and Results of Operations

The First Bancorp, Inc. and Subsidiary

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 accounting principles generally accepted in the United States of America. 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, the valuation of mortgage servicing rights, and goodwill. 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 for adequacy 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 SFAS No. 142. 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.

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 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. 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.

Executive Summary

Net income for the three months ended March 31, 2009 was $3,728,000, an increase of $137,000 or 3.8% over net income of $3,591,000 for the comparable period of 2008. The declining interest rate environment over the past year has been very positive for the Company, resulting in funding costs dropping faster than our yield on assets and improving our net interest margin. This, in turn, led to increased net interest income. The Company also saw good growth in earning assets year-to-date. The net interest margin on a tax-equivalent basis increased to 3.68% for the first three months of 2009 from 3.24% for the same period in 2008. Fully diluted earnings per share for the three months ended March 31, 2009 were $0.37, even with the first quarter 2008.

During the first quarter 2009, the Company took an after-tax charge of $596,000 for other-than-temporary impairment related to one automotive company holding in the investment portfolio. In the past six months, the Company has sold most of the corporate securities held to reduce the level of credit risk in the investment portfolio.

Net Interest Income

Total interest income of $16.6 million for the three months ended March 31, 2009 is a 9.3% decrease from total interest income of $18.3 million in the comparable period of 2008. Total interest expense of $5.5 million for the first three months of 2009 is an 41.7% decrease from total interest expense of $9.5 million for the first three months of 2008. Net interest income increased 25.6% or $2.3 million to $11.1 million for the three months ended March 31, 2009, from the $8.8 million reported for the same period in 2008.

The Company's net interest margin on a tax-equivalent basis increased from 3.24% in the first three months of 2008 to 3.68% for the three months ended March 31, 2009. This increase was due to a combination of lower interest rates and growth in earning assets.

Tax-exempt interest income amounted to $1,066,000 and $1,055,000 for the three months ended March 31, 2009 and 2008, respectively. The following table presents the effect of tax-exempt income on the calculation of the net interest margin, using a 35.0% tax rate in 2009 and 2008:

                                    For the three months ended
                                             March 31,
                                         2009          2008
Net interest income as presented           $11,073       $8,817
Effect of tax-exempt income                    574          568
Net interest income, tax equivalent        $11,647       $9,385

The following table presents the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2009 and 2008. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2009 and 2008.

Three months ended March 31,                2009                    2008
                                    Amount of    Average    Amount of    Average
Dollars in thousands                interest   Yield/Rate   interest   Yield/Rate
Interest on earning assets
Investments                            $ 4,085       5.57%     $ 3,402       5.94%
Loans held for sale                         22       5.41%          38       6.95%
Loans                                   13,085       5.38%      15,458       6.69%
Total interest-earning assets           17,192       5.43%      18,898       6.54%
Interest-bearing liabilities
Deposits                                 3,645       1.71%       6,439       3.55%
Other borrowings                         1,900       2.72%       3,074       3.91%
Total interest-bearing liabilities       5,545       1.96%       9,513       3.66%
Net interest income                    $11,647                 $ 9,385
Interest rate spread                                 3.47%                   2.89%
Net interest margin                                  3.68%                   3.24%

The following table presents changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2009 compared to 2008. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2009 and 2008.

Three months ended March 31, 2009 compared to 2008

Dollars in thousands                        Volume    Rate   Rate/Volume1  Total
Interest on earning assets
Investment securities                          $ 990 $ (238)       $ (69)   $ 683
Loans held for sale                             (10)     (9)            3    (16)
Loans                                            943 (3,125)        (191) (2,373)
Total interest income                          1,923 (3,372)        (257) (1,706)
Interest expense
Deposits                                       1,192 (3,363)        (623) (2,794)
Other borrowings2                              (317)   (956)           99 (1,174)
Total interest expense                           875 (4,319)        (524) (3,968)
Change in net interest income                 $1,048   $ 947        $ 267 $ 2,262

1 Represents the change attributable to a combination of change in rate and change in volume.

2 Includes federal funds purchased.

Provision for Loan Losses

A $1,650,000 provision to the allowance for loan losses was made during the first three months of 2009, compared to a $500,000 provision made for the same period of 2008. As a result, the allowance for loan losses has increased $1.0 million since year end (net of 2009 net chargeoffs) and stands at 0.99% of loans outstanding, an increase from 0.90% of loans outstanding at December 31, 2008.

While the weakness in the national economy has not hit coastal Maine as hard as many other parts of the country, the Company has seen an increase in the level of past-due and non-performing loans. At this point, this has not translated into a significantly higher level of losses, with net chargeoffs of $645,000 for the first three months of 2009. This translates to an annualized loss ratio of 0.28% of average loans outstanding, which is equal to the loss ratio for the entire year of 2008. Given the number of economic uncertainties at this time, however, Management views it prudent to continue to increase the allowance for loan losses.

