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, 2026 to March 31, 2025

General

For the three months ended March 31, 2026, net income totaled $3.7 million compared to net income of $5.8 million for the three months ended March 31, 2025. The decrease in net income for the three months ended March 31, 2026, was due primarily to a $4.9 million increase in merger-related expenses, a $2.1 million increase in salaries and employee benefits, a $602,000 increase in provision for credit losses, and a net increase of $1.9 million in all other expenses, offset, in part by an increase of $6.7 million in net interest income. Earnings for the three-months ended March 31, 2026 were $0.35 per basic and fully diluted share, compared to $0.63 per basic and fully diluted share for the three months ended March 31, 2025. The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2026 were 0.53% and 5.22%, respectively, compared to 1.01% and 10.73%, respectively, for the same period in 2025.

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, 2026 totaled $24.7 million which was $6.7 million higher than the comparable period in 2025. The increase in net interest income was due primarily to an $8.3 million increase in total interest income, offset by a $1.6 million increase in total interest expense. The (fte) net interest spread and net interest margin were 3.04% and 3.68%, respectively, for the three months ended March 31, 2026 compared to 2.61% and 3.30%, respectively, for the same period in 2025. See “Non-GAAP Financial Measures” described above beginning on page 40.

For the three-months ended March 31, 2026, interest income (fte) totaled $38.6 million, with a yield on average earning assets of 5.73% compared to $30.3 million and 5.54% for the three months ended March 31, 2025. Average loans increased $451.5 million during the three-months ended March 31, 2026, over the comparable period of 2025, while average securities increased $7.5 million compared to the three-months ended March 31, 2025. Average earning assets totaled $2.729 billion for the three months ended March 31, 2026, an increase of $512.0 million, over average earning assets for the same period in 2025. See “Non-GAAP Financial Measures” described above beginning on page 40.

Interest expense for the three months ended March 31, 2026 totaled $13.8 million, at an average cost of 2.69%, compared to $12.2 million, at an average cost of 2.93% for the same period in 2025. Average interest-bearing deposits increased $2.0 million during the three-months ended March 31, 2026, over the comparable period in 2025, while average borrowings decreased $437,000 compared to the three-months ended March 31, 2026. During the three months ended March 31, 2026, the average cost of time deposits, which is the most significant component of funding costs, decreased 41 basis points compared to the same three-month period of last year. The average cost of interest-bearing demand and money market decreased 14 basis points during the three months ended March 31, 2026, while savings deposit costs decreased two basis points. Average short-term borrowing costs decreased 36 basis points, while average other borrowings cost decreased 24 basis points, compared to the same three-month period of 2025.

Provision for Credit Losses

The Company had a provision for credit losses of $1.5 million during the three months ended March 31, 2026, compared to $857,000 for the three months ended March 31, 2025. 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 $501,000 for the quarter ended March 31, 2026, compared to a net charge-off of $324,000 for the similar period in 2025. At March 31, 2026, the allowance for credit losses related to loans receivable was 1.09% of loans receivable, compared to 1.15% at March 31, 2025. Additionally, at March 31, 2026, the allowance for credit losses related to loans receivable represented 236% of non-performing loans, compared to 257% at March 31, 2025.

Other Income

Other income totaled $2.7 million for the three months ended March 31, 2026, compared to $2.4 million for the same period in 2025. The increase was due primarily to an increase in service charges and fees of $242,000. All other categories of other income increased $122,000, net, during the three months ended March 31, 2026.

Other Expense

Other expense for the three months ended March 31, 2026 totaled $21.0 million, an increase of $8.9 million compared to the same period of 2025, due primarily to a $4.9 million increase in merger-related expenses and a $2.1 million increase in salaries and employee benefits. All other categories of other expense increased $1.9 million during the three months ended March 31, 2026 as compared to the year earlier quarter.

Income Tax Expense

Income tax expense totaled $1.1 million for an effective tax rate of 22.6% for the three months ended March 31, 2026 compared to $1.5 million for an effective tax rate of 20.8% for the three months ended March 31, 2025.

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