The First Bancorp, Inc. Annual Report 2008

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FY2008 Annual Report · The First Bancorp, Inc.

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A N N U A L R E P O R T 2 0 0 8

First Light

As the sun peaks over our spruce-lined shores, a new day dawns

along the coast of Maine. While much of the country is still

asleep, a lobsterman heads out on Penobscot Bay; a runner

begins her morning jog on the carriage roads of Acadia; and,

at 7 a.m. sharp, customers of The First are banking at drive-

up windows all along the coast, from Wiscasset to Calais.

Here in Maine, we make the most of dawn’s early light.

And here at The First Bancorp, we are proud to report that

your company was on the rise again in 2008, shining brightly

on the financial industry’s larger, wavering horizon. On the

following pages, we invite you to read our President’s letter,

our Chief Financial Officer’s letter, and the articles that appear

in between which we have written to help you gain a better

understanding of the financial crisis our country is facing.

Message from the President

Dear Shareholder:

I am pleased to report that 2008 was another year of record

earnings for The First Bancorp, Inc. Especially satisfying

was the fact that these earnings were achieved in a year with

the economy in a recession, the housing market collapsing

and a financial crisis that engulfed the banking industry.

2008 was both a tumultuous and a highly volatile year for

the financial sector with economic conditions not seen in

many decades. In this annual report we will share with you

our results and articulate the underlying reasons for another

successful year at The First. In addition, we have included

several background articles on important topics that will

help clarify what led to the financial crisis and what steps

have been taken to address the issues.

Record Earnings

Net income of $14,034,000 was an increase of $933,000 or

7.1% over the $13,101,000 earned in 2007. Earnings per share

on a fully diluted basis were $1.44, up $0.10 or 7.5% from the

$1.34 reported for the year ended December 31, 2007. The

First Bancorp certainly stands out in comparison to other

financial institutions that are announcing large losses or a

fairly significant decline in earnings. There are a number of

factors that led to this exceptional result for the Company.

One of the major contributors was the $99.3 million

growth in earning assets. The Company’s loan portfolio

increased by $59.1 million or 6.4% during the course of

the year and we increased the Bank’s investment portfolio

by $40.7 million or 18.4%. This growth, combined with

a decrease in interest costs, resulted in a strong increase in

net interest income from $31.8 million in 2007 to $37.7

million in 2008 – a $5.9 million or 18.4% increase. As

previously mentioned, this excellent result in net interest

income was driven by a combination of growth in earning

assets and a substantial reduction in funding costs brought

to fruition by declining interest rates. The net interest

margin also improved from 3.13% in 2007 to 3.33% in

2008. The Bank’s balance sheet was liability sensitive at the

end of 2007, which meant that as interest rates declined,

the cost of funding our loans and investments declined at

a more rapid pace than the decrease in yields on our loans

and investments. This $5.9 million increase in net interest

income was the single most contributing factor to the

$933,000 improvement in net income.

When we mention interest rates we are referring to the

Federal Funds Target Rate which is set by the Federal Open

Market Committee (FOMC) of the Federal Reserve Bank. As

of December 31, 2007, this rate was 4.25%, which was down

1.00% from the June 2006 high of 5.25%. As the economy

continued to weaken during 2008 and the financial crisis

worsened, the FOMC dramatically lowered this target rate

by 4.00% to 0.25% as of yearend. This was an unprecedented

low, well below the 1.00% bottom in June 2003 during the

post 9/11 rate cycle. The prime lending rate, which is widely

used as the base for business loans and home equity loans,

averages 3.00% above the Fed Funds Target Rate and ended

2008 at 3.25%.

The last time that the Prime rate was this low was over 50

years ago in 1955, making today’s rates historically low for

the modern economy. According to economic theory, low

interest rates spur economic growth and decreasing rates is

a move to either prevent a recession or minimize the depth

and length of a recession.

Net interest income

grew from $31.8 million

in 2007 to $37.7 million

in 2008 – a $5.9 million

or 18.4% increase.

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We continue to have a strong lending focus and culture which has helped us grow the portfolio in weak economic times.

Efficiency Ratio

loans on the books of $59.1 million. The categories with

the largest increases were commercial real estate, which

One of the performance metrics The First Bancorp prides

contributed $52.8 million to the growth, and residential

itself on is the efficiency ratio – a measure of the cost of

real estate, which was up $10.0 million. The growth in

operations in relationship to operating revenues. The lower

these portfolios was offset by a net decline in general

the figure, the more efficiently the company performs.

business loans and consumer loans of $5.2 million. We

This ratio improved from 50.16% in 2007 to an industry-

continue to have a strong lending focus and culture which

leading level of 46.07% in 2008. This is the best it has been

has helped us grow the portfolio in weak economic times

in the history of the Company. On a national basis, The

without compromising our loan underwriting standards

First Bancorp had the 60th-best efficiency ratio of the 500

nor our loan pricing approach. Generating good quality

largest bank holding companies in the United States in the

loans and operating efficiently have been the keys to our

third quarter of 2008. Operating as efficiently as possible

success over the past 15 years.

has been a major focus of the Company for the past 15

years and is made possible by the great buy-in from all of

Investments: Another source of revenue growth for the

the employees and the effective utilization of technology.

Company is the investment portfolio which increased

Asset Growth

by $40.7 million in 2008. The primary investments

purchased were municipal securities and U.S. agency

securities, all of which carry low exposure to credit risk.

Loans: Despite a weak economy and relatively slack

At the same time, the Company decreased its corporate

loan demand, the Company still posted a net increase in

bond holdings by $10.3 million, and the $5.7 million in

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remaining corporate bonds represent only 2.2% of the

investment portfolio. Our goal is to have minimal credit

risk in the portfolio which is the reason for the reduction

in corporate bonds. Revenues from interest and dividends

on investments were $13.3 million, an increase of $2.2

million or 19.3% over 2007.

Asset Quality

While the weaknesses in the national and global economies

have not impacted coastal Maine as much as other parts of

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the country, we nevertheless experienced deterioration in

the asset quality of our loan portfolio. Net charge offs in

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We continue to have a strong lending focus and culture which has helped us grow the portfolio in weak economic times.

2008 were $2.7 million compared to $1.0 million in 2007.

long-standing approach to working with our borrowers

One borrowing relationship contributed $1.1 million to

and our strong loan underwriting standards helps alleviate

the loan losses in 2008, with the balance being spread

some of the payment problems on customers’ bank loans

across the portfolios similarly to our past experience. This

and in the end minimizes actual loan losses.

$2.7 million in net losses is 0.28% of average loans in 2008

which is higher than our results in the most recent decade

Another downside of a recession is the amount of

but is still relatively low compared to most banks across

foreclosed properties the Bank ends up owning. As of

the country. Our average loss rate over the past 20 years

December 31, 2008, these totaled $2.4 million, up $1.6

is 0.22%. Without the $1.1 million attributable to the

million from the $0.8 million at the end of 2007. This is a

one relationship, the loss ratio would have been 0.17%,

relatively modest level, however, given the loan portfolio

which is in line with our ten-year historical average of

is nearly $1.0 billion.

0.16%. We have an excellent track record of managing

our loan portfolio to minimize losses, and the last time

As previously mentioned, the Company’s allowance for

loan losses were at this level was during the late 1980s

loan losses increased by $2.0 million in 2008, ending

and early 1990s. In addition to covering the actual losses

the year at $8.8 million. The allowance is a figure that

posted in 2008, the $4.7 million provision made to the

represents an amount sufficient to absorb probable losses

allowance for loan losses in 2008 resulted in a $2.0 million

in the loan portfolio in the short term. A number of

net increase in the allowance. With a weakening economy

factors are taken into consideration in arriving at the

and an increase in our level of non-performing loans, we

appropriate level for the allowance, such as historical

felt it prudent to add to the reserve.

losses, delinquency trends, a specific review of individual

In addition to loan losses being up, the level of non-

performing assets to total assets stood at 1.31% as of

yearend 2008, a significant increase over the 0.56% level

of December 31, 2007. This increase is clearly attributable

to the impact the weakened economy is having on our

borrowers. Small businesses are seeing revenue and

sales decline and some are now struggling to meet their

obligations. A number of consumers have either lost their

jobs or seen a reduction in hours worked and/or overtime,

thereby creating strained finances resulting in payment

issues on their loans. This, unfortunately, is very common

and expected in these recessionary cycles. We feel our

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The Company ended the year comfortably above the well-capitalized threshold.

loans and general economic conditions. The two most

increasingly important and critical for every bank,

important elements are the historical losses and the specific

irrespective of its performance. The bank regulatory

loan reviews. As of December 31, 2008, the allowance for

agencies place a strong emphasis on a bank’s capital ratios

loan losses stood at 0.90% of total loans outstanding.

which they see as a buffer to absorb losses. The more

capital a bank has, the more comfortable the regulators

Our historical loss factor over the past 20 years is 0.22%,

are. In these recessionary times it is no longer viewed as

so at 0.90%, this represents coverage for more than four

acceptable to only be well-capitalized – the new measure

years of potential losses. The First has a high concentration

bank regulators are looking for is to have the bank be

in residential real estate loans, comprising 46.6% of the

super-capitalized.

total loan portfolio. This loan category has a much lower

level of losses in comparison to other loan types. For

The Company ended the year comfortably above the

example, in 2008 the loss ratio for residential mortgages

well-capitalized threshold but felt the prudent course was

was 0.04% compared to 0.28% for the portfolio as a

to increase the bank capital to levels well

whole. We have avoided writing any subprime loans and

above the minimum requirements. In

what is commonly referred to as “no documentation

loans” which have been the two types of loans that are

currently defaulting on a large scale across the country.

In addition, the Company does not have a credit card

loan portfolio or a portfolio of what is referred to

as dealer consumer loans. These loan

categories generally carry more

risk and therefore higher losses.

Given all of the above factors

management feels comfortable

with the $8.8 million allowance

level as of December 31,

2008.

Bank Capital

challenging economic

times bank capital becomes

exploring different sources of capital

and availability, it became clear

that the least expensive option and

the one least dilutive to common

shareholders was to participate in

the U.S. Treasury’s Capital

Purchase

Program.

The Company did

so to the tune of

$25.0 million,

receiving

the

capital in early

January 2009.

On page 10

of this report

is a detailed

article on the

Capital Purchase

The Company ended the year comfortably above the well-capitalized threshold.

Program and a more detailed explanation as to the

Market Value of The First Bancorp Shares

reasons for our participation. With our total capital ratio

now at 13.97% based upon risk-based assets on December

One of the biggest highlights of our successful

31, 2008, we feel very comfortable going forward and

performance in 2008 was the market appreciation of

working through this economic recession regardless of

First Bancorp shares. In an era when all indices were

how long it may last or how deep it may go.

down in the 30% range, our stock went from $14.64 on

Cash Dividend

December 31, 2007 to $19.89 per share on December

31, 2008, and posted a total return of 43.7% for the

year. For a good part of the year, our stock price was up

The Company has a long history of paying out a good

despite most of the market, especially financial stocks,

portion of our earnings in the form of

cash dividends. In 2008, the dividends

declared amounted to 52.76% of our

net income and was the fifteenth

consecutive year of dividend increases

and provided the highest payout over

this period. In comparison, in 1994 the

payout was 15.36% of earnings. We

recognize that a strong dividend yield

is not only an attractive component

for investing in The First Bancorp,

but is also a source of current income

that a number of shareholders rely

on. In 2008 the dividend represented

being down. As a comparison,

the KBW Regional Bank Index

had a total return of -18.5%

and the broad market S&P 500

had a total return of -36.9%.

Over the past five years the

total return of FNLC shares has

been 43.93% with a compound

annual growth rate of 7.56%.

This compares to a negative

total return of 15.16% for the

S&P 500 and a negative 0.42%

for the NASD Bank Index.

a 10.9% increase over the 2007 dividend and produced a

In June, The First Bancorp was added to the Russell 2000

yield of 3.92% based on the $19.89 year end closing price

and Russell 3000 indices. Being part of these indices has

– especially attractive in the low interest rate environment

resulted in much more volatility in our stock as larger

that exists. We still feel it is both prudent and good practice

volumes of shares may be traded in a day based on investors

for the Company to continue to distribute a good portion

flowing funds into or out of index funds. Inclusion in the

of our annual earnings to our shareholders in the form of

Russell 3000 Index is based on the market capitalization

cash dividends and believe our longstanding track record

of the top 3,000 stocks that are publicly traded, therefore

supports that view.

we do not make the decision to belong or not belong. On

the whole it appears that despite the volatility this added

the insurance coverage from $100,000 to $250,000. The

2009 will likely be a year of even greater uncertainty than 2008.

liquidity for our shares is a positive.

FDIC also was proactive in informing the public that the

The First Bancorp, Inc.

insurance fund was solvent and they had access to the

full resources of the U.S. Government should additional

monies be needed to cover losses from failed banks. Please

At the April 2008 shareholder meeting, the name of the

see the article on page 13 for more detail on this topic.