Non-Interest Income

Non-interest income was $2,586,000 for the three months ended March 31, 2009, an increase of 18.8% from the $2,176,000 reported for the first three months of 2008. This increase was attributable to an increase in mortgage origination and servicing income. Non-Interest Expense

Non-interest expense of $6,787,000 for the three months ended March 31, 2009, is an increase of 24.6% compared to non-interest expense of $5,449,000 for the same period in 2008. This increase was attributable to the other-than- temporary impairment charge as well as an increase in other operating expense.

Income Taxes

Income taxes on operating earnings were $1,494,000 for the three months ended March 31, 2009, up from $1,453,000 in the same period a year ago. This is in line with the increase in the Company's level of income before taxes.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109" ("FIN 48"). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48. However, certain amounts

Investments

The Company's investment portfolio increased by $61.3 million or 23.3% to $323.8 million between December 31, 2008, and March 31, 2009. At March 31, 2009, the Company's available for sale portfolio had an unrealized loss, net of taxes, of $0.3 million. Between March 31, 2008, and March 31, 2009, the Company's investment portfolio increased by $91.0 million or 39.0%.

During the first quarter 2009, the Company took an after-tax charge of $596,000 for other-than-temporary impairment related to one automotive company holding in the investment portfolio. In the past six months, the Company has sold most of the corporate securities held to reduce the level of credit risk in the investment portfolio. As of March 31, 2009, corporate securities totaled only $3.1 million, of which $1.5 million is rated sub-investment grade. These securities are less than 0.5% of the Company's $323.8 million investment portfolio and had an after-tax unrealized loss of $70,000 as of March 31, 2009. In Management's opinion, no additional writedown for other-than-temporary impairment is warranted for these sub-investment-grade securities.

Loans

During the first three months of 2009, loans grew by $10.7 million or 1.1%. The growth in commercial loans was $18.1 million or 4.3% while municipal loans increased by $8.4 million or 23.2%. The residential mortgage portfolio decreased by $15.3 million or 4.0% and home equity lines of credit increased $4.3 million or 5.8% year-to-date. Between March 31, 2008 and March 31, 2009 the loan portfolio increased $56.2 million or 6.0%, as a result of customer demand.

Allowance for Loan Losses

The allowance for loan losses represents the amount available for credit losses inherent in the Company's loan portfolio. Loans are charged off when deemed uncollectible, after giving consideration to factors such as the customer's financial condition, underlying collateral and guarantees, as well as general and industry economic conditions.

Adequacy of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectibility of specific loans when determining the adequacy of the allowance for loan losses, Management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, and economic trends. The adequacy of the allowance for loan losses is assessed by an allocation process whereby specific loss allocations are made against certain adversely classified loans, and general loss allocations are made against segments of the loan portfolio that have similar attributes. The Company's historical loss experience, industry trends, and the impact of the local and regional economy on the Company's borrowers, are considered by Management in determining the adequacy of the allowance for loan losses.

The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when Management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, growth in loan portfolios, or for other reasons. Any future additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to record additions to the allowance based on judgments different from those of Management.

Credit quality of the commercial portfolios is quantified by a credit rating system designed to parallel regulatory criteria and categories of loan risk. Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of the commercial loan portfolio are also assessed on a regular basis by an independent loan review consulting firm. Ongoing portfolio trend analyses and individual credit reviews to evaluate loan risk and compliance with corporate lending policies are also performed. The level of allowance allocable to each group of risk-rated loans is then determined by applying a loss factor that estimates the amount of probable loss in each category. The assigned loss factor for each risk rating is based upon Management's

Consumer loans, which include residential mortgages, home equity loans/lines, and direct/indirect loans, are generally evaluated as a group based on product type and on the basis of delinquency data and other credit data available due to the large number of such loans and the relatively small size of individual credits. Allocations for these loan categories are principally determined by applying loss factors that represent Management's estimate of inherent losses. In each category, inherent losses are estimated based upon Management's assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions and past experience. In addition, certain loans in these categories may be individually risk-rated if considered necessary by Management.

The other method used to allocate the allowance for loan losses entails the assignment of reserve amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when Management believes it is probable that the Company will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on internal risk ratings or non-accrual status. A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value.

All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. As a result of these analyses, the Company has concluded that the level of the allowance for loan losses was adequate as of March 31, 2009. As of that date, the balance of $9.8 million was 0.99% of total loans, compared to 0.90% at December 31, 2008 and 0.77% at March 31, 2008. Loans considered to be impaired according to SFAS Nos. 114/118 totaled $13.1 million at March 31, 2009 compared to $12.4 million at December 31, 2008. At March 31, 2009 impaired loans with specific reserves totaled $7.9 million compared to $7.4 million at December 31, 2008. The portion of the allowance for loan losses allocated to impaired loans at March 31, 2009, was $2.3 million compared to $2.0 million at December 31, 2008.

