NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(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)Annualized

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

(5)Loan yields include the effect of amortization of 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.

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Comparison of Operating Results for the Three Months Ended September 30, 2024 to September 30, 2023

General

For the three months ended September 30, 2024, net income totaled $3,844,000 compared to net income of $4,119,000 in the three months ended September 30, 2023. The decrease in net income for the three months ended September 30, 2024, was due primarily to a $463,000 increase in the provision for credit losses. Earnings per share for the three-months ended September 30, 2024 were $0.48 per share for basic shares and fully diluted shares, compared to $0.51 per share for basic shares and for fully diluted shares for the three months ended September 30, 2023. The resulting annualized return on average assets and annualized return on average equity for the three months ended September 30, 2024 were 0.68% and 8.09%, respectively, compared to 0.76% and 9.33%, respectively, for the same period in 2023.

The following table sets forth changes in net income:

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2024 totaled $16,138,000 which was $914,000 higher than the comparable period in 2023. The increase in net interest income was due primarily to a $4,001,000 increase in total interest income, which was partially offset by a $3,087,000 increase in total interest expense (fte). The (fte) net interest spread and net interest margin were 2.23% and 2.99%, respectively, for the three months ended September 30, 2024 compared to 2.26% and 2.92%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

For the three-months ended September 30, 2024, interest income (fte) totaled $28,694,000, with a yield on average earning assets of 5.31% compared to $24,693,000 and 4.73% for the three months ended September 30, 2023. Average loans increased $62,447,000 million during the three-months ended September 30, 2024, over the comparable period of 2023, while average securities decreased $17,450,000 million compared to the three months ended September 30, 2023. Average earning assets totaled $2.148 billion for the three months ended September 30, 2024, an increase of $77.5 million, over average earning assets for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

Interest expense for the three months ended September 30, 2024 totaled $12,556,000, at an average cost of 3.09%, compared to $9,469,000, at an average cost of 2.47% for the same period in 2023. The increase in interest expense during the three-months ended September 30, 2024 reflects the overall higher level of market interest rates. During the three months ended September 30, 2024, the average cost of time deposits, which is the most significant component of funding costs, increased 77 basis points compared to the same three-month period of last year, while interest-bearing demand and money market costs increased 91 basis points and short-term borrowing costs decreased 144 basis points compared to the same three-month period of 2023.

Provision for Credit Losses

The Company had a provision for credit losses of $1,345,000 during the three months ended September 30, 2024, compared to a provision for credit loss expense of $882,000 for the three months ended September 30, 2023. The Company makes provisions for, or releases of credit loss expense in an amount necessary to maintain the allowance for credit losses at an acceptable level under the current expected credit loss methodology analysis. The Company recorded a net charge-off of $323,000 for the quarter ended September 30, 2024, compared to a net charge-off of $2,349,000 for the similar period in 2023. At September 30, 2024, the allowance for credit losses related to loans receivable was 1.12% of loans receivable. Additionally, at September 30, 2024, the allowance for credit losses related to loans receivable represented 237% of non-performing loans.

Other Income

Other income totaled $2,295,000 for the three months ended September 30, 2024, compared to $2,306,000 for the same period in 2023. The decrease was due primarily to a decrease in earnings and proceeds on life insurance policies of $67,000. All other categories of other income increased $56,000, net, during the three months ended September 30, 2024.

Other Expense

Other expense for the three months ended September 30, 2024 totaled $12,031,000, which was $755,000 higher than the same period of 2023, due primarily to a $286,000 increase in data processing expense, a $85,000 increase in FDIC insurance, and a $156,000 increase in salaries and employee benefits during the three months ended September 30, 2024. All other categories of other expense increased $228,000, net, during the three months ended September 30, 2024.

Income Tax Expense

Income tax expense totaled $1,006,000 for an effective tax rate of 20.7% for the three months ended September 30, 2024 compared to $1,068,000 for an effective tax rate of 20.6% for the three months ended September 30, 2023.