Company was changed from “First National Lincoln

Corporation” to “The First Bancorp, Inc.”. The rational

The Financial Crisis

for the new name reflects the expansion of the Company’s

physical presence and the Bank’s customer base beyond

2008 was a year that will be remembered as one of the

Lincoln County communities. Since the introduction of

most challenging periods since the Great Depression. The

The First Bancorp, we have been very pleased with the

problems first surfaced in the summer of 2007 and were

results. The synergy of referring to the Bank as The First

related primarily to problems with subprime mortgage

and the Company as The First Bancorp has developed

loans. From that point forward, the problems in housing

effectively. We feel a much broader base of customers and

carried over into the entire financial system. There were

shareholders now realize that both entities are one and

several points during the year when the crisis and concerns

the same. On a go forward basis, we are confident that the

about a systemic failure of the financial markets became

brand identity of the Company and the Bank will become

critical. The Federal Reserve began aggressively lowering

much stronger as well.

FDIC Insurance

the Fed Funds Target Rate in March 2008 after the near-

collapse of Bear Stearns, which ended up being sold to

J.P. Morgan with the help of the Federal Reserve Bank.

The markets seemed to have calmed down after that as

As the financial crisis worsened and the media became

the Federal Reserve also provided the investment banks

more and more obsessed with perceived problems in

access to the Fed Discount Window. The housing market

banking industry, the importance of FDIC insurance has

continued to decline, however, resulting in more losses in

heightened. Especially confusing to the general public was

mortgage-backed securities, more questions on the value

the reference to Wall Street investment firms such as Bear

of those securities and the losses the banks holding these

Stearns and Lehman Brothers as banks. These companies

securities would have to recognize. Please see the article

were not banks, were not approved to accept FDIC-

on page 16 for more detail on this topic.

insured deposits, and were not regulated like a bank. The

reference in the media, however, created an increased level

The next pivotal event was in September 2008 when

of anxiety for all bank customers. Fortunately, the FDIC

over the course of a few days, the investment bank

took decisive action to alleviate this concern by increasing
8

Lehman Brothers filed bankruptcy and 80% of AIG

2009 will likely be a year of even greater uncertainty than 2008.

(American International Group) was acquired by the

salability of real estate has been impacted as well. As

U.S. Government to keep it from failing. As a result, the

borrowers default on mortgage loans, foreclosures have

financial markets seized up even more and for the most

increased as the owners are unable to sell their homes.

part were on a downward spiral. The financial crisis was

With a weak buyers market, there is little interest in the

not limited to just the United States as similar major

foreclosure sales which drives the values of homes down

financial problems surfaced globally. The Federal Reserve,

further, fueling the downward spiral.

the U.S. Government and the FDIC collectively instituted

aggressive actions to stabilize the financial markets, free up

We are optimistic that in 2009 the housing market will

the flow of funds and calm people’s concerns about the

somehow stabilize and the financial markets, in turn, will

safety of their money held in banks and money market

begin to improve. The economy, however, is likely to

mutual funds. As 2008 came to a close, solving the financial

remain weak for most of 2009, even if the housing market

crisis was a top priority as the economy continued to

stabilizes. For the Company, this will be another year

worsen. The housing slide in home sales and prices did not

with a strong focus on asset quality. At the same time, we

show any improvement and the unemployment rate and

expect to still find good lending opportunities and will

job losses continued to increase at an alarming rate.

continue to take advantage of them when they present

What Will 2009 Look Like?

themselves. We continue to keep a watchful eye on our

expenses and anticipate that the interest rate environment

will be stable at these historically low levels.

2009 will likely be a year of even greater uncertainty

than 2008 was. As I write this letter in the first quarter of

Despite the economic turmoil of the past two years, The

2009, the unemployment rate has continued to increase

First Bancorp has prospered and we are optimistic that

and is expected to reach levels not seen in many years.

2009 will be another successful year. On behalf of the

On a daily basis, the news media reports additional major

Board of Directors and our employees, we thank you for

layoffs, the economy shows continued weakness, the auto

your support and confidence in The First.

industry is under severe strains and the housing crisis still

has not been contained. All of these components are

Sincerely,

interconnected with multiple ideas and opinions on what

the best steps need to be taken to resolve them.

The problems brought about from subprime mortgage

Daniel R. Daigneault

lending have carried over into the entire housing market,

President & Chief Executive Officer

impacting the value of real estate across the country.

Not only have housing values declined, but the actual

U.S. TREASURY CAPITAL
PURCHASE PROGRAM

In the fall of 2008, the financial crisis worsened to the

point where there was grave concern that some of the
major financial institutions in the United States might
fail and the financial markets would cease to function.
For months, various steps had been taken by the Federal
Reserve Bank to calm the financial markets without any
great success and, in October, at the request of the Bush
Administration and the Federal Reserve, the U.S. Congress
enacted the Emergency Economic Stabilization Act.

The Act allowed the Secretary of the Treasury to establish
the Troubled Asset Relief Program (TARP), and one of its
initial priorities was to have the U.S. Government purchase
troubled assets directly from financial institutions at an
agreed upon price. The theory was that taking troubled
assets off the institutions’ books would make the markets
more liquid and place the affected financial institutions in
a better position to lend more money to businesses and
consumers. This approach was not implemented, however,
as its execution proved to be more complex than anticipated
and the pricing of the toxic assets was a major roadblock.

What is the Capital Purchase Program?

The same legislation, however, also authorized a Capital
Purchase Program (CPP) with a goal of “stabilizing the
financial system by increasing the capital in U.S. banks
and then restoring confidence so credit can flow to
consumers and businesses.” This voluntary program for
qualifying healthy banks is designed to allow the U.S.
Treasury to inject capital into the banking system by
buying senior preferred stock issued by the banks. Out of
the $700 billion that was authorized by Congress under
the Emergency Economic Stabilization Act, $250 billion
was set aside for this program.

The amount any one bank could receive was limited to
3.00% of its risk based assets, and the $250 billion provided
sufficient funds for all banks in the United States to
participate. The attractiveness to banks was the relatively
low cost of 5.00% for tier-1 bank capital, as well as the ease
of participation and the short time frame which the funds
would be available.

The goal is to stabilize the financial system by increasing
the capital in U.S. banks and then restoring confidence so
credit can flow to consumers and businesses.

Sources of Capital

Banks – especially community banks like The First
Bancorp – have limited options to raise additional capital.
One option that has been utilized by banks over the past ten
years is the issuance of Trust Preferred Pooled Securities.
This form of bank capital generally carried an interest rate
in the 9% range and was, at one time, readily available to
healthy banks on relatively short notice. The financial crisis
and credit crunch in late summer 2008 essentially wiped
out this market and the availability of capital from this
source became non-existent.

The other option for capital is the
issuance of additional common
stock, which is much more
expensive and dilutive to
the holdings of existing
shareholders. The cost of
common stock is calculated
on the targeted rate of

return on tangible equity (ROE). The First Bancorp has a
targeted ROE of 15.0%, which we have achieved over the
past fifteen years. If we wanted to raise $25.0 million in
equity, we would have to issue approximately 1.5 million
new shares of common stock. These new shares would
dilute the ownership of the current shareholders by 13%
-- a fairly significant level.

Cost of Capital

In order to provide a 15.0% ROE on this higher capital
base, the earnings after tax would need to increase by $3.7
million, or 26.4%, over the $14.0 million earned by the
Company in 2008. In contrast, the
senior preferred stock sold to the
government under Capital
Purchase Program has a
5.0% cost for the first five
years, which would require
readily
a much more
attainable increase in after-

Community banks like The First have, on average,

outstanding loans equal to ten times their tangible capital.

tax earnings of $1.25 million, or 8.9%, to cover the incremental
costs. The CPP also required participating banks to issue
warrants to the Treasury giving it the right to purchase from
the company a number of common shares equal to 15% of the
amount of the senior preferred stock. For The First Bancorp,
this totaled 225,904 shares, or 2.33% of our outstanding
shares. So the dilutive factor is 2.33%, versus 13.00% had the
same amount of capital been raised by the issuance of common
stock. Under the CPP program, the Treasury does not have
any voting rights and the preferred stock can be repaid at the
bank’s option and with the approval of the bank’s regulator.

Importance of Bank Capital

Why would a healthy bank participate in this program? The
amount of capital a bank has is a critical driver in determining
the amount of money that can be loaned to customers or
invested. Community banks like The First have, on average,
outstanding loans equal to ten times their tangible capital,
meaning that $25.0 million of new capital supports up to
$250 million in net new loans. Equally important, however,
is that capital is viewed by banking regulators as the backstop
for problem loans.

Regulators look very carefully at the ratio of criticized loans
to a bank’s tangible capital. If that ratio gets too high they
may require the bank to raise additional capital and/or reduce
the level of non-performing assets in a short time period. An
accelerated sell-off of problem loans could result in increased
loan losses, business failures and increased unemployment.
With excess capital made available through the CPP, healthy
banks are in a much better position to work with struggling
customers and modify loan terms, change payment structures
or take other reasonable steps to allow businesses a better chance
of surviving the economic recession, and help consumers stay
in and keep their homes.

The Capital Purchase Program has noble goals and, if
implemented effectively, will be a successful program for the
U.S. Treasury and participating banks. For a further discussion
of the importance of capital for banks, please see the letter
from our Chief Financial Officer on page 20. ■

The Importance of
FDIC Insurance

One of the basic foundations of our nation’s

financial system is confidence, and as financial
intermediaries, banks rely on confidence to make
their business work. The basic model for a bank is very
simple: bring in funding, primarily from depositors, and use
it to make loans or purchase investments. What makes this
work is the confidence that the Federal Deposit Insurance
Corporation (FDIC) provides to depositors: they will get all
of their money back, when they need it, which is especially
important during times of financial turbulence.

What is the FDIC?

The FDIC is the U.S. Government agency that provides
deposit insurance and guarantees the safety of checking
accounts, savings accounts, certificates of deposit and
retirement accounts – up to certain limits. While we have
all heard of the FDIC and have seen “Member FDIC”
signage in banks and in bank advertising, the concept
of insuring bank deposits is relatively new. Prior to the
twentieth century, there was no bank guarantee fund

In 2008, the deposit insurance coverage limit

increased from $100,000 to $250,000 and the

insurance coverage for non-interest-bearing

checking accounts is now unlimited.

at a national level to protect depositors during the
occasional bank panic or failure. Over time, a number
of deposit security measures were adopted at the state
level, and when the Federal Reserve was founded in
1913, the government chose to be a “lender of last
resort” which would keep troubled banks afloat rather
than provide guarantees on bank deposits.

The Great Depression put an enormous strain on the
banking system, however, and in 1933, the United
States experienced a bank panic that saw the closing
of over 4,000 banks. While the federal government
stepped in to merge weaker banks with stronger ones,
it was months before depositors saw even a portion of
their funds that were deposited in the failed banks. At
the height of this crisis, President Roosevelt signed
the Banking Act of 1933 establishing the Federal
Deposit Insurance Corporation – initially intended
to be a temporary measure to raise the confidence of
U.S. depositors in the banking system.

When FDIC deposit insurance went into effect in
January of 1934, the initial insurance coverage level
was $2,500. Later that year, the coverage was increased
to $5,000, and with the passing of The Banking Act
of 1935, deposit insurance coverage and the FDIC
itself were made permanent. Over the years, the
insurance level has been increased several times until
it reached $100,000 in 1980, where it remained until
2008. In 1950, Congress expanded the FDIC’s role
and authorized the agency to also examine banks on
a regular basis to determine how well each bank is run
and the level of risk it places on the deposit insurance
fund. Today the FDIC insures more than $4.3 trillion in
deposits in over 8,000 U.S. banks and thrifts. It employs

4,500 people nationwide and is managed by a five
person board of directors, all of whom are appointed
by the President and confirmed by the Senate.

How is the FDIC funded?

The short answer to this question is that the FDIC is
funded by banks themselves though premiums that are
assessed based upon a bank’s level of deposits. It also
receives a small amount of revenue from the investment
of the fund’s assets in U.S. Treasury securities. Over
the years, however, the costs to the FDIC-member
banks have gone up dramatically and this increase was
not based solely on regular deposit premiums. By law,
the FDIC has to maintain reserves at a specified target,
currently 1.25% of insured deposits, and if the Fund
falls below this target, deposit insurance premiums
paid by banks are increased. In other words, when a
bank fails, the remaining healthy banks pay the cost of
replenishing the fund, not the U.S. taxpayer.

Until the 1980s, only regular banks were insured by the
FDIC. Savings and loan institutions, or thrifts, were
insured by a similar but separate agency, the Federal
Savings and Loan Insurance Corporation (FSLIC).
During the S&L debacle in the late 1980s, FSLIC
became insolvent and was recapitalized with $8.0
billion of bonds issued by the Financing Corporation
(FICO), to be repaid with funds from the Federal
Home Loan Bank System and premiums from FSLIC-
insured banks. The recapitalization plan proved to be
inadequate, however, and in 1989 Congress established
a new fund – the Savings Association Insurance Fund
(SAIF) – which was administered by the FDIC. At this
point, FICO bond payments were expected to come

$250.000

out of insurance premiums paid by the FSLIC-insured
banks for their coverage by the SAIF fund.

additional coverage is also expected to be temporary
and end on December 31, 2009.

It soon became apparent that the SAIF revenues would
not be able to cover the SAIF bond payments as the
projected annual deposit growth rate of 7% proved
to be overly optimistic. This led Congress to pass the
Deposit Insurance Funds Act of 1996 requiring regular
banks, which had previously not been involved in the
S&L problems, to assist with repayment of the FICO
bonds. Beginning in 1996, regular banks were required
to pay a FICO bond assessment equal to one-fifth of the
amount that the FSLIC-insured banks were paying until
1999 when the SAIF fund and Bank Insurance Fund
(BIF) were merged into one – the Deposit Insurance
Fund (DIF) – after which the assessments were equally
shared by all.

