Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. This includes statements regarding general economic conditions, legislative and regulatory changes, monetary, trade, tariff and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, instability in the banking system, and the potential for a recessionary economy. Further description of the risks and uncertainties to the business are included in the Company's other filings with the Securities and Exchange Commission.

The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

Our operations are subject to risks and uncertainties surrounding our exposure to changes in the interest rate environment. Earnings and liquidity depend to a great extent on our interest rates. Interest rates are highly sensitive to many factors beyond our control, including competition, general economic conditions, geopolitical tensions and conflicts and monetary and fiscal policies of various governmental and regulatory authorities, including the Federal Reserve. Conditions such as inflation, deflation, recession, unemployment and other factors beyond our control may also affect interest rates. The nature and timing of any changes in interest rates or general economic conditions and their effect on us cannot be controlled and are difficult to predict. If the rate of interest we pay on our interest-bearing liabilities increases more than the rate of interest we receive on our interest-earning assets, our net interest income, and therefore our earnings, could contract and be materially adversely affected. Our earnings could also be materially adversely affected if the rates on interest-earning assets fall more quickly than those on our interest-bearing liabilities. Changes in interest rates could also create competitive pressures, which could impact our liquidity position. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk - Asset/Liability Management."

Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

Note 2 to the Company's consolidated financial statements for the fiscal year ended December 31, 2025 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2025) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, the determination of goodwill impairment, and business combination accounting. Please refer to the discussion of the allowance for credit losses calculation under "Changes in Financial Condition - Loans" below.

In connection with the acquisition of North Penn in 2011, we recorded goodwill in the amount of $9.7 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of Delaware in 2016, we recorded goodwill in the amount of $1.6 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of UpState New York

Bancorp, Inc. in July 2020, we recorded goodwill in the amount of $17.9 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of PB Bankshares, we recorded goodwill in the amount of $7.1 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. Goodwill is tested annually and deemed impaired when the carrying value of goodwill exceeds its implied fair value.

Changes in Financial Condition

General

Total assets as of March 31, 2026 were $2.917 billion compared to $2.425 billion as of December 31, 2025. The increase was due primarily to a $385.2 million increase in gross loans outstanding and a $58.1 million increase in cash and cash equivalents. Both were primarily a result of the PB Bankshares acquisition.

Other Assets

Other assets as of March 31, 2026 were $10.6 million compared to $8.4 million as of December 31, 2025. The increase was primarily due to the increase of $1.4 million in right of use asset.

Securities

The fair value of securities available for sale as of March 31, 2026 was $431.2 million compared to $408.8 million as of December 31, 2025. The increase of $22.4 million was due primarily to the acquired portfolio.

The Company has securities in an unrealized loss position. In Management's opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. The Company did not recognize any credit losses on these available for sale debt securities for the three months ended March 31, 2026. The Company does not intend to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

Loans

Loans receivable totaled $2.239 billion at March 31, 2026 compared to $1.853 billion as of December 31, 2025, due primarily to the acquired portfolio. The $385.4 million increase in loans receivable during the three months ended March 31, 2026, was due primarily to a $118.3 million increase in commercial real estate loans, a $177.4 million increase in commercial loans, a $57.1 million increase in residential real estate loans, and an increase of $32.6 million in all other portfolios, net.

The allowance for credit losses totaled $24.4 million as of March 31, 2026, and represented 1.09% of total loans outstanding, compared to $19.9 million, or 1.07% of total loans outstanding, at December 31, 2025. The Company had net charge-offs for the three months ended March 31, 2026 of $501,000, compared to $324,000 in the corresponding period in 2025. The Company's management assesses the adequacy of the allowance for credit losses on a quarterly basis. Based on management's best judgement, the qualitative factors are applied to the final adjusted loss rate each quarter. Management considers the allowance for credit losses adequate at March 31, 2026 based on the Company's criteria. However, there can be no assurance that the allowance for credit losses will be adequate to cover significant losses, if any, which might be incurred in the future.

As of March 31, 2026, non-performing loans totaled $10.3 million or 0.46%, of total loans compared to $6.3 million, or 0.34%, of total loans at December 31, 2025. At March 31, 2026, non-performing assets totaled $11.1 million, or 0.38%, of total assets, compared to $7.1 million, or 0.29%, of total assets at December 31, 2025.

The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:

Deposits

During the three-months ended March 31, 2026, total deposits increased $428.1 million due primarily to a $198.1 million increase in certificates of deposit, an $83.9 million increase in interest-bearing demand deposits, and a $146.1 million increase in all other deposit categories. All increases were primarily due to the PB Bankshares acquisition.

The following table sets forth deposit balances as of the dates indicated:

Borrowings

The Company had no short-term borrowings at March 31, 2026, compared to $14.7 million at December 31, 2025, due primarily to a decrease in overnight borrowings, which was a result of the overall growth in deposits.

