The First Bancorp, Inc. and Subsidiary
Forward-Looking Statements
This report contains statements that are "forward-looking statements." We may
also make written or oral forward-looking statements in other documents we file
with the Securities and Exchange Commission ("SEC"), in our annual reports to
shareholders, in press releases and other written materials, and in oral
statements made by our officers, directors or employees. You can identify
forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and
other expressions that predict or indicate future events and trends and which do
not relate to historical matters. You should not rely on forward-looking
statements, because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond the control of the Company. These risks,
uncertainties and other factors may cause the actual results, performance or
achievements of the Company to be materially different from the anticipated
future results, performance or achievements expressed or implied by the
forward-looking statements.
Some of the factors that might cause these differences include the following:
changes in general national, regional or international economic conditions or
conditions affecting the banking or financial services industries or financial
capital markets, volatility and disruption in national and international
financial markets, government intervention in the U.S. financial system,
reductions in net interest income resulting from interest rate volatility as
well as changes in the balance and mix of loans and deposits, reductions in the
market value of wealth management assets under administration, changes in the
value of securities and other assets, reductions in loan demand, changes in loan
collectability, default and charge-off rates, changes in the size and nature of
the Company's competition, changes in legislation or regulation and accounting
principles, policies and guidelines, uncertainties with respect to the duration,
nature, and extent of the COVID-19 pandemic and its consequences, and changes in
the assumptions used in making such forward-looking statements. In addition, the
factors described under "Risk Factors" in Item 1A of our Annual Report on Form
10-K for the fiscal year ended December 31, 2019, as filed with the SEC, may
result in these differences, as well as the "Risk Factors" in Part II, Item 1A
listed below. You should carefully review all of these factors, and you should
be aware that there may be other factors that could cause these differences.
These forward-looking statements were based on information, plans and estimates
at the date of this quarterly report, and we assume no obligation to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially
from the results discussed in these forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
republish revised forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Readers are also urged to carefully review and consider the various disclosures
made by the Company, which attempt to advise interested parties of the facts
that affect the Company's business.
Critical Accounting Policies
Management's discussion and analysis of the Company's financial condition is
based on the consolidated financial statements which are prepared in accordance
with GAAP. The preparation of such financial statements requires Management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, Management evaluates its estimates,
including those related to the allowance for loan losses, goodwill, the
valuation of mortgage servicing rights, and other-than-temporary impairment on
securities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis in making judgments about the
carrying values of assets that are not readily apparent from other sources.
Actual results could differ from the amount derived from Management's estimates
and assumptions under different assumptions or conditions.
Allowance for Loan Losses. Management believes the allowance for loan losses
requires the most significant estimates and assumptions used in the preparation
of the consolidated financial statements. The allowance for loan losses is based
on Management's evaluation of the level of the allowance required in relation to
the estimated loss exposure in the loan portfolio. Management believes the
allowance for loan losses is a significant estimate and therefore regularly
evaluates it to determine the appropriate level by taking into consideration
factors such as prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and Management's estimation of
potential losses. The use of different estimates or assumptions could produce
different provisions for loan losses.
Goodwill. Management utilizes numerous techniques to estimate the value of
various assets held by the Company, including methods to determine the
appropriate carrying value of goodwill as required under FASB ASC Topic 350
"Intangibles - Goodwill and Other." In addition, goodwill from a purchase
acquisition is subject to ongoing periodic impairment tests, which include an
evaluation of the ongoing assets, liabilities and revenues from the acquisition
and an estimation of the impact of business conditions.

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Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The rights are subsequently carried at the lower of amortized cost or fair value. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights. The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Other-Than-Temporary Impairment on Securities. One of the significant estimates related to investment securities is the evaluation of other-than-temporary impairments. The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest when due. Derivative Financial Instruments. The Bank recognizes all derivatives in the consolidated balance sheets at fair value. On the date the Bank enters into the derivative contract, the Bank designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), or a held for trading instrument ("trading instrument"). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Bank also assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income (loss) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading instruments, including customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings. The Bank discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.

Use of Non-GAAP Financial Measures Certain information in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains financial information determined by methods other than in accordance with GAAP. Management uses these "non-GAAP" measures in its analysis of the Company's performance and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. Management believes that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the Company's underlying performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.



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In several places net interest income is presented on a fully taxable-equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total which, as adjusted, increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices. The following table provides a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements prepared in accordance with GAAP. A Federal Income Tax rate of 21.0% was used in 2020 and 2019.


                                                   For the three months ended March 31,
Dollars in thousands                                     2020                  2019
Net interest income as presented                 $            14,918     $        12,899
Effect of tax-exempt income                                      572                 562
Net interest income, tax equivalent              $            15,490     $        13,461

The Company presents its efficiency ratio using non-GAAP information which is most commonly used by financial institutions. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the Consolidated Statements of Income and Comprehensive Income (Loss). The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from noninterest expenses, excludes securities gains from noninterest income, and adds the tax-equivalent adjustment to net interest income. The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:

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