Changes to FDIC Coverage in 2008

With a high level of instability in the financial markets
in 2008, Congress passed the Emergency Economic
Stabilization Act (EESA) to shore up depositor
confidence in the banking industry. First, the deposit
insurance coverage limit was increased from $100,000
to $250,000. This is expected to be temporary and
revert to $100,000 on December 31, 2009 (excluding
retirement accounts which were already insured up
to $250,000 and will remain at that level.) The second
major change is that insurance coverage for non-
interest-bearing checking accounts is now unlimited,
however this is optional for financial institutions.
The First is participating, so all non-interest bearing
checking accounts in our Bank, regardless of how they
are owned, are insured to the balance on deposit. This

services

consumers,

In addition to providing insurance coverage and
examining banks, the FDIC also provides many
educational
including
for
informational booklets and an interactive website
that helps consumers learn about deposit insurance.
Consumers can also use an online calculator to determine
that best way to structure their accounts for maximum
FDIC coverage. The FDIC is backed by the full faith
and credit of the United States government and since
its inception no one has lost a penny of insured deposits
as the result of a bank failure.

The Cost to Us

So what does this mean to The First in terms of real
dollars? At the end of 2008 our FDIC insurance
premium assessment (based on our total deposits)
was approximately $550,000 per year and our FICO
Assessment was $100,000 per year, for a total annual
premium of $650,000. As noted above, when a bank fails,
the cost of this falls to the remaining healthy banks, and as
a result of the increasing level of bank failures in 2008, we
expect our total deposit insurance premium in 2009 to be
at least $1.5 million. The FDIC has also proposed a one-
time special assessment to be levied on all FDIC-insured
banks in 2009 to help replenish the fund.

While increased FDIC coverage will prove to be beneficial
to depositors and is necessary in these challenging
economic times, this comes at a cost to FDIC-member
banks, even if those banks are very healthy and well-
capitalized like The First, with little risk of failure. ■

WALL

The roots of the current financial crisis go very deep and are

centered on the traditional home mortgage, which, until
recently, had been considered one of the safest, most secure and
least risky loans. Mortgages are typically written for repayment over 20
to 30 years and may have a fixed interest rate for the entire period or one
that may adjust periodically based on a change in an agreed upon index,
such as the rate on the one-year U.S. Treasury. The borrower makes a
monthly payment that includes both interest and repayment of principal.
Because of the pride most Americans traditionally take in their homes,
conventional wisdom and experience have shown that
borrowers tend not to risk their homes and, in general,
when paying debt, the mortgage gets paid first.

If these were such low-risk loans, then how could
they be at the heart of today’s mess? The simple
answer is greed and self-deception. Take a low-
interest rate environment and a huge demand for
home ownership, combine these with the belief that
home prices would continue to climb, and the stage was set for the
mortgage meltdown that we have seen over the past two years. While
most mortgages that were made in this decade were based on sound
underwriting standards, a hybrid product – the subprime mortgage –
ultimately is behind our situation today.

This is a story that starts on Main Street and ends on Wall Street. There
is a lot of jargon used these days to describe the various contributors
to the mortgage meltdown. To help understand what the most
commonly used terms mean, we have assembled the following glossary
and chronology that takes us from the simple, safe, low-risk home
mortgage of Main Street to what is now described as the toxic waste
of Wall Street and the effect it is having on the financial system.

Fannie, Freddie and Ginnie

Many of the banks on Main Street that originate mortgages do not want
to hold these long-term fixed-rate instruments on their balance sheets

STREET

because they pose too much interest rate risk. As a result, three entities
were created between 1968 and 1970 to broaden home ownership in the
United States by making mortgage financing more readily and widely
available. Fannie Mae (Federal National Mortgage Association or
FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation
or FHLMC) are both Government Sponsored Enterprises (GSEs) –
for-profit corporations created through Congressional legislation but
owned by shareholders. Ginnie Mae (Government National Mortgage
Association or GNMA), however, is a part of the U.S. Department of
Housing and Urban Development and thus is backed by the full faith
and credit of the U.S. Government.

MBS

Fannie, Freddie and Ginnie work in a similar fashion – they buy
mortgages from regular banks and mortgage origination
companies (such as Countrywide) and then sell the majority
of them to other investors. Rather than selling them as
individual mortgages, however, a number of mortgages
are put together to create a pool of mortgages, and then
pieces of the pool are sold to different investors – usually in
$1,000 units – as a Mortgage-Backed Security (MBS). One
important characteristic of an MBS is that Fannie, Freddie
and Ginnie provide a credit guarantee, so an MBS has a AAA rating
and has virtually no credit risk for the investor.

CMO

MBS investors receive a principal and interest payment every month
based upon the payments from the mortgages which make up the pool.
Since mortgages give the borrower the ability to repay part or all of the
loan at any time, however, the MBS investor does not know exactly
how long it will be until the investment is completely repaid. Enter
the Collateralized Mortgage Obligation (CMO) – a marvel of Wall
Street financial engineering that is designed to bring a much higher
degree of repayment certainty than an MBS. A CMO is typically a

The Alchemy of

Transforming

Simple Home

Mortgages Into

Toxic Assets

behemoth financial structure that is created by pooling
many MBS pools and then dividing them into tranches, or
slices, each with a different time period for repayment. With
the good comes the bad, though … to create a tranche with
more certain repayment characteristics, a backstop tranche
with total repayment uncertainty is also created to make
this happen. These backstop tranches typically have much
higher yields and much greater risk, and they were the
toxic waste of Wall Street that was sold in the early 1990s
to unsuspecting local governments, such as Orange County,
California, which had no idea what they were purchasing.

ABS

Since Wall Street is very creative, putting together pools
didn’t stop with regular mortgages. Today you can purchase
an Asset Backed Security (ABS), a pool made up of a variety
of underlying financial instruments, including commercial
loans, auto loans, student loans, financing receivables, or credit
card debt, to name a few. Investors like these because pooling
together the underlying loans reduced the overall risk and these
were sometimes enhanced with an added credit guarantee.

Subprime Mortgage

In good financial times, potential risks and memories of
past problems are easy to ignore, and in the early to middle
part of this decade, economic conditions were ripe for such
avoidance. The economy was doing well, housing demand
and prices were skyrocketing, and everyone wanted to get
in on home ownership before it was too late. Enter the
Subprime Mortgage, a loan generally made by mortgage
originators (not regular banks) to borrowers with little or
no demonstrated ability to repay or with marginal credit,
typically characterized by a FICO score of 620 or below.
Many of these loans were made with an initial low rate that
would adjust upward after a few years, at which time it was
presumed that the borrower would have higher income to
afford the higher payments or would sell the home and book
a tidy profit. The problem is that many of these subprime
mortgages were made to borrowers who didn’t have the
ability to repay even at the low initial rate, let alone the higher
rate that some of the loans reset to after one to two years.

CDO

Once again, enter the financial engineers of Wall Street.
After such great success in creating and selling the MBS,
the CMO and the ABS, putting together pools of
subprime mortgage was seen as the logical next step. In
the same way that the CMO provided predictability for
the timing of repayment of principal, the Collateralized
Debt Obligation (CDO) was designed to remove credit
risk for the investor in pools of subprime mortgages.
Once again, this was done by creating good tranches, in
this case with little or no credit risk, balanced by higher-
yielding bad tranches, which were designed to take most
or all of the credit risk. While the good tranches had
AAA ratings from the credit agencies, there was a
fatal flaw in the design: the assumptions and models
used to quantify the potential default of subprime
mortgages grossly underestimated the actual rate.
The result was that the bad tranches were quickly
wiped out as mortgages defaulted and suddenly the
AAA-rated tranches were experiencing losses that
were never anticipated.

CDS

Just as most people purchase insurance to protect against
an untimely event beyond their control such as a home
fire, auto accident or early death, investors can purchase
insurance against the credit default of a borrower: the

its current fair value. For banks, this is typically seen in the
investment portfolio when the partial or full repayment
of a security is uncertain, resulting in the security being
classified as “other-than-temporarily-impaired.” When
this occurs, the difference between the carrying value
and fair value of the security is recorded in the company’s
statement of income.

Credit Default Swap (CDS). Like a typical insurance
policy, regular payments are made by the policy owner
for the term of the policy or until a specified event occurs:
with a CDS this is typically a loan or bond default or a
declaration of bankruptcy. If that event occurs, an agreed-
upon sum is paid to the policy owner. In good economic
times, the perceived potential for default or bankruptcy
was low, so banks and insurance
companies were willing to write a
CDS for a relatively low premium,
thinking it would be easy income
with little risk. In the past two years,
however, that has not been the case,
and the amount of CDS payouts
have crippled many underwriters,
such as the insurance giant AIG. And
to make matters worse, a CDS could
be written for speculative purposes,
betting against a company even if one
had no financial interest in it.

We have never

originated subprime

mortgages and none

of the securities we

Mark-to-Market

own have subprime

mortgages as

their underlying

collateral.

decades,

For
companies have
accounted for their assets using
historical cost – the actual price paid
for an asset, less any accumulated
depreciation. Since the early 1990s,
however, the Securities and Exchange
the Financial
Commission and
Accounting Standards Board (which
establishes the accounting rules in the
United States), have pushed to change
from historical cost accounting to
Mark-to-Market or fair value accounting. While this has
been touted as in the best interest of the investor, it may
not always be the case. For example, when markets seize
up and no one is willing to buy anything at any price, as
they did in the third and fourth quarters of 2008, what is
the true value of an asset? In this case, fair value accounting
can mislead the investor about the true value of a company,
since the asset would be priced at its liquidation value at
that moment in time, not at its true value assuming the
company has the ability to ride out current economic
problems and await the market’s rebound.

Impairment

A component of fair value accounting is Impairment – a
charge against current earnings to write down an asset to

The Situation Today

While it has taken nearly forty years,
what started as a way to expand home
ownership and allow more people to
live the American dream is now on a
much different path. As the economy
weakened, people became more
conservative and began spending less.
This, in turn, led to fewer jobs and
more foreclosures. With less demand
and more houses for sale, home prices
suddenly began to fall after rising for
so long. At this point in the cycle,
borrowers with subprime mortgages
had loans that were repricing upward
and they were unable to sell their
loans,
homes or refinance their
which put them in default. Investors
then saw huge losses on securities
that were supposedly of the highest
quality, which ultimately led to the
writedown of billions and billions of
dollars by large banks and brokerage
firms holding the CDOs collateralized
by subprime mortgages.

How This Affects The First

The First Bancorp has always operated on Main Street,
not Wall Street. We maintain a conservative credit culture
with high underwriting standards, which is why we have
never originated any subprime mortgages. This culture
extends to the investment portfolio as well, where none
of the securities we own have subprime mortgages as
their underlying collateral. Our securities available for
sale portfolio carries all investments at fair value, and as
of December 31, 2008, none of our investment securities
were classified as other-than-temporarily impaired. While
staying with our principles may have seemed overly
conservative to some in the past, today it is obvious that it
was the best course to have taken. ■

Message From the Chief Financial Officer

Dear Shareholder:

It is certainly a challenging time for the banking industry and

we have devoted much of this year’s annual report to help

you better understand what has led to the current economic

situation and how The First Bancorp is navigating through it.

In 2008, our record earnings were driven by excellent growth in

earning assets, wider margins due to declining rates, controlled

operating expenses and a strong focus on asset quality.

The Importance of Capital

The basic business of banking is pretty simple – we bring in money

from deposits and other borrowings (our liabilities) and then lend

it or invest it (our assets). There is a third section of the balance

sheet however: shareholders’ equity or the bank’s own stake in

the game. In order for a bank to remain in business, shareholders’

equity or bank capital must be a minimum percentage of assets

to be considered “well-capitalized” by the FDIC.

Since some assets on a bank’s balance sheet have more risk

than others, capital ratios are calculated in two ways: with

total assets as shown and then after adjusting these assets

for credit risk. To calculate “risk-weighted assets,” U.S.

Treasury securities are weighted at 0% of their carrying value,

Government Agency securities at 10%, municipal securities at

20%, residential mortgages at 50% and all other loans at 100%.

Risk-weighted assets are typically quite lower than total

assets at most banks. For The First Bancorp, as of December

31, 2008 our total assets were $1.325 billion while our risk-

weighted assets were only $877.7 million.

In challenging times such as these, having
ample capital is critical and enables a bank
to better ride out the economic storm.

There are three capital ratios used by the banking

In challenging times such as these, having ample capital is

regulators. The first is total capital (after adjusting for

critical and enables a bank to better ride out the economic

intangibles) as a percentage of average assets for the

storm. But banking regulators look at more than the ratio

quarter, which is known as leverage capital. The second

of bank capital to assets – they also evaluate the level of

is total capital as a percentage of risk-weighted assets, or

problem loans to bank capital. If this ratio rises above 50%

tier-1 risk-based capital. The third is total capital plus the

of bank capital, the regulators may step in and push a bank

allowance for loan losses as a percentage of risk-weighted

to reduce its level of problem loans. This can be done in

assets, which is known as total risk-based capital. To be

two ways – by encouraging the borrower to refinance

considered well-capitalized, a bank’s leverage capital must

elsewhere or sometimes to foreclose on the loan, which

be at least 5.0%, tier-1 risk-based capital at least 6.0%, and

happened frequently in the early 1990s. It is one of the

total risk-based capital at least 10.0%. As of December 31,

factors which made that economic recession even worse.

