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 March 31, 2025 to March 31, 2024

General

For the three months ended March 31, 2025, net income totaled $5,773,000 compared to net income of $4,433,000 in the three months ended March 31, 2024. The increase in net income for the three months ended March 31, 2025, was due primarily to a $3,147,000 increase in net interest income, offset by a $1,481,000 increase in the provision for credit losses. Earnings per share for the three-months ended March 31, 2025 were $0.63 per share for basic shares and fully diluted shares, compared to $0.55 per share for basic shares and for fully diluted shares for the three months ended March 31, 2024. The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2025 were 1.01% and 10.73%, respectively, compared to 0.80% and 9.79%, respectively, for the same period in 2024.

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 March 31, 2025 totaled $18,054,000 which was $3,149,000 higher than the comparable period in 2024. The increase in net interest income was due primarily to a $3,148,000 increase in total interest income. The (fte) net interest spread and net interest margin were 2.61% and 3.30%, respectively, for the three months ended March 31, 2025 compared to 2.08% and 2.80%, respectively, for the same period in 2024. See “Non-GAAP Financial Measures” described above beginning on page 35.

For the three-months ended March 31, 2025, interest income (fte) totaled $30,281,000, with a yield on average earning assets of 5.54% compared to $27,133,000 and 5.10% for the three months ended March 31, 2024. Average loans increased $131,466,000 during the three-months ended March 31, 2025, over the comparable period of 2024, while average securities decreased $19,486,000 compared to the three months ended March 31, 2024. Average earning assets totaled $2.217 billion for the three months ended March 31, 2025, an increase of $78,852,000, over average earning assets for the same period in 2024. See “Non-GAAP Financial Measures” described above beginning on page 35.

Interest expense for the three months ended March 31, 2025 totaled $12,227,000, at an average cost of 2.93%, compared to $12,228,000, at an average cost of 3.03% for the same period in 2024. The decrease in interest expense during the three-months ended March 31, 2025 reflects the overall lower level of market interest rates. During the three months ended March 31, 2025, the average cost of time deposits, which is the most significant component of funding costs, decreased 20 basis points compared to the same three-month period of last year, while savings costs decreased 16 basis points and short-term borrowing costs increased 186 basis points compared to the same three-month period of 2024.

Provision for Credit Losses

The Company had a provision for credit losses of $857,000 during the three months ended March 31, 2025, compared to a release of credit losses of $624,000 for the three months ended March 31, 2024. 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 $324,000 for the quarter ended March 31, 2025, compared to a net charge-off of $323,000 for the similar period in 2024. At March 31, 2025, the allowance for credit losses related to loans receivable was 1.15% of loans receivable. Additionally, at March 31, 2025, the allowance for credit losses related to loans receivable represented 257% of non-performing loans.

Other Income

Other income totaled $2,351,000 for the three months ended March 31, 2025, compared to $2,006,000 for the same period in 2024. The increase was due primarily to an increase in service charges and fees of $170,000. All other categories of other income increased $175,000, net, during the three months ended March 31, 2025.

Other Expense

Other expense for the three months ended March 31, 2025 totaled $12,064,000, which was $332,000 higher than the same period of 2024, due primarily to a $99,000 increase in taxes, other than income, a $117,000 increase in occupancy, furniture and equipment, and a $337,000 increase in salaries and employee benefits during the three months ended March 31, 2025. All other categories of other expense increased $221,000, net, during the three months ended March 31, 2025.

Income Tax Expense

Income tax expense totaled $1,514,000 for an effective tax rate of 20.8% for the three months ended March 31, 2025 compared to $1,175,000 for an effective tax rate of 21.0% for the three months ended March 31, 2024.

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