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Nov. 5, 2021, 10:09 a.m. EDT


(EDGAR Online via COMTEX) -- Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 2020, 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, the fair value of securities, 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 regularly evaluates the allowance, typically monthly, to determine the appropriate level by taking into consideration factors such as the size and growth trajectory of the portfolio, quality trends as measured by key indicators, prior loan loss experience in major portfolio segments, local and national business and economic conditions, the results of any stress testing undertaken during the period, 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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.

remain in place and are expected to remain in place in some form subsequent to September 30, 2021. There continues to be uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any further government actions to mitigate them. Accordingly, while management has considered the effect of the pandemic on collectability of loans receivable and other business impacts, it is possible that this matter may have a further financial impact on the Company's financial position and results of future operations, such potential impact of which cannot be reasonably estimated.

Use of Non-GAAP Financial Measures

                                                    For the nine months ended     For the quarter ended September
                                                          September 30,                         30,
        Dollars in thousands                          2021             2020             2021            2020
        Net interest income as presented        $       48,607    $     44,154    $      17,011    $    14,745
        Effect of tax-exempt income                      1,762           1,741              574            586
        Net interest income, tax equivalent     $       50,369    $     45,895    $      17,585    $    15,331

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:

                                                     For the nine months ended September 30,       For the quarter ended September 30,
        Dollars in thousands                               2021                    2020                  2021                2020
        Non-interest expense, as presented       $            29,302      $            29,236    $          9,932     $          9,276
        Net interest income, as presented                     48,607                   44,154              17,011               14,745
        Effect of tax-exempt interest income                   1,762                    1,741                 574                  586
        Non-interest income, as presented                     14,584                   13,627               4,375                4,805
        Effect of non-interest tax-exempt income                 124                      124                  41                   41
        Net securities (gains) losses                            (22)                  (1,179)                142                    -
        Adjusted net interest income plus
        non-interest income                      $            65,055      $            58,467    $         22,143     $         20,177
        Non-GAAP efficiency ratio                              45.04    %               50.00  %            44.85   %            45.97  %
        GAAP efficiency ratio                                  46.37    %               50.60  %            46.44   %            47.45  %

The Company presents certain information based upon average tangible shareholders' common equity instead of total average shareholders' equity. The difference between these measures is the Company's intangible assets, specifically goodwill from prior acquisitions. Management, banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions. The following table provides a reconciliation of average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:

                                                     For the nine months ended         For the quarter ended
                                                           September 30,                   September 30,
        Dollars in thousands                           2021             2020            2021            2020
        Average shareholders' equity as
        presented                                $      233,763    $    218,603    $    239,672    $   220,465
         Less average intangible assets                 (30,971)        (29,920)        (30,994)       (29,934)
        Average tangible shareholders' common
        equity                                   $      202,792    $    188,683    $    208,678    $   190,531

To provide period-to-period comparison of operating results prior to consideration of credit loss provision and income taxes, the non-GAAP measure of Pre-Tax, Pre-Provision Net Income is presented. The following table provides a reconciliation to Net Income:

                                                     For the nine months ended     For the quarter ended September
                                                           September 30,                         30,
        Dollars in thousands                           2021             2020             2021            2020
        Net Income, as presented                 $       26,723    $     20,159    $       9,014    $     7,095
        Add: provision for loan losses                    1,575           4,550              525          1,800
        Add: income taxes expense                         5,591           3,836            1,915          1,379
        Pre-tax, pre-provision net income        $       33,889    $     28,545    $      11,454    $    10,274

Executive Summary

Net Interest Income

Nov 05, 2021


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