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Results of Operations

Consolidated Average Balance Sheets with Resultant Interest and Rates

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

Comparison of Operating Results for the Nine Months Ended September 30, 2024 to September 30, 2023

General

For the nine months ended September 30, 2024, net income totaled $12,491,000 compared to net income of $16,405,000 in the nine months ended September 30, 2023. The decrease in net income for the nine months ended September 30, 2024 was due primarily to a $1,208,000 decrease in net interest income and an increase of $2,557,000 in operating expenses. Earnings per share for the nine-months ended September 30, 2024 were $1.55 per share for basic shares and fully diluted shares, compared to $2.03 per share for basic shares and fully diluted shares for the nine months ended September 30, 2023. The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2024 were 0.75% and 9.09%, respectively, compared to 1.04% and 12.54%, respectively, for the same period in 2023.

The following table sets forth changes in net income:

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2024 totaled $46,167,000 which was $1,161,000 lower than the comparable period in 2023. The decrease in net interest income was due primarily to a $14,848,000 increase in total interest expense, which was partially offset by a $13,687,000 increase in total interest income (fte). The (fte) net interest spread and net interest margin were 2.12% and 2.87%, respectively, for the nine months ended September 30, 2024 compared to 2.56% and 3.10%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

For the nine-months ended September 30, 2024, interest income (fte) totaled $83,696,000, with a yield on average earning assets of 5.20% compared to interest income (fte) of $70,009,000, with a yield on average earning assets of 4.59% for the nine months ended September 30, 2023. Average loans increased $78.9 million during the nine-months ended September 30, 2024, over the comparable period of 2023, while average securities decreased $18.0 million compared to the nine months ended September 30, 2023. Average earning assets totaled $2.152 billion for the nine months ended September 30, 2024, an increase of $110.1 million, compared to average earning assets for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

Interest expense for the nine months ended September 30, 2024, totaled $37,529,000, at an average cost of 3.07%, compared to $22,681,000, at an average cost of 2.02%, for the same period in 2023. The increase in interest expense during the nine-months ended September 30, 2024 reflects the overall higher level of market interest rates. During the nine months ended September 30, 2024, the average cost of time deposits, which is the most significant component of funding costs, increased 124 basis points compared to the same nine-month period of 2023. The average cost of interest-bearing demand and money market deposits increased 109 basis points, while short-term borrowing costs decreased 110 basis points, compared to the same nine-month period of 2023.

Provision for Credit Losses

The Company had a provision for credit loss expense of $1,069,000 during the nine months ended September 30, 2024, compared to a release of provision for credit loss expense of $568,000 for the nine months ended September 30, 2023. The Company makes provisions for, or releases of, credit loss expense in an amount necessary to maintain the allowance for credit losses at an acceptable level under the current expected credit loss methodology analysis. The Company had net charge-offs for the nine months ended September 30, 2024, of $1,157,000, compared to $2,897,000 in the corresponding period in 2023. At September 30, 2024, the allowance for credit losses related to loans receivable was 1.12% of total loans receivable. Additionally, at September 30, 2024, the allowance for credit losses related to total loans receivable represented 237% of non-performing loans.

Other Income

Other income totaled $6,508,000 for the nine months ended September 30, 2024, compared to $6,001,000 for the same period in 2023. The increase was due primarily to an increase of $172,000 in the level of service charges and fees, along with an increase of

$327,000 in gains on sales of securities and sales on loans. All other categories of other income increased $8,000, net, during the nine months ended September 30, 2024.

Other Expense

Other expense for the nine months ended September 30, 2024 totaled $35,206,000, which was $2,557,000 or 7.8%, higher than the same period of 2023, due primarily to a $435,000 increase in salaries and employee benefits, a $537,000 increase in professional fees, a $310,000 increase in FDIC insurance, and a $743,000 increase in data processing expenses during the nine months ended September 30, 2024. All other categories of other expense increased $532,000, net, during the nine months ended September 30, 2024.

Income Tax Expense

Income tax expense totaled $3,308,000 for an effective tax rate of 20.9% for the nine months ended September 30, 2024 compared to $4,289,000 for an effective tax rate of 20.7% for the nine months ended September 30, 2023.