2008, the Company’s actual ratios were 7.07%, 10.11%

and 11.13%, respectively.

Although The First Bancorp comfortably met the well-

capitalized threshold of 10.0% of risk-weighted assets

How does a bank add to its capital? Retained earnings

as of December 31, 2008, the Board and Management

is the most common way, however a bank can also issue

felt that carrying additional bank capital would be

new stock to increase capital levels. And what reduces

prudent given current economic conditions. This was

capital? Dividends are the most common use of capital,

the primary reason for choosing to participate in the

and a bank can also use capital

to repurchase its own stock.

But in the same way that

earnings add to capital, losses

reduce bank capital – which is

the reason regulators require a

bank to have a minimum ratio

of capital to its assets. This is

the buffer that allows a bank to

absorb losses while depositors’

dollars remain safe.

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Capital Purchase Program, under

which we received a $25 million

preferred stock investment from

the U.S. Treasury. Based upon our

December 31, 2008 assets, leverage

capital increased from 7.07% to

9.06% after the preferred stock

investment, tier-1 risk-based capital

went from 10.11% to 12.96%, and

total-risked-based capital increased

from 11.13% to 13.97%.

The challenge we face is determining the opportune time to extend liabilities.

The Capital Purchase Program has, unfortunately, been

The table below shows the composition of the

incorrectly maligned by the media. It is not a bailout,

investment portfolio at December 31, 2008. All

and it has been structured to make money for the U.S.

of the mortgage-backed securities in the portfolio

taxpayer, not to cost the taxpayer. More importantly,

were issued by either Fannie Mae, Freddie Mac,

though, it is intended to strengthen the capital position

or Ginnie Mae and we had no collateralized debt

of the banks and stimulate the flow of funding to the

obligations secured by subprime mortgages – the

banking system, which is expected, in turn, to increase

toxic securities which were a prime contributor

the level of bank lending.

to the current economic situation. Corporate debt

The First’s investment portfolio as of December 31, 2008

U.S. Treasury and agency

$110,513,000

Mortgage-backed securities

State and municipal

Corporate securities

FHLB stock

FRB stock

Other equity securities

61,696,000

71,240,000

4,127,000

14,031,000

662,000

263,000

42.1%

23.5%

27.1%

1.6%

5.3%

0.3%

0.1%

Total

$262,532,000

100.0%

securities rated below investment

grade totaled $2.4 million and

had an estimated

fair value

of $1.4 million. Management

has evaluated these securities

for

other-than

temporary

impairment, and in the Company’s

opinion, none of these holdings

warranted other-than-temporary

classification as of December 31,

2008. Management considered

several factors in making this

determination, including:

Our Investment Portfolio

• All three companies were current on their interest

payments to bondholders.

During 2008, the Company increased its investment

• The securities are issued by auto-related companies.

portfolio by $40.7 million or 18.4% and also saw interest

The U.S. Government and President Obama have

income from investments increase by $2.2 million or 19.3%.

publicly stated the importance of helping the U.S.

We have always sought to minimize the amount of credit

auto industry and preserving jobs.

risk in the portfolio, and during the fourth quarter we

• The Company has both the intent and the ability to

reduced the level of corporate securities by $10.7 million. It

continue to hold these securities.

has been our long-standing position that the predominant

• The securities are in the available-for-sale portfolio,

risk we take in the investment portfolio is interest rate risk,

and the decline in market value is recognized on the

not credit risk, and paring back the level of holdings of

Company’s balance sheets as an unrealized loss to

corporate debt securities is consistent with that view.

equity in accordance with SFAS 115.

The challenge we face is determining the opportune time to extend liabilities.

Liquidity Management

Since the middle of 2008 we have strengthened our

liquidity position, and as of December 31, 2008, the Bank

Unlike most other businesses, a bank does not manage cash

had primary sources of liquidity of $188.4 million, or

flow. Why? Because cash is the raw material which a bank

14.5% of its assets compared to $84.5 million, or 7.07% of

turns into its product – either loans or investments. Instead,

its assets as of December 31, 2007. In Management’s view,

a bank needs to manage its liquidity or its access to sources

this is adequate and can meet the growth and liquidity

of funding, since almost all of the money it lends or invests

needs of the Bank.

come from deposits or borrowed funds, not from bank

capital or shareholders’ equity.

The key to liquidity management at a bank is to have multiple

sources to go to. While local deposits are our largest single

source of funding, it is difficult to raise a significant amount

of local deposits in a short period of time. As a result, The

First Bancorp uses a liability-based approach to liquidity

management and has a variety of wholesale or non-local

funding sources which it can tap quickly and easily. These

include the Federal Home Loan Bank of Boston, repurchase

agreements with brokerage firms, lines of credit from two

correspondent banks and non-local certificates of deposit

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from brokers and online networks. Management evaluates

Managing Interest Rate Risk

our liquidity position on a daily basis and is prepared to

move from one source to another based on available pricing

The increase in earnings in 2008 was a direct result of

and overall liquidity needs.

the $5.9 million or 18.4% increase in net interest income

over 2007. While this was partly attributable to growth in

One of the major reasons that the financial markets came close

earning assets, a greatly improved net interest margin was

to seizing up in September was liquidity – or lack thereof.

also a major contributor to this increase.

With huge uncertainty about what a bank might have on its

balance sheet, other banks became extremely cautious about

The management of interest rate risk is the major factor in a

which banks they would loan money to and for how much

bank’s net interest margin – the spread earned between the

or for how long. Access to this short-term liquidity is the

income on loans and investments and the cost of deposits

lifeblood of the global financial system, and when these funds

and borrowings, expressed as a percentage of average

stopped flowing, the financial crisis deepened quickly.

earning assets. With a balance sheet made up of tens of

Given our strong capital position, conservative credit
culture, ample liquidity, and limited interest rate risk,
we feel we are in a much better position to weather
this economic storm than many other banks.

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thousands of accounts with various

maturities or repricing at different

intervals, when interest rates change,

not everything changes at the same

time or by the same amount. This

can lead to the net interest margin

widening or contracting.

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The First Bancorp started 2008

with a

liability-sensitive balance

sheet. This means that we had more

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opportune time to extend liabilities

– before rates begin to increase but

not too soon should rates remain

flat for an extended period.

As President Daigneault noted in

his letter, we expect 2009 to be a

challenging year for the banking

industry. Given our strong capital

position, conservative credit culture,

ample liquidity, and limited interest

liabilities repricing in the short-term than assets, which is a

rate risk, we feel that The First Bancorp is in a much better

good position to be in with a declining rate environment.

position to weather this economic storm than many other

The 3.25% drop in prime rate and the Fed Funds target rate

banks – especially the large money center banks and the

during the year led to our margin increasing from 3.13% in

super-regionals. We are a true community bank and have

2007 to 3.33% in 2008.

stayed true to our focus of serving our customers and

communities. This has served us very well in the past, and

Management’s goal in managing the balance sheet is to

I am confident that this approach will continue to serve us

have a modest level of interest rate risk at most. Given

well in the future.

that interest rates are now at unprecedented lows, our

objective is to reduce liability sensitivity so that liabilities

reprice less quickly. The preferred way to do this is by

extending the maturity of liabilities, however this comes

at a cost since longer liabilities typically have a higher

F. Stephen Ward

rate of interest. The challenge we face is determining the

Executive Vice President & Chief Financial Officer

Selected Financial Data
The First Bancorp, Inc. and Subsidiary

Dollars in thousands,
except for per share amounts
Summary of Operations
Interest Income
Interest Expense
Net Interest Income
Provision for Loan Losses
Non-Interest Income
Non-Interest Expense
Net Income
Per Common Share Data
Net Income
Basic
Diluted
Cash Dividends (Declared)
Book Value
Market Value
Financial Ratios
Return on Average Equity
Return on Average Tangible Equity
Return on Average Assets
Average Equity to Average Assets
Average Tangible Equity to Average Assets
Net Interest Margin (Tax-Equivalent)
Dividend Payout Ratio (Declared)
Allowance for Loan Losses/Total Loans
Non-Performing Loans to Total Loans
Non-Performing Assets to Total Assets
Efficiency Ratio (Tax-equivalent)
At Year End
Total Assets
Total Loans
Total Investment Securities
Total Deposits
Total Borrowings
Total Shareholders’ Equity

Market price per common share of stock during 2008

2008

$ 71,372
33,669
37,703
4,700
9,646
22,994
14,034

Years ended December 31,
2007

2006

2005

2004

$ 71,721
39,885
31,836
1,432
10,145
22,183
13,101

$ 64,204
33,589
30,615
1,325
10,306
22,439
12,295

$ 50,431 $ 30,528
9,024
21,504
880
4,667
13,371
8,509

18,848
31,583
200
9,034
22,518
12,843

$ 1.45
1.44
0.765
12.09
19.89

$ 1.34
1.34
0.69
11.58
14.64

$ 1.25
1.25
0.61
10.98
16.72

$ 1.32
1.30
0.53
10.52
17.58

$ 1.16
1.14
0.45
7.18
17.45

12.02%
15.75
1.10
9.14
6.98
3.33
52.76
0.90
1.27
1.31
46.07

11.89%
15.89
1.13
9.53
7.13
3.13
51.49
0.74
0.31
0.56
50.16

11.63%
15.75
1.14
9.81
7.24
3.24
48.80
0.76
0.42
0.32
52.12

12.98%
17.81
1.36
10.44
7.61
3.84
40.15
0.79
0.40
0.30
52.89

979,273
262,532
925,736
272,074
117,181

$1,325,744 $1,223,250 $1,104,869 $1,042,209
772,338
183,981
713,964
215,189
$ 103,452
High
$23.05

838,145
180,549
805,235
179,862
$ 107,327

920,164
221,815
781,280
316,719
$112,453

17.10%
17.36
1.41
8.22
8.27
3.94
38.62
0.99
0.34
0.25
48.78

$ 634,238
478,332
126,827
369,844
207,206
$ 52,815
Low
$12.84

Consolidated Balance Sheets
The First Bancorp, Inc. and Subsidiary

As of December 31,
Assets
Cash and cash equivalents
Securities available for sale
Securities to be held to maturity, fair value of $229,460,000
at December 31, 2008, and $181,132,000 at December 31, 2007
Loans held for sale
Loans
Less allowance for loan losses
Net loans
Accrued interest receivable
Premises and equipment, net
Other real estate owned
Goodwill
Other assets
Total assets
Liabilities
Demand deposits
NOW deposits
Money market deposits
Savings deposits
Certificates of deposit under $100,000
Certificates of deposit $100,000 or more
Total deposits
Borrowed funds
Other liabilities
Total liabilities
Commitments and contingent liabilities (notes 13, 15, 19 and 20)
Shareholders’ equity
Common stock, one cent par value
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Net unrealized (loss) gain on securities available for sale, net of
tax benefit of $441,000 in 2008 and net of tax of $234,000 in 2007
Net unrealized loss on post-retirement benefit costs,
net of tax benefit of $146,000 in 2008 and $147,000 in 2007
Total shareholders’ equity
Total liabilities and shareholders’ equity
Common stock
Number of shares authorized
Number of shares issued
Number of shares outstanding
Book value per share

2007
(restated for change in
accounting principle)

2008

$ 16,856,000
27,765,000

$ 17,254,000
40,461,000

234,767,000
1,298,000
979,273,000
8,800,000
970,473,000
5,783,000
16,028,000
2,428,000
27,684,000
22,662,000
$1,325,744,000

$ 68,399,000
108,188,000
129,333,000
82,867,000
246,152,000
290,797,000
925,736,000
272,074,000
10,753,000
1,208,563,000

181,354,000
1,817,000
920,164,000
6,800,000
913,364,000
6,585,000
16,481,000
827,000
27,684,000
17,423,000
$ 1,223,250,000

$ 60,637,000
101,680,000
124,033,000
86,611,000
301,364,000
106,955,000
781,280,000
316,719,000
12,798,000
1,110,797,000

97,000
44,117,000
74,057,000

97,000
44,762,000
67,432,000

(819,000)

436,000

(271,000)
117,181,000
$ 1,325,744,000

(274,000)
112,453,000
$ 1,223,250,000

18,000,000
9,696,397
9,696,397
$12.09

18,000,000
9,732,493
9,732,493
$11.58

The accompanying notes are an integral part of these consolidated financial statements

Consolidated Statements of Income
The First Bancorp, Inc. and Subsidiary

Years ended December 31,
Interest and dividend income
Interest and fees on loans (includes tax-exempt income
of $1,245,000 in 2008, $1,179,000 in 2007, and $975,000 in 2006)
Interest on deposits with other banks
Interest and dividends on investments (includes tax-exempt income of
$2,820,000 in 2008, $2,685,000 in 2007, and $2,703,000 in 2006)
Total interest and dividend income
Interest expense
Interest on deposits
Interest on borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Fiduciary and investment management income
Service charges on deposit accounts
Net securities gains
Mortgage origination and servicing income
Other operating income
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy expense
Furniture and equipment expense
Net securities losses
Amortization of core deposit intangible
Other operating expenses
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share
Basic earnings per share
Diluted earnings per share
Cash dividends declared per share
Weighted average number of shares outstanding
Incremental shares

