NORWOOD FINANCIAL CORP

Net loss for the Company for the year ended December 31, 2024 was $160,000, compared to the net income of $16,759,000 earned in the year ended December 31, 2023. Losses per share on a fully diluted basis were $0.02 for 2024 compared to earnings per share on fully diluted basis of $2.07 in 2023. The return on average assets for the year ended December 31, 2024, was (0.01)%, and the return on average equity was (0.09)%, compared to 0.79% and 9.67%, respectively, for the year ended December 31, 2023. Net interest income increased $124,000 for the year ended December 31, 2024.

For the year ended December 31, 2024, fully taxable equivalent (“fte”) net interest income totaled $63,010,000, an increase of $194,000 from the year ended December 31, 2023 total. Average loans outstanding increased $80.5 million in 2024, which contributed to an increase in interest income (fte) of $14.3 million. During the year ended December 31, 2024, average interest-bearing deposits increased $115.5 million, which contributed to an increase in interest expense of $16.3 million. The cost of borrowed funds increased $611,000 in 2024, compared to the prior year due to an increase in borrowings. During the year ended December 31, 2024, the resulting net interest spread (fte) decreased to 2.17% compared to 2.47% at December 31, 2023, as a 0.56% increase in the yield earned was offset by a 0.86% increase in the cost of funds.

Total other income was a loss of $11,151,000 for the year ended December 31, 2024, compared to income of $8,124,000 in the prior year, a decrease of $19,275,000. Net realized losses on sales of securities increased $19,753,000 to $19,962,000 during the year ended December 31, 2024, primarily as a result of the repositioning of the securities portfolio in December 2024, while gains on the sale of foreclosed real estate owned and gains on sale of loans increased $84,000 in aggregate. Earnings and proceeds on life insurance policies increased $44,000 in 2024 compared to 2023, while all other items of other income increased $350,000, net, in 2024.

During the year ended December 31 ,2024, other expenses were $48,625,000, compared to $43,497,000 for the same period in 2023, an increase of $5,128,000. Salaries and benefits costs increased $1,453,000 in 2024, while data processing costs increased $1,178,000. Professional fees increased $497,000. All other operating expenses increased $2,000,000, net, in 2024. Income tax benefit for the 2024 year totaled $98,000, compared to income tax expense of $4,387,000 from the 2023 year ended. The effective tax rate in 2024 was 38.0% compared to 20.7% in 2023.

The following table sets forth changes in net income (loss) (in thousands):

NET INTEREST INCOME

Net interest income (fte) totaled $63,010,000 for the year ended December 31, 2024 compared to $62,816,000 for 2023, an increase of $194,000. The resulting fte net interest spread and net interest margin were 2.17% and 2.91%, respectively, in 2024 compared to 2.47% and 3.06%, respectively, in 2023.

Interest income (fte) for the year ended December 31, 2024 totaled $113,399,000 compared to $96,289,000 in 2023. The fte yield on average earning assetswas 5.24%, increasing 56 basis points from the 4.68% reported last year. The tax-equivalent yield on total loans was 6.06% in 2024, increasing from 5.46% in 2023, while average loans outstanding increased $80.5 million, resulting in an increase in interest income (fte) from loans of $14.3 million. The yield on securities increased 17 basis points in 2024 due primarily to higher yields on new securities purchased during the year ended December 31, 2024. During the year ended December 31, 2024, while average securities outstanding decreased $14.1 million, interest income (fte) from securities outstanding, increased $486,000 from the year ended December 31, 2023.

Interest expense was $50,389,000 for the year ended December 31, 2024, which resulted in an average cost of interest-bearing liabilities of 3.07% compared to total interest expense of $33,473,000 during the year ended December 31, 2023, with an average cost of 2.21%. Total interest-bearing deposits cost was 2.94% for the year ended December 31, 2024, which was an increase of 98 basis points over the 2023 fiscal year ended. The increase in cost was due primarily to time certificates of deposit that repriced to current market rates upon maturity, resulting in an increase in the interest rate paid from 3.25% in 2023 to 4.18% in 2024, along with an increase in the interest-bearing demand and money market from 1.25% in 2023 to 2.21% in 2024.

