Mars Bancorp : Annual Report

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A N N U A L R E P O R T

Focused on Growth

• Strong mortgage and home equity loan production
• • Strategically added mortgage sta in new market areas to increase volume
  • • Expanded commercial lending sta to add equipment lending expertise and volume
    • • Developed digital sales channel to expand geographic and demographic reach

T A B L E O F C O N T E N T S

1. Message to Shareholders

1. Financial Highlights
2. Independent Auditors' Report

Innovation and Technology

• Renegotiated core contract to reduce cost and add digital capabilities
• • Increased security technology for threat monitoring and secure storage
  • • New website includes added security with "dot bank" domain address
    • • New loan status dashboard provides secure electronic transfer of loan documents

Community Impact

• Continued focus on emergency and local needs
• • 2,000 hours serving charitable and civic organizations
  • • Engaged customers and community in donation drives
    • • Financial literacy programs provided to schools, libraries, and rst time homebuyers

1. Consolidated Balance Sheets
2. Consolidated Statements of Income

10	Consolidated Statements of Comprehensive Income	Commitment to Shareholders
• Net income increase of $129,000 or 6.5%
10	Consolidated Statements of Stockholders' Equity	• Asset growth of $40.9 million or 8.8%
• Increased cash dividend by $0.035 or 5.8%
11	Consolidated Statements of Cash Flows	• Executed a 20-for-1 stock split

1. Notes to Consolidated Financial Statements

1. Community Reinvestment Act Program
2. Board of Directors and Leadership Team

Cranberry Renovation

• Updated technology, security, and mechanical systems

• Complete renovation of interior space

• Addition of "signature" blue roof

Message to Shareholders

INTRODUCTION

The success of the company and bank in 2021 is detailed on the following pages, yet our story doesn't begin and end there. As was highlighted on the inside front cover of this report, and detailed in this letter, the bank's many accomplishments can be found in the way we fulfill our mission. As a true community bank, we strive to consistently deliver high quality results, through talented professionals, while providing an outstanding experience to our custom- ers, shareholders, community, and staff.

KEY ACCOMPLISHMENTS

The bank serves a critical role in the lives and work of individuals, families, businesses, charitable and civic orga- nizations, and communities. Our staff provides financial products and services, but more importantly oppor- tunities, support, knowledge, and insight to our customers and other stakeholders. We are pleased to play this important role and look forward to continuing to grow with our customers and communities.

Ongoing Pandemic Response

Precautions and mitigation strategies continued during 2021. The bank's management and staff operated at a high level, maximizing the efficiencies of new procedures and technologies that were implemented during the pan- demic. Our hybrid work model was developed to operate safely and effectively, mitigate spread, and increase productivity while ensuring the benefits of collaboration, teamwork, and relationship building to support the culture of our community bank. This model, which will be implemented permanently in 2022, continues to position the bank well in today's difficult employee talent retention/acquisition market and for ongoing success.

The bank also continued to provide assistance to both consumer and commercial customers. The bank managed on a case-by-case basis and encouraged conversations with customers who required assistance or loan adjustments. On the commercial side, the Paycheck Protection Program (PPP) phase two was still accepting applications at the beginning of 2021 and the forgiveness process for phase one was underway. As the bank participated in both phases of the program, we worked with customers to finalize loan applications and navigate the forgiveness process.

Focused on Growth

Throughout the year our focus was on maximizing opportunities to increase top-line revenue, while planning and building for the next phase of growth. This included mortgage, commercial, retail, and digital sales channels.

Due to low interest rates and very active housing market, the bank generated strong mortgage and home equity loan volume during 2021. The mortgage team also added a key management position to oversee and expand the processing and underwriting capabilities of the mortgage lending business while supporting additional future growth. The added capacity will allow for more origination from the mortgage, retail, and digital channels.

The bank also expanded mortgage volume by strategically hiring mortgage originators. In the second half of 2021 two additional mortgage originators, who have experience in areas outside the bank's traditional market, joined the bank. This includes eastern Butler, Armstrong, and Clarion Counties, and Beckley, West Virginia where the bank has opened a loan production office.

The bank also launched a new mortgage product in 2021. The Perfect Fit Mortgage helps low-to-moderate income buyers achieve homeownership. It features special rates and reduced fees for qualifying individuals and families. The Perfect Fit Mortgage adds to the existing resources the bank offers to help first time homebuyers, including education and access to downpayment grants.