$ 1.34
1.34
0.690
9,787,287
25,731
The accompanying notes are an integral part of these consolidated financial statements

$ 1.45
1.44
0.765
9,701,379
18,952

2008

2007

2006

$58,079,000
3,000

$60,585,000
-

$54,585,000
64,000

13,290,000
71,372,000

11,136,000
71,721,000

9,555,000
64,204,000

23,000,000
10,669,000
33,669,000
37,703,000
4,700,000
33,003,000

1,475,000
2,837,000
-
145,000
5,189,000
9,646,000

29,745,000
10,140,000
39,885,000
31,836,000
1,432,000
30,404,000

1,737,000
2,740,000
2,000
589,000
5,077,000
10,145,000

11,333,000
1,518,000
2,005,000
89,000
283,000
7,766,000
22,994,000
19,655,000
5,621,000
$ 14,034,000

11,037,000
1,438,000
1,944,000
-
283,000
7,481,000
22,183,000
18,366,000
5,265,000
$13,101,000

25,804,000
7,785,000
33,589,000
30,615,000
1,325,000
29,290,000

1,951,000
2,752,000
18,000
503,000
5,082,000
10,306,000

10,826,000
1,421,000
2,124,000
-
283,000
7,785,000
22,439,000
17,157,000
4,862,000
$12,295,000

$ 1.25
1.25
0.610
9,816,307
49,476

Consolidated Statements of Changes in Shareholders’ Equity
The First Bancorp, Inc. and Subsidiary

Balance at December 31, 2005
Net income
Net unrealized loss on securities
available for sale, net of tax
benefit of $3,000
Initial application of Statement No.
158, net of tax benefit of $190,000
Comprehensive income
Cash dividends declared
Equity compensation expense
Payment to repurchase common stock
Proceeds from sale of common stock
Tax benefit of disqualifying
disposition of stock option shares
Balance at December 31, 2006
Net income
Net unrealized loss on securities
available for sale, net of tax benefit of
$100,000
Unrecognized actuarial gain
for post-retirement benefits,
net of taxes of $42,000
Comprehensive income
Cash dividends declared
Equity compensation expense
Payment to repurchase common stock
Proceeds from sale of common stock
Balance at December 31, 2007
(as previously stated)
Change in accounting for split dollar
life insurance arrangements
Balance at December 31, 2007
(restated)
Net income
Net unrealized loss on securities
available for sale, net of tax benefit of
$675,000
Unrecognized actuarial gain
for post-retirement benefits,
net of taxes of $1,000
Comprehensive income
Cash dividends declared
Equity compensation expense
Payment to repurchase common stock
Proceeds from sale of common stock
Tax benefit of disqualifying
disposition of stock option shares
Balance at December 31, 2008

Number of
common
shares
outstanding

Common
stock

Additional
paid-in
capital

9,832,777 $ 99,000 $47,718,000
-

Accumulated
other
comprehensive
income (loss)

Total
shareholders’
equity

$ 734,000 $103,452,000
12,295,000

Retained
earnings
$54,901,000
12,295,000

(38,000)

-
-
-
-
(179,176)
117,191

-
-
-
-
(1,000)
-

-
-
-
60,000
(3,051,000)
860,000

-
9,770,792
-

-
98,000
-

-
45,587,000
-

-
12,295,000
(5,983,000)
-
-
-

85,000
61,298,000
13,101,000

(352,000)
(390,000)
-
-
-
-

(352,000)
11,905,000
(5,983,000)
60,000
(3,052,000)
860,000

-
344,000
-

85,000
107,327,000
13,101,000

(260,000)

-
-
-
-
(109,860)
71,561

-
-
-
-
(1,000)
-

-
-
-
59,000
(1,686,000)
802,000

-
13,101,000
(6,752,000)
-
-
-

78,000
(182,000)
-
-
-
-

78,000
12,919,000
(6,752,000)
59,000
(1,687,000)
802,000

9,732,493

$ 97,000 $ 44,762,000

$67,647,000

$ 162,000 $112,668,000

(215,000)

9,732,493
-

$ 97,000 $ 44,762,000
-

$67,432,000
14,034,000

$ 162,000 $112,453,000
14,034,000

-
-
-
-
(88,764)
52,668

-
-
-
-
-
-

(1,255,000)

-
-
-
37,000
(1,414,000)
732,000

-
14,034,000
(7,416,000)
-
-
-

3,000
(1,252,000)
-
-
-
-

3,000
12,782,000
(7,416,000)
37,000
(1,414,000)
732,000

-
9,696,397

-
$ 97,000 $ 44,117,000

7,000
$74,057,000

7,000
$ (1,090,000) $117,181,000

The accompanying notes are an integral part of these consolidated financial statements

Consolidated Statements of Cash Flows
The First Bancorp, Inc. and Subsidiary

2008

2007

2006

$14,034,000

$13,101,000

$12,295,000

For the years ended December 31,
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Change in deferred income taxes
Provision for loan losses
Loans originated for resale
Proceeds from sales of loans
Net (gain) loss on sale of other real estate owned
Net (gain) loss on sale of premises and equipment
Equity compensation expense
Net (gain) loss on sale or call of securities
Net change in other assets and accrued interest receivable
Net change in other liabilities
Amortization of investment in limited partnership
Net accretion of discounts on investments
Net acquisition amortization
Provision for losses on other real estate owned
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from sales of securities available for sale
Proceeds from maturities, payments, calls of securities available for sale
Proceeds from maturities, payments, calls of securities held to maturity
Proceeds from sales of other real estate owned
Purchases of securities available for sale
Investment in limited partnership
Purchases of securities to be held to maturity
Net increase in loans
Capital expenditures
Proceeds from sale of premises and equipment
Net cash used in investing activities
Cash flows from financing activities
Net increase (decrease) in transaction and savings accounts
Net increase in certificates of deposit
Advances on long-term borrowings
Repayments on long-term borrowings
Net increase (decrease) in short-term borrowings
Payments to repurchase common stock
Proceeds from sale of common stock
Dividends paid
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Interest paid
Income taxes paid
Non-cash transactions:
Transfer from loans to other real estate owned
Net decrease in unrealized gain on securities available for sale

1,232,000
(1,039,000)
4,700,000
(19,199,000)
19,718,000
-
17,000
37,000
89,000
(1,627,000)
(1,933,000)
84,000
(5,475,000)
239,000
-
10,877,000

1,224,000
(464,000)
1,432,000
(24,081,000)
22,724,000
20,000
(34,000)
59,000
(2,000)
(926,000)
486,000
-
(2,996,000)
228,000
56,000
10,827,000

14,192,000
3,551,000
106,450,000
-
(6,836,000)
(1,700,000)

179,000
8,883,000
90,261,000
978,000
(4,983,000)
-
(154,618,000) (133,008,000)
(83,804,000)
(63,410,000)
(2,108,000)
(796,000)
282,000
-
(103,167,000) (123,320,000)

15,826,000
128,651,000
50,000,000
-
(94,622,000)
(1,414,000)
732,000
(7,281,000)
91,892,000
(398,000)
17,254,000
$16,856,000
$34,558,000
7,111,000

(24,102,000)
231,000
100,000,000
(62,000,000)
98,880,000
(1,687,000)
802,000
(6,565,000)
105,559,000
(6,934,000)
24,188,000
$17,254,000
$39,265,000
5,919,000

1,400,000
(424,000)
1,325,000
(17,435,000)
16,975,000
(10,000)
-
60,000
(18,000)
(1,444,000)
2,542,000
-
(253,000)
252,000
269,000
15,534,000

218,000
9,801,000
20,040,000
561,000
(58,000)
-
(26,339,000)
(68,961,000)
(872,000)
339,000
(65,271,000)

(11,415,000)
102,837,000
30,000,000
-
(65,304,000)
(3,052,000)
860,000
(5,983,000)
47,943,000
(1,794,000)
25,982,000
$24,188,000
$32,934,000
4,443,000

The accompanying notes are an integral part of these consolidated financial statements

1,601,000
1,930,000

737,000
360,000

1,964,000
41,000

Notes to Consolidated Financial Statements

Nature of Operations
The First Bancorp, Inc. (the “Company”) through its wholly-owned subsidiary, The First, N.A. (“the Bank”), provides a
full range of banking services to individual and corporate customers from fourteen offices in coastal Maine. First
Advisors, a division of the Bank, provides investment management, private banking and financial planning services. At
the Company’s Annual Meeting of Shareholders on April 30, 2008, the Company’s name was changed to The First
Bancorp, Inc. from First National Lincoln Corporation.

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the Bank. All intercompany accounts
and transactions have been eliminated in consolidation.

Use of Estimates in Preparation of Financial Statements
In preparing the financial statements in accordance with accounting principles generally accepted in the United States of
America, Management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheet and revenues and
expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan
losses, the valuation of mortgage servicing rights, and goodwill.

Investment Securities
Investment securities are classified as available for sale or held to maturity when purchased. There are no trading
account securities. Securities available for sale consist primarily of debt securities which Management intends to hold
for indefinite periods of time. They may be used as part of the Bank’s funds management strategy, and may be sold in
response to changes in interest rates or prepayment risk, changes in liquidity needs, or for other reasons. They are
accounted for at fair value, with unrealized gains or losses adjusted through shareholders’ equity, net of related income
taxes. Securities to be held to maturity consist primarily of debt securities which Management has acquired solely for
long-term investment purposes, rather than for purposes of trading or future sale. For securities to be held to maturity,
Management has the intent and the Bank has the ability to hold such securities until their respective maturity dates.
Such securities are carried at cost adjusted for the amortization of premiums and accretion of discounts. Investment
securities transactions are accounted for on a settlement date basis; reported amounts would not be materially different
from those accounted for on a trade date basis. Gains and losses on the sales of investment securities are determined
using the amortized cost of the security.

Loans Held for Sale
Loans held for sale consist of residential real estate mortgage loans and are carried at the lower of aggregate cost or
market value, as determined by current investor yield requirements.

Loans
Loans are generally reported at their outstanding principal balances, adjusted for chargeoffs, the allowance for loan
losses and any deferred fees or costs to originate loans. Loan commitments are recorded when funded.

Loan Fees and Costs
Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income as an
adjustment to the loan yield over the life of the related loans. The unamortized net deferred fees and costs are included
on the balance sheets with the related loan balances, and the amortization is included with the related interest income.

Allowance for Loan Losses
Loans considered to be uncollectible are charged against the allowance for loan losses. The allowance for loan losses is
maintained at a level determined by Management to be adequate to absorb probable losses. This allowance is increased
by provisions charged to operating expenses and recoveries on loans previously charged off. Arriving at an appropriate
level of allowance for loan losses necessarily involves a high degree of judgment. In determining the appropriate level
of allowance for loan losses, Management takes into consideration several factors, including reviews of individual non-
performing loans and performing loans listed on the watch report requiring periodic evaluation, loan portfolio size by
category, recent loss experience, delinquency trends and current economic conditions. Loans more than 30 days past

due are considered delinquent. Impaired loans, including restructured loans, are measured at the present value of
expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan
is collateral dependent. Management takes into consideration impaired loans in addition to the above mentioned factors
in determining the appropriate level of allowance for loan losses.

Goodwill and Identified Intangible Assets
Intangible assets include the excess of the purchase price over the fair value of net assets acquired (goodwill) from the
acquisition of FNB Bankshares in 2005 as well as the core deposit intangible related to the same acquisition. The core
deposit intangible is amortized on a straight-line basis over ten years. Amortization expense for 2008, 2007 and 2006
was $283,000 and the amortization expense for each year until fully amortized will be $283,000. The straight-line basis
is used because the Company does not expect significant run off in the core deposits acquired. The Company annually
evaluates goodwill, and periodically evaluates other intangible assets for impairment on the basis of whether these
assets are fully recoverable from projected, undiscounted net cash flows of the acquired company. At December 31,
2008, the Company determined goodwill and other intangible assets were not impaired.

Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period the change is enacted.

Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income using methods which relate the income earned to the
balances of loans and investment securities outstanding. Interest expense on liabilities is derived by applying applicable
interest rates to principal amounts outstanding. Recording of interest income on problem loans, which includes impaired
loans, ceases when collectibility of principal and interest within a reasonable period of time becomes doubtful. Cash
payments received on non-accrual loans, which includes impaired loans, are applied to reduce the loan’s principal
balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected.
As a general rule, a loan may be restored to accrual status when payments are current and repayment of the remaining
contractual amounts is expected or when it otherwise becomes well secured and in the process of collection.

Premises and Equipment
Premises, furniture and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed
by straight-line and accelerated methods over the asset’s estimated useful life.

Other Real Estate Owned (OREO)
Real estate acquired by foreclosure or deed in lieu of foreclosure is transferred to OREO and recorded at the lower of
cost or fair market value, less estimated costs to sell, based on appraised value at the date actually or constructively
received. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses.
Subsequent provisions to reduce the carrying value of a property are recorded to the allowance for OREO losses and a
charge to operations on a specific property basis.

Earnings Per Share
Basic earnings per share data are based on the weighted average number of common shares outstanding during each
year. Diluted earnings per share gives effect to the stock options outstanding, determined by the treasury stock method.

Post-Retirement Benefits
The cost of providing post-retirement benefits is accrued during the active service period of the employee or director.