PROVISION FOR CREDIT LOSSES

Theprovision for credit losses was $2,673,000 in 2024 compared to $5,548,000 in 2023. Net charge-offs for the year ended December 31, 2024 decreased to $1,671,000 from net charge-offs of $6,078,000 for the year ended December 31, 2023.

The Company makes provisions for, or releases of, credit losses in an amount necessary to maintain the allowance for credit losses at an acceptable level under the current expected credit loss methodology analysis.

OTHER INCOME

Total other income was a loss of $11,151,000 for the year ended December 31, 2024, compared to income of $8,124,000 for the year ended December 31, 2023, a decrease of $19,275,000. Net realized losses on sales of securities increased $19,753,000 to $19,962,000 during the year ended December 31, 2024, primarily as a result of the repositioning of the securities portfolio in December 2024. The increase in losses on sales of securities was partially offset by an increase of $145,000 in loan related service fees, an increase in gains on sale of loans of $132,000, and an increase in commission on mutual funds and annuities of $111,000. All other items of other income increased $90,000 during the year ended December 31, 2024.

Other Income (dollars in thousands)

For the year ended December 31

The following table shows total other income:

OTHER EXPENSES

Other expenses totaled $48,625,000 for the year ended December 31, 2024, compared to $43,497,000 in the 2023 fiscal year. For the year ended December 31, 2024, salaries and employee benefits increased $1,453,000 to $25,018,000, while data processing costs increased $1,178,000 million to $4,520,000, as compared to the year ended December 31, 2023. Professional fees increased

$497,000 to $2,173,000 during the year ended December 31, 2024, compared to $1,676,000 for the year ended December 31, 2023. During the year ended December 31, 2024, all other operating expenses increased $2,000,000, net. The Company’s efficiency ratio, which measures total other expenses as a percentage of net interest income (fte) plus other income excluding losses on securities sales was 68.5% in 2024 compared to 62.1% in 2023. Please see “Non-GAAP Financial Measures” later in this discussion for more information on this Non-GAAP Financial Measure.

Other Expenses (dollars in thousands)

For the year ended December 31

The following table shows total other expenses:

INCOME TAXES

Income tax benefit for the year ended December 31, 2024 totaled $98,000, which resulted in an effective tax rate of 38.0%, compared to an income tax expense of $4,387,000 and 20.7% for 2023.

CAPITAL AND DIVIDENDS

Total stockholders’ equity as of December 31, 2024, was $213.5 million, compared to $181.1 million as of December 31, 2023. The increase in stockholders’ equity was primarily due to the receipt of approximately $28.1 million in net proceeds from the Offering, partially offset by $10.2 million in cash dividends declared. The repositioning of the Company’s Available-for-Sale securities portfolio during the year ended December 31, 2024, impacted the fair value of the portfolio, and contributed to $14.2 million increase in accumulated other comprehensive income. As of December 31, 2024 the Company had a leverage capital ratio of 9.36%, a Tier 1 risk-based capital ratio and a common equity Tier 1 risk-based capital ratio of 12.35%, and a total risk-based capital ratio of 13.45%, compared to 9.00%, 11.99% and 13.06%, respectively, at December 31, 2023.

NON-GAAP FINANCIAL MEASURES

This Annual Report contains or references fully taxable-equivalent interest income and net interest income, which are non-GAAP financial measures. Tax-equivalent interest income and net interest income are derived from GAAP interest income and net interest income using a marginal tax rate of 21%. We believe the presentation of interest income and net interest income on a fully taxable-equivalent basis ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

The following table reconciles net interest income to net interest income on a fully taxable-equivalent basis:

The following table provides a reconciliation between certain GAAP financial measures (net interest income and other expense) and the related non-GAAP measures to derive the efficiency ratio measure:

CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES

(Tax-Equivalent Basis, dollars in thousands)

(1)Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.

(2)Average balances have been calculated based on daily balances.

(3)Loan balances include non-accrual loans and are net of unearned income.

(4)Loan yields include the effect of amortization of purchased credit marks and deferred fees net of costs.

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RATE/VOLUME ANALYSIS

The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.

Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.