In Management's opinion, the level of the Company's allowance for loan losses is adequate. Although the allowance is lower as a percentage of loans than many peers, the Bank's loan portfolio has a higher percentage of residential mortgage loans than peers, which typically reflects a much lower level of credit risk. In coastal Maine, the geographic area which the Company serves, the level of foreclosures has been much lower than in many parts of the United States, and the Company has maintained very high standards when underwriting residential mortgage loans. In addition, the Company's actual historical loan loss experience has been much lower than most of its peer banks, again reflective of our loan portfolio composition. This was demonstrated by the Bank's 2008 losses of 0.28% of average loans outstanding, which compares to 0.75% of average loans outstanding for its peer group.

Non-Performing Assets

At March 31, 2009, loans on non-accrual status totaled $13.1 million, which compares to non-accrual loans of $12.4 million as of December 31, 2008. In addition to loans on non-accrual status at March 31, 2009, loans past due 90 days or more and accruing (calculated on a constant 30-day month basis) totaled $3.9 million which compares to $5.0 million as of December 31, 2008. The Company continues to accrue interest on these loans because it believes collection of the interest is reasonably assured. The level of non-performing loans stood at 1.32% on March 31, 2009 compared to 1.27% of total loans on December 31, 2008 and 0.36% of total loans on March 31, 2008. In comparison, our peer group's non-performing loans stood at 2.30% as of December 31, 2008.

Goodwill

On January 14, 2005, the Company completed the acquisition of FNB Bankshares of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor, which was merged into the Bank. The total value of the transaction was $48.0 million, and all of the voting equity interest of FNB Bankshares was acquired in the transaction. As of December 31, 2007, in accordance with SFAS No. 142, the Company completed its annual review of goodwill and determined there has been no impairment.

Deposits

During the first three months of 2009, total deposits increased by $61.7 million or 6.7% over December 31, 2008. Low-cost deposits (demand, NOW, and savings accounts) decreased by $13.4 million or 5.2% in the first three months

Borrowed Funds

The Company uses funding from the Federal Home Loan Bank of Boston, the Federal Reserve System and repurchase agreements, enabling it to grow its balance sheet and its revenues. This funding may also be used to carry out interest rate risk management strategies, and is increased to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the three months ended March 31, 2009, borrowed funds decreased $18.0 million or 6.6% from December 31, 2008, as a result of the deposit growth previously noted and a shift in strategy to increase the Bank's immediate sources of liquidity. Between March 31, 2008 and March 31, 2009, borrowed funds decreased by $41.1 million or 13.9%.

Shareholders' Equity

Shareholders' equity as of March 31, 2009 was $144.6 million, compared to $117.2 million as of December 31, 2008. The Company's earnings in the first three months of 2009 net of dividends paid, plus participation in the U.S. Treasury Capital Purchase Program, added to shareholders' equity. The net unrealized loss on available-for-sale securities, presented in accordance with SFAS 115, decreased by $0.5 million from December 31, 2008.

In 2009, a cash dividend of 19.5 cents per share was declared in the first quarter compared to 18.5 cents in the first quarter of 2008. The dividend payout ratio was 52.70% in the first quarter of 2009 compared to 50.00% in the first quarter of 2008. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 2009 is this year's net income plus $12.3 million.

On November 21, 2008, the Company received approval for a $25 million preferred stock investment by the U.S. Treasury under the Capital Purchase Program ("CPP"). The Company completed the CPP investment transaction on January 9, 2009. The CPP Shares call for cumulative dividends at a rate of 5.0% per year for the first five years, and at a rate of 9.0% per year in following years. The CPP Shares qualify as Tier 1 capital on the Company's books for regulatory purposes and will rank senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future.

On August 16, 2007, the Company announced that its Board of Directors had authorized a program for the repurchase of up to 300,000 shares of the Company's common stock or approximately 3.1% of the outstanding shares. The Company expects such repurchases to be effected from time to time, in the open market, in private transactions or otherwise, during a period of up to 24 months. The amount and timing of shares to be purchased will be subject to market conditions and will be based on several factors, including the price of the Company's stock and the level of stock issuances under the Company's employee stock plans. No assurance can be given as to the specific timing of the share repurchases or as to whether and to what extent the share repurchase will be consummated. As a consequence of

the Company's issuance of securities under the U.S. Treasury's CPP program, its ability to repurchase stock while such securities remain outstanding is restricted to purchases from employee benefit plans. In the first three months of 2009, the Company repurchased 2,563 from employee benefit plans at an average price of $15.18 per share and for total proceeds of $39,000. As of March 31, 2009, the Company had repurchased 178,038 shares under the new repurchase plan at an average price of $15.53 and at a total cost of $2.8 million.

Regulatory leverage capital ratios for the Company were 8.71% and 7.07% at March 31, 2009 and December 31, 2008, respectively. The Company had a tier one risk-based capital ratio of 12.99% and tier two risk-based capital ratio of . . .