Comprehensive Income
Comprehensive income includes net income and other comprehensive income (loss),which is comprised of the change
in unrealized gains and losses on securities available for sale, net of tax, and unrealized gains and (loss) related to post-
retirement benefit costs, net of tax, is disclosed in the consolidated statements of changes in shareholders’ equity.

Segments
The First Bancorp, Inc., through the branches of its subsidiary, The First, N.A., provides a broad range of financial
services to individuals and companies in coastal Maine. These services include demand, time, and savings deposits;
lending; credit card servicing; ATM processing; and investment management and trust services. Operations are

managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all of the Company’s banking
operations are considered by Management to be aggregated in one reportable operating segment.

Loan Servicing
Servicing rights are recognized when they are acquired through sale of loans. Capitalized servicing rights are reported in
other assets and 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. Servicing rights are evaluated for impairment based upon the fair
value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an
individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

Stock Options
The Company established a shareholder-approved stock option plan in 1995, under which the Company may grant
options to its employees for up to 600,000 shares of common stock. The Company believes that such awards align the
interests of its employees with those of its shareholders. Only incentive stock options may be granted under the plan.
The exercise price of each option grant is determined by the Options Committee of the Board of Directors, and in no
instance shall be less than the fair market value on the date of the grant. An option’s maximum term is ten years from
the date of grant, with 50% of the options granted vesting two years from the date of grant and the remaining 50%
vesting five years from date of grant. As of January 16, 2005, all options under this plan had been granted.

The Company applies the fair value recognition provisions of Statement of Financial Accounting Standards

(“SFAS”) No. 123 (Revised 2004), “Share-Based Payment”, to stock-based employee compensation for fiscal years
beginning on or after January 1, 2006. As a result, $37,000, $59,000 and $60,000 in compensation cost was included in
the Company’s financial statements for 2008, 2007 and 2006, respectively. The unrecognized compensation cost to be
amortized over a weighted average remaining vesting period of 2.0 years is $74,000 for 21,000 options granted in 2005.
The weighted average fair market value per share was $4.41 for options granted in 2005. The fair market value

was estimated using the Black-Scholes option pricing model and the following assumptions: quarterly dividends of
$0.12, risk-free interest rate of 4.20%, volatility of 25.81%, and an expected life of ten years. Volatility is based on the
actual volatility of the Company’s stock during the quarter in which the options were granted. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of the option grant.
The following table summarizes the status of the Company’s non-vested options as of December 31, 2008.

Number of
Shares

Weighted Average Grant
Date Fair Value

Non-vested at December 31, 2007
Granted in 2008
Vested in 2008
Forfeited in 2008
Non-vested at December 31, 2008

21,000
-
-
-
21,000

$4.41
-
-
-
$4.41

During 2008, 13,000 options were exercised, with total proceeds paid to the Company of $84,000. The excess of
the fair value of the stock issued upon exercise over the exercise price was $115,000. A summary of the status of the
Company’s Stock Option Plan as of December 31, 2008, and changes during the year then ended, is presented below.

Number of
Shares

Weighted
Average
Exercise Price

Weighted Average
Remaining
Contractual Term

Aggregate
Intrinsic
Value

Outstanding at December 31, 2007
Granted in 2008
Vested in 2008
Exercised in 2008
Forfeited in 2008
Outstanding at December 31, 2008
Exercisable at December 31, 2008

89,500
-
-
(13,000)
-
76,500
55,500

$ 12.28
-
-
6.43
-
$ 13.27
$ 11.49

4.1
3.4

$ 506,000
$ 466,000

Note 2. Cash and Cash Equivalents

For the purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand, amounts due
from banks and federal funds sold. At December 31, 2008 the Company had a contractual clearing balance of $500,000
and a reserve balance requirement of $706,000 at the Federal Reserve Bank, which are satisfied by both cash on hand at
branches and balances held at the Federal Reserve Bank of Boston. The Company maintains a portion of its cash in
bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any significant risk with respect to these accounts.

Note 3. Investment Securities

The following tables summarize the amortized cost and estimated fair value of investment securities at December 31,
2008 and 2007:

As of December 31, 2008
Securities available for sale
Mortgage-backed securities
State and political subdivisions
Corporate securities
Federal Home Loan Bank stock
Federal Reserve Bank stock
Other equity securities

Securities to be held to maturity
U.S. Treasury and agency
Mortgage-backed securities
State and political subdivisions
Corporate securities

As of December 31, 2007
Securities available for sale
Mortgage-backed securities
State and political subdivisions
Corporate securities
Federal Home Loan Bank stock
Federal Reserve Bank stock
Other equity securities

Securities to be held to maturity
U.S. Treasury and agency
Mortgage-backed securities
State and political subdivisions
Corporate securities

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair Value
(Estimated)

$ 900,000
8,571,000
4,566,000
14,031,000
662,000
295,000
$ 29,025,000

$110,513,000
60,774,000
62,330,000
1,150,000
$234,767,000

$ 22,000
339,000
-
-
-
2,000
$ 363,000

$ 74,000
640,000
952,000
-
$1,666,000

$ -
-
(1,589,000)
-
-
(34,000)
$(1,623,000)

$(5,871,000)
(297,000)
(684,000)
(121,000)
$(6,973,000)

$ 922,000
8,910,000
2,977,000
14,031,000
662,000
263,000
$ 27,765,000

$104,716,000
61,117,000
62,598,000
1,029,000
$229,460,000

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair Value
(Estimated)

$ 1,309,000
10,524,000
14,393,000
12,569,000
662,000
334,000
$ 39,791,000

$ 95,009,000
30,786,000
53,914,000
1,645,000
$ 181,354,000

$ 40,000
331,000
638,000
-
-
5,000
$ 1,014,000

$ 189,000
219,000
731,000
9,000
$ 1,148,000

$ (27,000)
-
(304,000)
-
-
(13,000)
$ (344,000)

$ (935,000)
(354,000)
(81,000)
-
$ (1,370,000)

$ 1,322,000
10,855,000
14,727,000
12,569,000
662,000
326,000
$ 40,461,000

$ 94,263,000
30,651,000
54,564,000
1,654,000
$ 181,132,000

The following table summarizes the contractual maturities of investment securities at December 31, 2008:

Due in 1 year or less
Due in 1 to 5 years
Due in 5 to 10 years
Due after 10 years
Equity securities

Securities available for sale
Fair Value
Amortized
(Estimated)
Cost

Securities to be held to maturity

Amortized
Cost

Fair Value
(Estimated)

$ 1,063,000
5,251,000
5,935,000
1,788,000
14,988,000
$29,025,000

$ 935,000
4,408,000
6,162,000
1,304,000
14,956,000
$27,765,000

$ 935,000
7,210,000
21,856,000
204,766,000
-
$234,767,000

$ 936,000
7,369,000
22,199,000
198,956,000
-
$229,460,000

At December 31, 2008, securities with a fair value of $153,560,000 were pledged to secure borrowings from the
Federal Home Loan Bank of Boston, public deposits, repurchase agreements, and for other purposes as required by law.
This compares to securities with a fair value of $139,108,000, as of December 31, 2007 pledged for the same purpose.

Gains and losses on the sale of securities available for sale are computed by subtracting the amortized cost at the

time of sale from the security’s selling price, net of accrued interest to be received. The following table shows
securities gains and losses for 2008, 2007 and 2006:

Proceeds from sales
Gross gains
Gross losses
Net gain (loss)
Related income taxes

2008
$14,192,000
$ 123,000
(212,000)
$ (89,000)
$ (31,000)

2007
$179,000
$ 2,000
-
$ 2,000
$ 1,000

2006
$218,000
$ 18,000
-
$ 18,000
$ 6,000

Management reviews securities with unrealized losses for other than temporary impairment. Federal Home Loan
Bank stock and Federal Reserve Bank stock have been evaluated for impairment. As of December 31, 2008, there were
97 securities with unrealized losses held in the Company’s portfolio. These securities were temporarily impaired as a
result of changes in interest rates reducing their fair market value, of which 29 had been temporarily impaired for 12
months or more. At the present time, there have been no material changes in the credit quality of these securities
resulting in other than temporary impairment. Information regarding securities temporarily impaired as of December 31,
2008 is summarized below:

As of December 31, 2008
U.S. Treasury and agency
Mortgage-backed securities
State and political subdivisions
Corporate securities
Other equity securities

Less than 12 months

Fair
Value

Unrealized
Losses

12 months or more
Fair
Value

Unrealized
Losses

Total

Fair
Value

Unrealized
Losses

$64,951,000 $(4,610,000) $10,043,000 $(1,261,000)
(187,000)
12,498,000
(111,000)
13,592,000
(1,523,000)
1,821,000
(34,000)
-

$74,994,000 $(5,871,000)
(297,000)
16,032,000
15,757,000
(684,000)
(1,710,000)
3,530,000
(34,000)
32,000
$92,862,000 $(5,480,000) $17,483,000 $(3,116,000) $110,345,000 $(8,596,000)

3,534,000
2,165,000
1,709,000
32,000

(110,000)
(573,000)
(187,000)
-

As of December 31, 2007, there were 74 securities with unrealized losses held in the Company’s portfolio. These
securities were temporarily impaired as a result of changes in interest rates reducing their fair market value, of which 50
had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of
December 31, 2007 is summarized below:

As of December 31, 2007
U.S. Treasury and agency
Mortgage-backed securities
State and political subdivisions
Corporate securities
Other equity securities

Note 4. Loan Servicing

Fair
Value
$ 37,356,000
-
1,658,000
2,529,000
11,000
$ 41,554,000

Less than 12 months

Total

12 months or more
Fair
Value

Fair
Value

Unrealized
Losses

Unrealized
Losses
$ (719,000) $ 13,575,000 $ (216,000) $ 50,931,000 $ (935,000)
(381,000)
(381,000)
(81,000)
(60,000)
(304,000)
(122,000)
(13,000)
(13,000)
$ (792,000) $ 76,527,000 $ (1,714,000)

17,844,000
2,559,000
930,000
65,000
$ (922,000) $ 34,973,000

17,844,000
4,217,000
3,459,000
76,000

-
(21,000)
(182,000)
-

At December 31, 2008 and 2007, the Bank serviced loans for others totaling $168,242,000 and $168,001,000,
respectively. Net gains from the sale of loans totaled $249,000 in 2008, $333,000 in 2007, and $222,000 in 2006.

In 2008, mortgage servicing rights of $201,000 were capitalized or acquired, and amortization for the year totaled
$366,000. After deducting for an impairment reserve of $368,000 at December 31, 2008, mortgage servicing rights had
a fair value of $311,000, which is included in other assets. In 2007, mortgage servicing rights of $325,000 were
capitalized or acquired, and amortization for the year totaled $471,000. After deducting for an impairment reserve of
$11,000 at December 31, 2007, mortgage servicing rights had a fair value of $832,000, which is included in other
assets.

SFAS No. 156, “Accounting for Servicing of Financial Assets”, requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value, if practicable. Servicing assets and servicing liabilities are
reported using the amortization method or the fair value measurement method. In evaluating the carrying values of
mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type
and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan
prepayments, calculated using a three-month moving average of weekly prepayment data published by the Public
Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future
cash flows. As of December 31, 2008, the prepayment assumption using the PSA model was 549, which translates into
an anticipated prepayment rate of 32.95%. The discount rate is the quarterly average ten-year U.S. Treasuries plus
9.42%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan
cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing
rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage
servicing fee income.

Note 5 – Derivative Financial Instruments

During 2007, the Bank purchased an interest rate protection agreement (cap) as a cash flow hedge to eliminate the cash
flow exposure of interest rate movements on money-market deposits. The premium paid for the cap is amortized over its
life. Any cash payments received are recorded as an adjustment to net interest income. The Bank documents its risk
management strategy and hedge effectiveness at the inception of and during the term of the hedge. The cap is
designated and qualifies as a cash flow hedge, and thus is recorded at fair value. SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, provides that a cash flow hedge is effective to the extent the variability
in its cash flows offsets the variability in the cash flows of the hedged item, in this case the increase in cost of money
market deposits. Management has determined that the hedge relationship is 100 percent effective. The amortized cost of
the cap was $24,000 and $51,000 at December 31, 2008 and 2007, respectively, and is recorded on the balance sheet.
This approximates the fair value of the derivative, and as a result, no unrealized gain or loss, net of applicable income
taxes, is recorded in other comprehensive loss in the statement of changes in shareholders’ equity for the year ended
December 31, 2008 and 2007.

Note 6. Loans

The following table shows the composition of the Company’s loan portfolio as of December 31, 2008 and 2007:

As of December 31,
Real estate loans
Residential
Commercial
Commercial and industrial loans
State and municipal loans
Consumer loans
Residential construction loans
Total loans

2008

2007

$ 455,753,000
172,492,000
245,224,000
36,279,000
67,642,000
1,883,000
$ 979,273,000

$ 442,407,000
119,675,000
251,489,000
34,785,000
66,539,000
5,269,000
$ 920,164,000

Loan balances include net deferred loan costs of $1,369,000 in 2008 and $1,303,000 in 2007. Pursuant to collateral

agreements, qualifying first mortgage loans, which were valued at $356,964,000 and $349,797,000 in 2008 and 2007,
respectively, were used to collateralize borrowings from the Federal Home Loan Bank of Boston.

