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 June 30, 2025 to June 30, 2024

General

For the three months ended June 30, 2025, net income totaled $6,205,000 compared to net income of $4,213,000 in the three months ended June 30, 2024. The increase in net income for the three months ended June 30, 2025, was due primarily to a $4,140,000 increase in net interest income, offset by a $603,000 increase in the provision for credit losses and a $651,000 increase in salaries and benefits. Earnings per share for the three-months ended June 30, 2025 were $0.67 per share for basic shares and fully diluted shares, compared to $0.52 per share for basic shares and for fully diluted shares for the three months ended June 30, 2024. The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, 2025 were 1.06% and 11.14%, respectively, compared to 0.75% and 9.44%, 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 June 30, 2025 totaled $19,264,000 which was $4,140,000 higher than the comparable period in 2024. The increase in net interest income was due primarily to a $3,535,000 increase in total interest income. The (fte) net interest spread and net interest margin were 2.75% and 3.43%, respectively, for the three months ended June 30, 2025 compared to 2.06% and 2.80%, respectively, for the same period in 2024. See “Non-GAAP Financial Measures” described above beginning on page 40.

For the three-months ended June 30, 2025, interest income (fte) totaled $31,405,000, with a yield on average earning assets of 5.60% compared to $27,870,000 and 5.17% for the three months ended June 30, 2024. Average loans increased $154,343,000 during the three-months ended June 30, 2025, over the comparable period of 2024, while average securities decreased $21,554,000 compared to the three months ended June 30, 2024. Average earning assets totaled $2.251 billion for the three months ended June 30, 2025, an increase of $82,701,000, over average earning assets for the same period in 2024. See “Non-GAAP Financial Measures” described above beginning on page 40.

Interest expense for the three months ended June 30, 2025 totaled $12,141,000, at an average cost of 2.84%, compared to $12,746,000, at an average cost of 3.11% for the same period in 2024. The decrease in interest expense during the three-months ended June 30, 2025 reflects the overall lower level of market interest rates. During the three months ended June 30, 2025, the average cost of time deposits, which is the most significant component of funding costs, decreased 42 basis points compared to the same three-month period of last year, while savings deposit costs decreased 26 basis points and short-term borrowing costs increased 245 basis points compared to the same three-month period of 2024.

Provision for Credit Losses

The Company had a provision for credit losses of $950,000 during the three months ended June 30, 2025, compared to a provision for credit losses of $347,000 for the three months ended June 30, 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 $375,000 for the quarter ended June 30, 2025, compared to a net charge-off of $511,000 for the similar period in 2024. At June 30, 2025, the allowance for credit losses related to loans receivable was 1.17% of loans receivable. Additionally, at June 30, 2025, the allowance for credit losses related to loans receivable represented 258% of non-performing loans.

Other Income

Other income totaled $2,248,000 for the three months ended June 30, 2025, compared to $2,207,000 for the same period in 2024. The increase was due primarily to an increase in gains on sales of loans of $29,000. All other categories of other income increased $12,000, net, during the three months ended June 30, 2025.

Other Expense

Other expense for the three months ended June 30, 2025 totaled $12,531,000, which was $1,087,000 higher than the same period of 2024, due primarily to a $651,000 increase in salaries and employee benefits, a $165,000 increase in data processing and related operations, a $122,000 increase in foreclosed real estate expenses, and a $120,000 increase in occupancy, furniture and equipment. All other categories of other expense increased $29,000, net, during the three months ended June 30, 2025.

Income Tax Expense

Income tax expense totaled $1,627,000 for an effective tax rate of 20.8% for the three months ended June 30, 2025 compared to $1,128,000 for an effective tax rate of 21.1% for the three months ended June 30, 2024.

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 Six Months Ended June 30, 2025 to June 30, 2024

General

For the six months ended June 30, 2025, net income totaled $11,978,000 compared to net income of $8,646,000 in the six months ended June 30, 2024. The increase in net income for the six months ended June 30, 2025 was due primarily to a $7,288,000 increase in net interest income, offset by a $2,083,000 increase in the provision for credit losses, a $987,000 increase in salaries and benefits, and an increase of $839,000 in income tax expense. Earnings per share for the six-months ended June 30, 2025 were $1.30 per share for basic shares and fully diluted shares, compared to $1.07 per share for basic shares and fully diluted shares for the six months ended June 30, 2024. The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2025 were 1.03% and 10.94%, respectively, compared to 0.78% and 9.62%, 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 six months ended June 30, 2025 totaled $37,320,000 which was $7,291,000 higher than the comparable period in 2024. The increase in net interest income was due primarily to a $6,686,000 increase in total interest income. The (fte) net interest spread and net interest margin were 2.68% and 3.37%, respectively, for the six months ended June 30, 2025 compared to 2.07% and 2.80%, respectively, for the same period in 2024. See “Non-GAAP Financial Measures” described above beginning on page 40.

For the six-months ended June 30, 2025, interest income (fte) totaled $61,688,000, with a yield on average earning assets of 5.57% compared to $55,002,000 and 5.14% for the six months ended June 30, 2024. Average loans increased $143,016,000 million during the six-months ended June 30, 2025, over the comparable period of 2024, while average securities decreased $20,533,000 million compared to the six months ended June 30, 2024. Average earning assets totaled $2.234 billion for the six months ended June 30, 2025, an increase of $80,871,000 million, over average earning assets for the same period in 2024. See “Non-GAAP Financial Measures” described above beginning on page 40.

Interest expense for the six months ended June 30, 2025, totaled $24,368,000, at an average cost of 2.89%, compared to $24,973,000, at an average cost of 3.07% for the same period in 2024. The decrease in interest expense during the six-months ended June 30, 2025 reflects the overall lower level of market interest rates. During the six months ended June 30, 2025, the average cost of time deposits, which is the most significant component of funding costs, decreased 32 basis points compared to the same six-month period of last year, while short-term borrowing costs increased 203 basis points and other borrowing costs decreased 17 basis points compared to the same six-month period of 2024.

Provision for Credit Losses

The Company had a provision for credit loss expense of $1,807,000 during the six months ended June 30, 2025, compared to a release of provision for credit loss expense of $276,000 for the six months ended June 30, 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 had net charge-offs for the six months ended June 30, 2025, of $699,000, compared to $834,000 in the corresponding period in 2024. At June 30, 2025, the allowance for credit losses related to loans receivable was 1.17% of loans receivable. Additionally, at June 30, 2025, the allowance for credit losses related to loans receivable represented 258% of non-performing loans.

Other Income

Other income totaled 4,599,000 for the six months ended June 30, 2025, compared to $4,213,000 for the same period in 2024. The increase was due primarily to an increased level of service charges and fees of $180,000. All other categories of other income increased $206,000, net, during the six months ended June 30, 2025.

Other Expense

Other expense for the six months ended June 30, 2025 totaled $24,595,000, which was $1,420,000 or 6.1%, higher than the same period of 2024, due primarily to a $987,000 increase in salaries and employee benefits, a $190,000 increase in professional fees, a $238,000 increase in occupancy, furniture and equipment, and a $228,000 increase in data processing expenses. All other categories of other expense decreased $223,000, net, during the six months ended June 30, 2025.

Income Tax Expense

Income tax expense totaled $3,142,000 for an effective tax rate of 20.8% for the six months ended June 30, 2025 compared to $2,303,000 for an effective tax rate of 21.0% for the six months ended June 30, 2024.

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