National Capital Bancorp : 2021 Annual & Financial Report

TABLE OF CONTENTS

3
Financial Highlights
4
Letter from the President
6
National Links Trust
8
Red Peg Marketing
10
The GA Team
12	Cornerstone Schools of
Washington
14
Tech24
16	Board of Directors &
Executive Management
18
Bank Officers
19
Offices and Branches

National Capital Financial Group's securities and advisory services through Cetera Advisor Network LLC member FINRA, SIPC, a broker/dealer and a registered investment adviser. Cetera is under separate ownership from any other named entity. 316 Pennsylvania Avenue, SE, Suite 402, Washington, DC 20003. Securities and insurance products are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed

* Not a deposit * Not insured by a federal government agency. Cetera Advisor Networks LLC is not affiliated with the financial institution where investment services are offered.

About Our Bank

The National Capital Bank of Washington, a wholly owned subsidiary of National Capital Bancorp, Inc. is a full-service community bank serving the greater Washington, D.C. metropolitan area. Founded in 1889, we are proud to be Washington's oldest bank.

NCB is headquartered on Capitol Hill with additional branches in Friendship Heights in Northwest D.C., in the Fox Hill community of Bethesda, Maryland and the Courthouse neighborhood in Arlington, Virginia.

We also operate residential mortgage and commercial lending offices and a wealth management services division, National Capital Financial Group. Founded on the principle that "customers come first," our employees are dedicated to making every transaction an exceptional and rewarding experience.

NCB Product & Service Offerings Include:

Commercial loans

Commercial real estate & construction financing

Equipment leasing

Residential mortgage loans

Personal and business deposit accounts

Mobile banking services for consumers and businesses

Treasury management solutions

Fraud monitoring Solutions

Financial planning & investment management

National Capital Bancorp, Inc. Consolidated Financial Highlights

December 31, 2021 and 2020

Year ended December 31, Dollars in thousands, except per share data

ANNUAL RESULTS

Net Income

Net Income per Common Share* Common Dividends Paid per Share

PERFORMANCE RATIOS BASED ON NET INCOME

Return on Average Assets

Return on Average Common Shareholders' Equity Net Interest Margin

Cost Efficiency Ratio

SELECTED AVERAGE BALANCES

Total Assets

Total Earning Assets Total Gross Loans Total Deposits

Non Interest

Interest

Total Borrowings

Total Stockholders' Equity

SELECTED YEAR-END BALANCES

Total Assets

Total Earning Assets Total Gross Loans Allowance for Loan Losses Total Deposits

Non Interest

Interest

Total Borrowings

Total Shareholders' Equity Total Shares of Common Stock

CAPITAL RATIOS

Average Shareholders' Equity to

Average Assets at Year-end Shareholders' Equity to

Assets at Year-end

COMMON STOCK, PER SHARE:

Book Value

Tangible Book Value

Market Price

*Average Shares Outstanding

2021

2020 % Change

$4,646 16.23 2.20

$2,648 75.5%

9.26 75.3%

2.20 0.0%

0.71% 8.57% 3.22% 75.25%

0.46% 56.7%

5.12% 67.5%

3.29% -2.1%

75.68% -0.6%

$650,090

$580,528 12.0%

627,866

560,463 12.0%

449, 562

423,865 6.1%

569, 681

497,895 14.4%

205, 191

160,649 27.7%

364, 490

337,246 8.1%

23,175

28,146 -17.7%

54,206

51,746 4.8%

$734,709

$615,294 19.4%

712, 351

592,629 20.2%

396, 453

440,819 -10.1%

5,959

6,111 -2.5%

657,116

532,444 23.4%

268,530

171,909 56.2%

388,586

360,535 7.8%

19,952

25,576 -22.0%

54,854

53,449 2.6%

286,457

286,057 0.1%

8.34%

8.91% -6.5%

7.47%

8.69% -14.1%

$191.49 $191.49 $197.00

$186.85 2.5%

$186.85 2.5%

$163.00 20.9%

286,328

285,999 0.1%

A Letter from the President

To Our Stockholders, Customers and Friends,

In 2021 National Capital Bank's activities predominantly revolved around three themes: continuing to assist our customers and communities weather the impacts of the COVID-19 pandemic, preparing the Bank to resume its strategic plan of balance sheet growth and addressing the pandemic's residual effects on the economy and business activity.

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 businesslines. 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.