At December 31, 2008 and 2007, loans on non-accrual status totaled $12,449,000 and $2,867,000, respectively. As

of December 31, 2008, 2007 and 2006, interest income which would have been recognized on these loans, if interest
had been accrued, was $489,000, $283,000, and $396,000, respectively. Loans past due greater than 90 days which are
accruing interest totaled $4,980,000 at December 31, 2008 and $2,287,000 at December 31, 2007. The Company
continues to accrue interest on these loans because it believes collection of principal and interest is reasonably assured.
Transactions in the allowance for loan losses for the years ended December 31, 2008, 2007 and 2006 were as

follows:

For the years ended December 31,
Balance at beginning of year
Provision charged to operating expenses

Loans charged off
Recoveries on loans
Net loans charged off
Balance at end of year

2008

$ 6,800,000
4,700,000
11,500,000
(2,941,000)
241,000
(2,700,000)
$ 8,800,000

2007

$ 6,364,000
1,432,000
7,796,000
(1,337,000)
341,000
(996,000)
$ 6,800,000

2006

$ 6,086,000
1,325,000
7,411,000
(1,313,000)
266,000
(1,047,000)
$ 6,364,000

Information regarding impaired loans is as follows:

As of December 31,
Average investment in impaired loans
Interest income recognized on impaired
loans, all on cash basis

2008

2007

2006

$ 6,199,000

$ 2,427,000

$ 3,391,000

24,000

163,000

99,000

As of December 31,
Balance of impaired loans
Less portion for which no allowance for loan losses is allocated
Portion of impaired loan balance for which an allowance for
loan losses is allocated
Portion of allowance for loan losses allocated to the impaired
loan balance

2008
$ 12,449,000
(4,805,000)

2007
$ 2,867,000
(1,589,000)

$ 7,644,000

$ 1,278,000

$ 1,957,000

$ 560,000

Loans to directors, officers and employees totaled $37,876,000 at December 31, 2008 and $34,510,000 at

December 31, 2007. A summary of loans to directors and executive officers, which in the aggregate exceed $60,000, is
as follows:

For the years ended December 31,
Balance at beginning of year
New loans
Repayments
Balance at end of year

2008

2007

$ 20,886,000 $ 18,695,000
10,021,000
(7,830,000)
$ 23,896,000 $ 20,886,000

12,245,000
(9,235,000)

Note 7. Premises and Equipment

Premises and equipment are carried at cost and consist of the following:

As of December 31,
Land
Land improvements
Buildings
Equipment

Less accumulated depreciation

2008
$ 3,556,000
636,000
13,788,000
6,348,000
24,328,000
8,300,000
$ 16,028,000

2007
$ 3,837,000
602,000
13,115,000
6,082,000
23,636,000
7,155,000
$ 16,481,000

Note 8. Other Real Estate Owned

The following summarizes other real estate owned:

As of December 31,
Real estate acquired in settlement of loans

2008

$ 2,428,000

2007
$ 827,000

Changes in the allowance for losses from other real estate owned were as follows:

For the years ended December 31,
Balance at beginning of year
Losses charged to allowance
Provision charged to operating expenses
Balance at end of year

2008

$ 325,000
-
-
$ 325,000

2007

$ 269,000
-
56,000
$ 325,000

2006

$ -
-
269,000
$ 269,000

Note 9. Goodwill

On January 14, 2005, the Company completed the acquisition of FNB Bankshares (“FNB”) of Bar Harbor, Maine, and
its subsidiary, The First National Bank of Bar Harbor. As part of the acquisition, the Company issued 2.35 shares of its
common stock to the shareholders of FNB in exchange for each of the 1,048,814 shares of the common stock
outstanding of FNB. The total value of the transaction was $47,955,000, and all of the voting equity interest of FNB
was acquired in the transaction. The transaction was accounted for as a purchase and the excess of purchase price over
the fair value of net tangible assets acquired equaled $27,559,000 and was recorded as goodwill, none of which was
deductible for tax purposes. The portion of the purchase price related to the core deposit intangible is being amortized
over its expected economic life, and goodwill is evaluated annually for possible impairment under the provisions of
SFAS No. 142, Goodwill and Other Intangible Assets.

Note 10. Income Taxes

The current and deferred components of income tax expense (benefit) were as follows:

For the years ended December 31,
Federal income tax
Current
Deferred

State franchise tax

2008

2007

2006

$ 6,415,000
(1,039,000)
5,376,000
245,000
$ 5,621,000

$ 5,500,000
(464,000)
5,036,000
229,000
$ 5,265,000

$ 5,075,000
(424,000)
4,651,000
211,000
$ 4,862,000

The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal

corporate income tax rate to income before income taxes) as follows:

For the years ended December 31,
Expected tax expense
Non-taxable income
State franchise tax, net of federal tax benefit
Tax credits, net of amortization
Other

2008

$ 6,879,000
(1,364,000)
159,000
(100,000)
47,000
$ 5,621,000

2007

$ 6,428,000
(1,244,000)
149,000
-
(68,000)
$ 5,265,000

2006
$ 6,005,000
(1,209,000)
137,000
-
(71,000)
$ 4,862,000

Deferred tax assets and liabilities are classified as other assets and other liabilities in the consolidated balance
sheets. No valuation allowance is deemed necessary for the deferred tax asset. Items that give rise to the deferred
income tax assets and liabilities and the tax effect of each at December 31, 2008 and 2007 are as follows:

Allowance for loan losses
Other real estate owned
Assets related to FNB acquisition
Accrued pension and post-retirement
Unrealized loss on securities available for sale
Other assets
Total deferred tax asset
Net deferred loan costs
Depreciation
Unrealized gain on securities available for sale
Mortgage servicing rights
Core deposit intangible
Liabilities related to FNB acquisition
Other liabilities
Total deferred tax liability
Net deferred tax asset

2008
$3,080,000
114,000
9,000
1,139,000
441,000
75,000
4,858,000
(578,000)
(1,422,000)
-
(109,000)
(600,000)
(32,000)
(35,000)
(2,776,000)
$2,082,000

2007
$2,328,000
114,000
24,000
1,087,000
-
120,000
3,673,000
(529,000)
(1,490,000)
(234,000)
(291,000)
(699,000)
(52,000)
(8,000)
(3,303,000)
$370,000

At December 31, 2008, the Company held an investment in a limited partnership with related New Market Tax

Credits. This investment is carried at cost and amortized on the effective yield method. The tax credit from this
investment is estimated at $154,000 for the year ended December 31, 2008, and is recorded as a reduction of income tax
expense. Amortization of the investment in the limited partnership for the year ended December 31, 2008 totaled
$84,000 and is recognized as a component of income tax expense in the consolidated statements of income. The
carrying value of this investment at December 31, 2008 amounts to $1,616,000, which is recorded in other assets. The
Company's total exposure to this limited partnership at December 31, 2008 was $5,516,000, which is comprised of the
Company's equity investment in the limited partnership and the balance of a participated loan receivable.

Note 11. Certificates of Deposit

At December 31, 2008, the scheduled maturities of certificates of deposit are as follows:

Year of
Maturity
2009
2010
2011
2012
2013

Less than
$100,000
$211,889,000
28,694,000
2,633,000
1,141,000
1,795,000
$246,152,000

Greater than
$100,000

$272,597,000
12,268,000
3,074,000
1,553,000
1,305,000
$290,797,000

All Certificates of
Deposit
$484,486,000
40,962,000
5,707,000
2,694,000
3,100,000
$536,949,000

Interest on certificates of deposit of $100,000 or more was $6,905,000, $11,885,000, and $11,210,000 in 2008,

2007 and 2006, respectively.

Note 12. Borrowed Funds

Borrowed funds consist of advances from the Federal Home Loan Bank of Boston (FHLB), Treasury Tax & Loan
Notes, and securities sold under agreements to repurchase with municipal and commercial customers.

Pursuant to collateral agreements, FHLB advances are collateralized by all stock in FHLB, qualifying first

mortgage loans, U.S. Government and Agency securities not pledged to others, and funds on deposit with FHLB. As of
December 31, 2008, the Bank’s total FHLB borrowing capacity was $317,796,000, of which $102,612,000 was unused
and available for additional borrowings. All FHLB advances as of December 31, 2008, had fixed rates of interest until
their respective maturity dates. Under the Treasury Tax & Loan Note program, the Bank accumulates tax deposits made
by customers and is eligible to receive Treasury Direct investments up to an established maximum balance. Securities
sold under agreements to repurchase include U.S. Treasury and Agency securities and other securities. Repurchase
agreements have maturity dates ranging from one to 365 days. The Bank also has in place $15.0 million in credit lines
with correspondent banks which are currently not in use.

Borrowed funds at December 31, 2008 and 2007 have the following range of interest rates and maturity dates:

As of December 31, 2008
Federal Home Loan Bank Advances
2009
2010
2011
2012
2013
2014 and thereafter

Treasury Tax & Loan Notes (rate at December 31, 2008 was 0.00%)
Repurchase agreements
Municipal and commercial customers

0.36%
4.43%

-
-
-

0.00%

5.00%
5.41%

4.39%
3.49%
3.89%

variable

1.49%

4.75%

$80,227,000
50,000,000
-
10,000,000
10,000,000
70,184,000
220,411,000
2,864,000

48,799,000
$272,074,000

As of December 31, 2007
Federal Home Loan Bank Advances
2008
2009
2010
2011
2012
2013 and thereafter

Treasury Tax & Loan Notes (rate at December 31, 2007 was 3.59%)
Repurchase agreements
Municipal and commercial customers

3.00%
4.79%
4.43%

0.00%

-
-
-

-
-

4.94% $ 156,460,000
27,000,000
5.00%
50,000,000
5.41%
-
10,000,000
30,191,000
273,651,000
1,961,000

4.39%
3.89%

variable

2.71%

5.02%

41,107,000
$316,719,000

Note 13. Employee Benefit Plans

401(k) Plan
The Bank has a defined contribution plan available to substantially all employees who have completed six months of
service. Employees may contribute up to $15,500 of their compensation if under age 50 and $20,500 if over age 50, and
the Bank may provide a match to employee contributions not to exceed 3.0% of compensation depending on
contribution level. Subject to a vote of the Board of Directors, the Bank may also make a profit-sharing contribution to
the Plan. Such contribution equaled 2.0% of each eligible employee’s compensation in 2008, 2007, and 2006. The
expense related to the 401(k) plan was $356,000, $338,000, and $315,000 in 2008, 2007, and 2006, respectively.

Supplemental Retirement Plan
The Bank also sponsors an unfunded, non-qualified supplemental retirement plan for certain officers. The agreement
provides supplemental retirement benefits payable in installments over 20 years upon retirement or death. The costs for
this plan are recognized over the service periods of the participating officers. The expense of this supplemental plan was
$164,000 in 2008, $153,000 in 2007,and $149,000 in 2006. As of December 31, 2008 and 2007, the accrued liability of
this plan was $1,265,000 and $1,157,000, respectively.

Post-Retirement Benefit Plans
The Bank sponsors two post-retirement benefit plans. One plan currently provides a subsidy for health insurance
premiums to certain retired employees and a future subsidy for seven active employees who were age 50 and over in
1996. These subsidies are based on years of service and range between $40 and $1,200 per month per person. The other
plan provides life insurance coverage to certain retired employees. The Bank also provides health insurance for retired
directors. None of these plans are pre-funded.

In December 2003, the federal Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)
was signed into law. The Act included two features to Medicare (Medicare Part D) that could affect the measurement of
the accumulated post-retirement benefit obligation and net periodic postretirement benefit costs: a subsidy to plan
sponsors that is based on 28% of an individual beneficiary’s annual prescription drug costs between $250 and $5,000,
and the opportunity for a retiree to obtain a prescription drug benefit under Medicare. During 2004, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 106-2, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The FSP
addresses employers’ accounting for the effects of the Act and was effective for the Company in 2004. The accounting
for the Act will depend on the Company’s assessment as to whether the prescription drug benefits available under its
plan are actuarially equivalent to Medicare Part D, among other factors. The Company’s Plan has not been actuarially
determined to be equivalent to Medicare Part D. Accordingly, the impact of applying the FSP has not been reflected in
the consolidated financial statements.

