serve as a holding company for the Bank. This action affords the Bank better operating and capital flexibility and the potential to engage in new business

lines. Following this action, a subordinated debt offering was initiated by the Holding Company to take advantage of historic low interest rates and obtain funding which can be down streamed to the Bank as Tier 1 capital to support growth on a non-dilutive basis to shareholders. The offering was well received with standing orders oversubscribed resulting in a $14 million raise at 3.75%. After issuance costs $8.8 million of these funds were subsequently down streamed to the Bank with $4.5 million held at the Holding Company level.

While the COVID-19 pandemic’s infection rates and health implications moderated during the middle of the year the business climate remained cautious and interest rates remained low. This negatively impacted new borrowing and resulted in significant refinancing activity of residential and commercial mortgages creating pressure on bank net interest margins industry wide. In turn, this created a rush to quality and increased competition in both the loan and bond markets as financial institutions chased yield on earning assets.

The confluence of these factors resulted in abundant balance sheet liquidity which management was challenged to deploy to minimize net interest margin compression. To address this challenge management undertook an aggressive bond purchase program focused on maximizing yield without elevating credit, concentration, and duration risk. As a result, over $108 million in bond purchases were executed during 2021 at an average transaction size of $1-1.5 million.

As noted, our consolidated financial results for 2021 reflected a mixed bag in terms of balance sheet growth but achieved a solid increase in earnings as a result of the recognition of significant PPP fee income upon forgiveness by the SBA, management’s efforts to maintain net interest earnings through an aggressive program of bond purchases and a steady focus on cost containment. Total assets at FYE 2021 of $734.7 million increased 19.4% from the prior year driven by a 46.6% increase in the securities portfolio to $179.1 million offsetting a 10.1% decline in total loans to $396.5 million. Total deposits experienced a healthy 23.4% increase to $657.1 million but, included a year-end customer deposit of $55 million which was subsequently transferred out in January 2022. As noted earlier, our net interest margin came under pressure from historic low interest rates and the lack of higher yielding lending alternatives however, the decline to 3.22% was considered a managed success given the year’s challenges. As a result of the asset growth and aggressive efforts to manage the impact to the net interest margin, net interest income rose 9.7% to $20.2 million. This increase along with improved non-interest income (excluding 2020 securities gains) from National Capital Financial Group and the ability to reduce allocations to the allowance for loan losses enabled NCB to generate $4.65 million in consolidated net income for the year, a 75.5% increase over 2020.

I continue to be awed and impressed by the resilience and teamwork NCB’s dedicated management and staff demonstrated in addressing the challenges faced in 2021 and their ability to pivot and find opportunities to make the best of circumstances from an operating and earnings perspective. I also feel fortunate and humbled to be able to lead a team with this kind of talent and resourcefulness. As we look toward 2022 which I suspect will have its own set of challenges as inflationary pressures, rising interest rates and supply line issues promise to have a business impact I remain optimistic that better times are ahead, and that NCB is well equipped to take advantage of them.

In closing, I would like to thank our customers for the consistent loyalty and support they demonstrate for the Bank and our shareholders for the confidence you continue to place in us.