Other borrowings as of March 31, 2026, were $88.3 million compared to $59.4 million as of December 31, 2025. There were no Federal Reserve Bank borrowings during three-months ended March 31, 2026, while Federal Home Loan Bank borrowings increased $29.0 million during the three-months ended March 31, 2026.

Other borrowings consisted of the following:

Stockholders' Equity and Capital Ratios

As of March 31, 2026, total stockholders' equity was $283.9 million, compared to $242.2 million as of December 31, 2025. Total stockholders' equity increased $41.7 million as of March 31, 2026. The increase consisted of $44.3 million due to the PB Bankshares acquisition and net income of $3.7 million, offset, in part by a $2.8 million decrease in the fair value of securities in the available-for-sale portfolio and a decrease of $4.0 million of dividends declared, net of tax. Because of interest rate volatility, the Company's accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

Regulatory Capital Requirements. The Federal Reserve has adopted regulatory capital rules pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act ("BHCA"). The Federal Reserve's capital rules are similar to those imposed on the Bank by the FDIC. The Federal Reserve's Small Bank Holding Company Policy Statement, however, exempts from the regulatory capital requirements bank holding companies with less than $3.0 billion in consolidated assets that are not engaged in significant non-banking or off-balance sheet activities and that do not have a material amount of debt or equity securities registered with the SEC. As long as their bank subsidiaries are well capitalized, such bank holding companies need only maintain a pro forma debt to equity ratio of less than 1.0 in order to pay dividends and repurchase stock and to be eligible for expedited treatment on applications.

A comparison of the Company's consolidated regulatory capital ratios is as follows:

The Bank is required to comply with applicable capital adequacy rules adopted by the FDIC and other federal bank regulatory agencies (the "Basel III Capital Rules"). The Basel III Capital Rules apply to all depository institutions as well as to all top-tier bank and savings and loan holding companies that are not subject to the Federal Reserve Small Bank Holding Company Policy Statement.

Under the Basel III Capital Rules, banks are required to meet four minimum capital standards: (1) a "Tier 1" or "core" capital leverage ratio equal to at least 4% of total adjusted assets; (2) a common equity Tier 1 capital ratio equal to 4.5% of risk-weighted assets; (3) a Tier 1 risk-based ratio equal to 6% of risk-weighted assets; and (4) a total capital ratio equal to 8% of total risk-weighted assets. Common equity Tier 1 capital is defined as common stock instruments, retained earnings, any common equity Tier 1 minority interest and, unless the bank has made an "opt-out" election, accumulated other comprehensive income, net of goodwill and certain other intangible assets. Tier 1 or core capital is defined as common equity Tier 1 capital plus certain qualifying subordinated interests and grandfathered capital instruments. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, qualifying subordinated instruments and certain grandfathered capital instruments. An institution's risk-based capital requirements are measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Risk weightings range from 0% for cash to 100% for property acquired through foreclosure, commercial loans, and certain other assets to 150% for exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.

In addition to the above minimum requirements, the Basel III Capital Rules require banks and covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement effectively raises the minimum required risk-based capital ratios to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital on a fully phased-in basis. The Company and the Bank were in compliance with all applicable regulatory capital requirements as of March 31, 2026.

Liquidity

As of March 31, 2026, the Company had cash and cash equivalents of $102.6 million in the form of cash, due from banks, short-term deposits with other institutions, and fed funds sold. In addition, the Company had total non-pledged securities available for sale of $137.9 million which could be used for liquidity needs. Total liquidity of $234.3 million as of March 31, 2026, represents 8.0% of total assets, compared to $190.8 million and 7.9% of total assets as of December 31, 2025. The Company also monitors other liquidity measures, all of which were within the Company's policy guidelines as of March 31, 2026 and December 31, 2025. Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7.0 million which expires June 30, 2026. There were no borrowings under this line as of March 31, 2026 and December 31, 2025.

The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $10.0 million. There were no borrowings under this line as of March 31, 2026 and December 31, 2025.

The Bank's maximum borrowing capacity with the Federal Home Loan Bank was estimated to be $682.8 million as of March 31, 2026, of which $88.4 million was outstanding in the form of borrowings as of March 31, 2026. As of December 31, 2025, the maximum borrowing capacity was $677.6 million, of which $74.1 million of borrowings was outstanding as of December 31, 2025. Additionally, as of March 31, 2026, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $178.1 million as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. As of December 31, 2025, there was $155.5 million outstanding in the form of Letters of Credit. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

Non-GAAP Financial Measures

This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on page 42. Fully

taxable equivalent interest income and net interest income is also reflected in the table on page 43. Although the Company believes that these non-GAAP financial measures enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered as an alternative to GAAP measures.

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Results of Operations

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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