During 2021, the commercial lending team activities continued to grow. While the team was supporting PPP loan application and forgiveness activity, they also increased customer interaction, networking, and calling efforts to build the commercial lending pipeline as businesses are planning for growth following the pandemic. The commercial lending team added a new lender with an extensive background in commercial equipment finance lending. More lenders are being recruited to expand both the geographic reach and the lending expertise of the commercial team.

The retail banking group, under the direction of Stephanie Embry, the bank's new SVP, Chief Retail Banking Offi- cer, worked very hard in 2021 to maintain a strong connection to the bank's customers as our branches remained open for business during the ongoing pandemic. The retail team assisted in the strong growth of core deposits, expanded home equity loan originations, and launched a new home equity line of credit product, the HELOC

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with Term Lock. This new product plus increased networking and referral activities resulted in more meaningful customer conversations and drove more loan volume through the branch system.

The bank continued to add to and expand its digital capabilities. Stephen L. Eckert, the bank's new SVP, Chief Marketing Officer, is further developing the digital sales channel. The bank launched a new website, rolled out online loan and deposit application functionality, and the bank's new BankOn-certified Perfect Fit deposit prod- uct. The Perfect Fit deposit account is a digital-first product designed to help younger consumers and the under- banked establish their finances online. Customers can open a Perfect Fit deposit account online along with the bank's other checking, savings, and certificate of deposit accounts. These and future digital products and services will help to expand both the geographic and demographic reach of the bank.

Innovation and Technology

During 2021, new technology was added to support sales, grow customer engagement, improve efficiencies, and maintain data security. In addition to the new bank website and account opening functionality, a new mobile-first loan origination web portal was launched with an improved user experience including messaging and document exchange functionality that makes remote application and loan processing more efficient and secure.

In 2021, the bank implemented a renegotiated contract with its core operating software provider. The new agreement lowered overall costs while adding new digital technologies to better serve customers and improve internal processes. It also positions the bank for future enhancements that are both internal and customer-facing.

Security is an ongoing effort, as cyber-attacks increase in both number and sophistication. The bank added to its security technology, including additional layers of threat monitoring and secure storage capabilities. We continued to improve our "human firewall" by training and testing staff continually to better identify and report potential threats.

The bank also offers free web-based threat awareness training for customers and the community and communicates known threats via the bank's social media channels. We also personally work with customers to help them avoid being defrauded. Additionally, the bank's new website uses the address Mars.Bank; the "dot bank" certified domain address makes it more difficult for criminals to create fake websites to scam customers.

Managing Risk

The bank continued to improve its operating processes and controls to properly support its growth initiatives. In 2021, the bank implemented an Enterprise Risk Management dashboard to identify and monitor key risk indicators, and to help understand, evaluate, and manage related mitigation efforts. This tool, along with the bank's ongoing commitment to risk management, ensures the bank's sustainability and compliance with internal control and regulatory requirements.

Cranberry Renovation

Perhaps the most visible accomplishment of 2021 was the complete renovation of the bank's Cranberry location. This office houses the Cranberry retail branch and the mortgage lending department. The renovation included a complete rebuild of the interior of the branch and mortgage area. Additionally, the existing roof was replaced with the bank's "signature" blue roof. The drive-through was rebuilt and refitted with new equipment. There were upgrades to windows and doors to maximize energy efficiency and a complete update of technology infra- structure. The result is a new space that is adaptable and able to serve both current and future customer needs.

Community Impact

Despite the limitations caused by COVID guidelines, the bank and its staff supported local charitable organizations through service as well as donations. The bank's staff provided roughly 2,000 hours of community service in 2021 and the bank again increased its giving to emergency and other local charitable efforts in response to the impact of the pandemic. We are gratified to serve in communities with many caring and effective organizations that help those in need. If you would like to learn more about our efforts, visit our website to review our community activities in more detail or follow us on social media where the bank shares how our customers and community can get involved with us in supporting local causes.

Each year the bank works to bring financial literacy tools to our communities. We believe providing education about money, budgeting, the use of credit, and banking is part of fulfilling our mission. The bank supplied financial literacy software to schools and presented in-person education events to children and teens. The bank's first time homebuyer online seminar also helps to educate potential buyers about the home buying and mortgage process.