On the bright side NCB's asset quality remained strong and management's conservative strategy for the allowance for loan losses positioned the Bank with strong reserves to weather any future credit issues and resume loan growth without an initial drag on earnings. However, the acceleration of PPP forgiveness during the year (turning loans into grants) and the inability to achieve new loan growth (particularly after the advent of the Omicron variant during the fourth quarter which heightened pandemic concerns) negatively impacted loan totals. At the same time deposit growth flourished in part due to higher cash levels being maintained by businesses, the impact of PPP and other Federal assistance program loan proceeds and an increase in new account relationships.

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 purchasesand 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.

Richard B. (Randy) Anderson, Jr.

President and Chief Executive Officer February 21, 2022

A Partnership that Will Go the Distance

An RFP process led the National Links Trust nonprofit organization to entrust National Capital Bank with their multi-year restoration of DC's historic golf courses.

National Links Trust, a nonprofit organization dedicated to protecting and promoting accessible and engaging municipal golf courses across America, is in the midst of their largest project to date right in the heart of Washington D.C. As operators and managers of the East Potomac Park, Langston and Rock Creek golf courses, all part of the National Parks System, National Links Trust has committed to renovating all three facilities over the next seven to ten years, requiring a long-term partnership with a banking partner they can trust.

"We were looking for a bank with local roots who understood the needs of the community and our business needs," said Sinclair Eaddy, President and Chief Executive Officer of National Links Trust. "We felt like our banker Richard Sobonya, National Capital Bank's Senior Vice President and Construction Lending Director, understood our commitment to the community as a nonprofit and that our long-term plans required unique funding."

National Links Trust worked with Rich and his team to secure both a line of credit and a term loan to finance the purchase of the assets and equipment from the previous operator of the courses. "The equipment purchase was a vital part of our ability to keep the golf courses operating smoothly from one owner to the next, and the process with Rich was seamless," says Sinclair. "From a financial standpoint it was critical as we look forward to these major renovations that we complete the financing in a timely manner, and National Capital Bank was a very willing partner to listen to us and make a fair credit offer that we were delighted to accept."

The NCB Partnership

Along with the line of credit and equipment financing, National Links Trust utilizes digital treasury management services including ACH, online wire transfers, mobile deposit and online bill pay, but there's one particular service that gives John Hong, Treasurer of National Links Trust, extra piece of mind. "We have a fiduciary responsibility to our donors that we will protect the funds we have, so their Positive Pay security feature on our account that prevents fraud definitely helps me sleep at night."

I believe we have strong relationships at NCB from the very top of the bank to the people doing the day-to-day services. Everyone at the bank is engaged, they know the importance of this relationship and they're willing to put in the work.

John Hong

Treasurer and Board Member National Links Trust

Brad Nierenberg has spent the last 27 years creating the type of company he'd want to work for. At Red Peg Marketing, an experiential marketing agency that creates fully immersive events for clients including Geico and Yuengling, having an employee-first culture and positive workplace is their top priority.

"As a smaller independent organization, I believe in the importance of investing in your people and doing the little things that mean a lot," said Brad. He knew that finding a banking partner with a similar people-first attitude would be the best fit for Red Peg, which proved to be true during what he and his team described as 'the worst time in our lives'.

"As a live events business, everything came to a halt for us in 2020, but NCB played a huge role in helping us secure stimulus funding from the government and with

got lost in the shuffle." Brad and Eric believe that access to executive leadership and proactive communication helped Red Peg to grow and thrive.

"Our personal banker Renee Aldrich, who is a member of the executive leadership team and NCB's Chief Commercial Lending Officer, has helped us with term loans and a line of credit to finance a new fleet of vehicles and to launch an exciting new drone company which really helped us grow our main business," said Eric. "

The new drone show company set the stage to illuminate the sky at major events including Super Bowl LVI. "It was a complex partnership arrangement and Renee and her team committed to structuring the financing for our success. They trust that we know how to grow our business and have confidence in us. That's a great feeling."

They Take Great Care of Us

As an experiential agency centered on live events, pandemic-related shutdowns hit Red Peg Marketing especially hard, but NCB helped them navigate the storm and fuel their growth.

NCB has a great trust in our vision and where we want to go. We know we have a trusted partner that's going to help us work through how we're going to get there.

Brad Nierenberg

CEO and Founder, Red Peg

managing our own internal capital," said Eric Hansen, CFO and COO. "They were a true advisor helping us out the entire way with a level of service that you just don't get anywhere else. In addition to providing critical financing for our business operations, they recommended and set up digital and mobile services to help us efficiently manage our daily banking activities. We never

The NCB Partnership

In addition to commercial financing solutions, Red Peg is a super-user of NCB's digital and mobile banking services including remote deposit capture, ACH origination, Positive Pay, mobile wallet, online bill pay and more - all designed for efficient access and management of daily banking activities.