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We are encouraged that the community recognizes the quality of our organization and its impact. The bank was again awarded the Best Bank Community Choice Gold Award by readers of the Cranberry Eagle.

Commitment to Shareholders

On January 29, 2021, the company increased its cash dividend by $0.035 or 5.8% to $0.635 per share on an annual basis providing a yield of 2.9% as of December 31, 2021. The board of directors recognize the importance of driving long-term value to shareholders and acknowledges the importance of the dividend as part of that value. The increase reflects the strong financial condition of the bank and confidence in our growth strategy.

The company also declared a twenty-for-one stock split in the form of a stock dividend that was payable to stockholders on June 18, 2021. The split benefits shareholders as the reduced trading price per share and the substantial increase in the number of shares outstanding supports price stability, enhances liquidity in the market, and potentially promotes increased existing and new investor interest.

FINANCIAL RESULTS

Net income for the current year totaled $2,114,000 as compared to $1,985,000 for the same period in the prior year, an increase of $129,000 or 6.5%. For 2021, the company generated earnings per share of $1.32, return on average assets of 0.44%, and return on average equity of 5.35%.

The key items impacting our financial performance were as follows:

Interest income totaled $12,384,000 for the twelve months ended December 31, 2021, compared to $12,685,000 for the same twelve-month period in 2020, a decrease of $301,000. This was primarily due to decreases in interest income on loans of $352,000 and interest income on interest-bearing deposits of $64,000. This was partially offset by an increase in interest income on investment securities of $115,000. The decrease in interest income on loans was primarily related to lower average loan balances outstanding along with lower yields earned. The decrease in interest-bearing deposits with banks was primarily related to lower yields earned. The increase in investment security interest income was primarily related to higher average investment security balances partially offset by lower yields earned.

Interest expense totaled $479,000 for the twelve months ended December 31, 2021, compared to $1,571,000 for the same twelve-month period in 2020, a decrease of $1,092,000. This was primarily due to decreases in interest expense from lower deposit costs of $932,000 and lower borrowings costs of $160,000. The decrease in deposit costs was primarily related to lower rates paid on deposits resulting from market rate decreases and reduced borrowing costs related to lower average borrowings outstanding partially offset by higher average deposit balances.

As a result, net interest income increased by $791,000 or 7.1% for the twelve months ended December 31, 2021, compared to the same period in 2020.

The net interest spread and net interest margin were 2.60% and 2.65% for the twelve months ended December 31, 2021, respectively, compared to 2.57% and 2.75% for the same period in the prior year.

Loans outstanding decreased by $0.8 million, or 0.3%, to $281.0 million at December 31, 2021, compared to $281.8 million at December 31, 2020. Deposits increased by $49.2 million, or 11.9%, to $463.4 million at December 31, 2021, compared to $414.2 million at December 31, 2020.

The provision for loan losses totaled $36,000 for the year ended December 31, 2021, compared to a $338,000 provision for the same period in the prior year. The Company's credit quality position at December 31, 2021, remained very strong, as evidenced by delinquencies at 0.04% of total loans, non-accrual loans at 0.01% of total loans, and the allowance for loan losses at 1.05% of total loans. Excluding the Paycheck Protection Program loans, which are 100% secured by the Small Business Administration, the allowance for loan losses at December 31, 2021, was 1.06% of total loans.

Non-interest income decreased by $679,000 or 19.6% for the twelve months ended December 31, 2021, as compared to the same period in 2020. The primary reasons for this decrease were lower residential mortgage sale and processing income of $538,000, lower net gain on sales of available for sale securities of $60,000, lower title insurance fees of $54,000, lower Federal Home Loan Bank of Pittsburgh stock dividends of $53,000, and lower service charges on deposits including NSF Fees of $19,000. These decreases were partially offset by higher ATM/ Debit Card-related fees of $60,000.

Non-interest expense increased by $229,000 or 1.91% for the twelve months ended December 31, 2021, as compared to the same period in 2020, primarily related to increases in employee benefit costs of $118,000, equipment expense of $92,000, salaries of $88,000, charitable expense of $67,000, FDIC insurance costs of $61,000, fixed rate

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