The following tables set forth the accumulated post-retirement benefit obligation, funded status, and net periodic

benefit cost:

At December 31,
Change in benefit obligations
Benefit obligation at beginning of year:
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year:
Funded status
Benefit obligation at end of year
Accrued benefit cost

2008

2007

2006

$ 1,949,000
19,000
134,000
(155,000)
43,000
$ 1,990,000

$ 2,005,000
20,000
136,000
(144,000)
(68,000)
$ 1,949,000

$ 1,705,000
13,000
125,000
(157,000)
319,000
$ 2,005,000

$(1,990,000)
$(1,990,000)

$(1,949,000) $ (2,005,000)
$(1,949,000) $ (2,005,000)

For the years ended December 31,
Components of net periodic benefit cost
Service cost
Interest cost
Amortization of unrecognized transition obligation
Amortization of prior service credit
Amortization of accumulated losses
Net periodic benefit cost

Weighted average assumptions as of December 31
Discount rate

2008

2007

2006

$ 19,000
134,000
29,000
(3,000)
21,000
$ 200,000

$ 20,000
136,000
29,000
(3,000)
26,000
$ 208,000

$ 13,000
125,000
29,000
(3,000)
4,000
$ 168,000

7.0%

The above discount rate assumption was used in determining both the accumulated benefit obligation as well as the
net benefit cost. The measurement date for benefit obligations was as of year-end for all years presented. The estimated
amount of benefits to be paid in 2009 is $157,000. For years ending 2010 through 2013 the estimated amount of
benefits to be paid is $163,000, $169,000, $185,000 and $183,000 respectively, and the total estimated amount of
benefits to be paid for years ended 2014 through 2018 is $850,000. Plan expense for 2009 is estimated to be $175,000.
In 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans.” On initial application, a $352,000 adjustment was recognized in the Statement of Changes in
Shareholders’ Equity as a component of accumulated other comprehensive income. Amounts not yet reflected in net
periodic benefit cost and included in accumulated other comprehensive income are as follows:

At December 31,
Unamortized prior service credit
Unamortized net actuarial loss
Unrecognized transition obligation

Deferred tax benefit at 35%
Net unrecognized post-retirement benefits
included in accumulated other comprehensive income

2008
$ 1,000
(297,000)
(121,000)
(417,000)
146,000

2007
$ 5,000
(276,000)
(150,000)
(421,000)
147,000

Portion to Be
Recognized in
Income in 2009
$
-
-
29,000
29,000
(10,000)

$(271,000)

$(274,000)

$ 19,000

Note 14. Shareholders’ Equity

The Company has reserved 700,000 shares of its common stock to be made available to directors and employees who
elect to participate in the stock purchase or savings and investment plans. During 2006, the number of shares set aside
for these plans was increased by the Board of Directors from 480,000 to 700,000. As of December 31, 2008, 463,382
shares had been issued pursuant to these plans, leaving 236,618 shares available for future use. The issuance price is
based on the market price of the stock at issuance date. Sales of stock to directors and employees amounted to 17,425 in
2008, 17,828 shares in 2007, and 17,410 shares in 2006.

In 2001, the Company established a dividend reinvestment plan to allow shareholders to use their cash dividends
for the automatic purchase of shares in the Company. When the plan was established, 600,000 shares were registered
with the Securities and Exchange Commission, and as of December 31, 2008, 134,388 shares have been issued, leaving
465,612 shares for future use. Participation in this plan is optional and at the individual discretion of each shareholder.
Shares are purchased for the plan from the Company at a price per share equal to the average of the daily bid and asked
prices reported on the NASDAQ System for the five trading days immediately preceding, but not including, the
dividend payment date. Sales of stock under the Dividend Reinvestment Plan amounted to 22,243 shares in 2008,
20,233 shares in 2007, and 17,031 shares in 2006.

Note 15. Off-Balance-Sheet Financial Instruments and Concentrations of Credit Risk

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to originate loans, commitments for
unused lines of credit, and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial instruments.

Commitments for unused lines are agreements to lend to a customer provided there is no violation of any condition

established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on Management’s credit evaluation of the borrower. The Bank did not incur any losses on
its commitments in 2008, 2007 or 2006.

Standby letters of credit are conditional commitments issued by the Bank to guarantee a customer’s performance to

a third party, with the customer being obligated to repay (with interest) any amounts paid out by the Bank under the
letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending
loans to customers.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet
instruments. At December 31, the Bank had the following off-balance-sheet financial instruments, whose contract
amounts represent credit risk:

As of December 31,
Unused lines, collateralized by residential real estate
Other unused commitments
Standby letters of credit
Commitments to extend credit
Total

2008

2007

$ 55,370,000 $ 55,694,000
56,904,000
2,594,000
15,098,000
$145,789,000 $ 130,290,000

75,236,000
2,687,000
12,496,000

The Bank grants residential, commercial and consumer loans to customers principally located in the Mid-Coast and

Down East regions of Maine. Collateral on these loans typically consists of residential or commercial real estate, or
personal property. Although the loan portfolio is diversified, a substantial portion of borrowers’ ability to honor their
contracts is dependent on the economic conditions in the area, especially in the real estate sector.

Note 16. Earnings Per Share

The following tables provide detail for basic earnings per share (EPS) and diluted earnings per share for the years ended
December 31, 2008, 2007 and 2006:

For the year ended December 31, 2008
Net income as reported
Basic EPS: Income available to common shareholders
Effect of dilutive securities: incentive stock options
Diluted EPS: Income available to common
shareholders plus assumed conversions
For the year ended December 31, 2007
Net income as reported
Basic EPS: Income available to common shareholders
Effect of dilutive securities: incentive stock options
Diluted EPS: Income available to common
shareholders plus assumed conversions
For the year ended December 31, 2006
Net income as reported
Basic EPS: Income available to common shareholders
Effect of dilutive securities: incentive stock options
Diluted EPS: Income available to common
shareholders plus assumed conversions

Income
(Numerator)

Shares
(Denominator)

Per-Share
Amount

$ 14,034,000
14,034,000

9,701,379
18,952

$ 1.45

$ 14,034,000

9,720,331

$ 1.44

$ 13,101,000
$ 13,101,000

9,787,287
25,731

$ 1.34

$ 13,101,000

9,813,018

$ 1.34

$ 12,295,000
$ 12,295,000

9,816,307
49,476

$ 1.25

$ 12,295,000

9,865,783

$ 1.25

All earnings per share calculations have been made using the weighted average number of shares outstanding for
each year. All of the dilutive securities are incentive stock options granted to certain key members of Management. The
dilutive number of shares has been calculated using the treasury method, assuming that all granted options were
exercisable at each year end.

Note 17 – Fair Value Disclosures

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of
earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a
nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example,
securities available for sale and derivative financial instruments are recorded at fair value on a recurring basis. Other
assets, such as, mortgage servicing rights, loans held for sale, and impaired loans, are recorded at fair value on a
nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets.

Under Statement of Financial Accounting No. 157, Fair Value Measurements, the Company groups assets and
liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair
value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1
considered highest and level 3 considered lowest). A brief description of each level follows.

Level 1 – Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect estimates that market participants would use in
pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar
techniques.
The most significant instruments that the Company fair values include securities and derivative instruments, all of

which fall into Level 2 in the fair value hierarchy. The securities in the available for sale portfolio are priced by
independent providers. In obtaining such valuation information from third parties, the Company has evaluated their

valuation methodologies used to develop the fair values in order to determine whether the valuations are representative
of an exit price in the Company’s principal markets. The Company’s principal markets for its securities portfolios are
the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those
markets. Derivative instruments are priced by independent providers using observable market assumptions with
adjustments based on widely accepted valuation techniques. A discounted cash flow analysis on the expected cash flows
of each derivative reflects the contractual terms of the derivatives, including the period to maturity, and uses observable
market-based inputs, including interest rate curves, implied volatilities, and credit valuation adjustments.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Securities Available for Sale. Investment securities available for sale are recorded at fair value on a recurring basis. Fair
value measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair
values are measured using matrix pricing models, or other model-based valuation techniques requiring observable
inputs other than quoted prices such as yield curves, prepayment speeds, and default rates. Recurring Level 1 securities
would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.
Recurring Level 2 securities include federal agency securities, mortgage-backed securities, collateralized mortgage
obligations, municipal bonds and corporate debt securities.
Derivative Financial Instruments. Substantially all derivative financial instruments held by the Company are traded in
over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company
measures fair value based upon pricing for similar derivative instruments if they were purchased today. The Company
classifies derivative financial instruments held or issued for risk management as recurring Level 2.

The following table presents the balances of assets and liabilities that were measured at fair value on a recurring

basis as of December 31, 2008.

In thousands of dollars
Securities available for sale
Derivative financial instruments
Total Assets

Level 1
$ -
-
$ -

At December 31, 2008
Level 2
Level 3
$ 27,765 $ -
-
$ 27,789 $ -

Total
$ 27,765
24
$ 27,789

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

Mortgage Servicing Rights. Mortgage servicing rights represent the value associated with servicing residential
mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method or the fair value
measurement method. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party
valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company
classifies mortgage servicing rights as nonrecurring Level 2.
Loans Held for Sale. Mortgage loans held for sale are recorded at the lower of carrying value or market value. The fair
value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with
similar characteristics. As such, the Company classifies mortgage loans held for sale as nonrecurring Level 2.
Other Real Estate Owned. Real estate acquired through foreclosure is recorded at the lower of carrying value or market
value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties
currently available. As such, the Company records other real estate owned as nonrecurring Level 2.
Impaired Loans. A loan is considered to be impaired when it is probable that all of the principal and interest due under
the original underwriting terms of the loan may not be collected. Impairment is measured based on the fair value of the
underlying collateral. The Company measures impairment on all nonaccrual loans for which it has established specific
reserves as part of the specific allocated allowance component of the allowance for loan losses. As such, the Company
records impaired loans as nonrecurring Level 2.

The following table includes assets measured at fair value on a nonrecurring basis that have had a fair value

adjustment since their initial recognition as of March 31, 2008. Other real estate owned is presented net of an allowance
for losses of $325,000. Impaired loans are presented net of their related specific allowance for loan losses of
$1,957,000.

In thousands of dollars
Mortgage servicing rights
Loans held for sale
Other real estate owned
Impaired loans
Total Assets

Level 1
$ -
-
-
-
$ -

At December 31, 2008
Level 2
$ 311
1,298
2,428
10,492
$ 14,529

Level 3
$ -
-
-
-
$ -

Total
$ 311
1,298
2,428
10,492
$ 14,529

SFAS No. 107, “Disclosures about the Fair Value of Financial Instruments,” requires disclosures of fair value

information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be
reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices
are not available, fair values are based on estimates using present value or other valuation techniques using observable
inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.

The estimated fair values for financial instruments as of December 31, 2008 and 2007 were as follows:

Financial assets
Cash and cash equivalents
Securities available for sale
Securities to be held to maturity
Loans held for sale
Loans (net of allowance for loan losses)
Cash surrender value of life insurance
Accrued interest receivable
Interest rate cap
Financial liabilities
Deposits
Borrowed funds
Accrued interest payable

December 31, 2008

December 31, 2007

Carrying
amount

Estimated
fair value

Carrying
amount

Estimated
fair value

$ 16,856,000 $ 16,856,000
27,765,000
229,460,000
1,298,000
994,560,000
9,148,000
5,783,000
24,000

27,765,000
234,767,000
1,298,000
970,473,000
9,148,000
5,783,000
24,000

$ 17,254,000
40,461,000
181,354,000
1,817,000
913,364,000
8,804,000
6,585,000
51,000

$17,254,000
40,461,000
181,132,000
1,817,000
908,190,000
8,804,000
6,585,000
51,000

$ 925,736,000
272,074,000
1,322,000

$ 904,926,000
290,336,000
1,322,000

$ 781,280,000 $687,739,000
317,288,000
2,212,000

316,719,000
2,212,000

The fair value estimates, methods, and assumptions for the Company’s financial instruments are set forth below.

Cash and Cash Equivalents
The carrying values of cash equivalents, due from banks and federal funds sold approximate their relative fair values.

Investment Securities
The fair values of investment securities are estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices
of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Fair
values are calculated based on the value of one unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these
considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed.
The carrying values of restricted equity securities approximate fair values.

Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. The fair values of performing
loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the
Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of
the effect of current economic and lending conditions, and the effects of estimated prepayments. Fair values for
significant non-performing loans are based on estimated cash flows and are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower information. Management has made
estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for
many of these financial instruments, Management has no basis to determine whether the fair value presented above
would be indicative of the value negotiated in an actual sale.

Cash Surrender Value of Life Insurance
The fair value is based on the actual cash surrender value of life insurance policies.

Accrued Interest Receivable
The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a
short maturity. It is the Company’s policy to stop accruing interest on loans for which it is probable that the interest is
not collectible. Therefore, this financial instrument has been adjusted for estimated credit loss.

Deposits
The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the
benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the
market. If that value were considered, the fair value of the Company’s net assets could increase.

Derivatives
The fair values of derivatives are based on quotations received from securities dealers.

Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently available for borrowings of similar remaining maturities.

Accrued Interest Payable
The fair value estimate approximates the carrying amount as this financial instrument has a short maturity.

Off-Balance-Sheet Instruments
Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as
the future revenue derived from such financial instruments is not significant.

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about
the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at
one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant
portion of the Company’s financial instruments, fair value estimates are based on Management’s judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair
value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset,
premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of
the estimates.

Note 18. Other Operating Income and Expense

Other operating income and other operating expense include the following items greater than 1% of revenues.

For the years ended December 31,
Other operating income
Merchant discount fees
ATM income
Other operating expense
Merchant interchange fees

2008

2007

2006

$ 2,433,000
1,156,000

$ 2,528,000
971,000

$ 2,507,000
771,000

$ 2,358,000

$ 2,427,000

$ 2,393,000

Note 19. Regulatory Capital Requirements

The ability of the Company to pay cash dividends to its shareholders depends primarily on receipt of dividends from its
subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net income 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 income of that year combined with its retained net income of the preceding two
years and subject to minimum regulatory capital requirements. The amount available for dividends in 2009 will be 2009
earnings plus retained earnings of $12,279,000 from 2008 and 2007.

The payment of dividends by the Company is also affected by various regulatory requirements and policies, such as

the requirements to maintain adequate capital. In addition, if, in the opinion of the applicable regulatory authority, a
bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the bank, could include the payment of dividends), that authority may require, after notice and
hearing, that such bank cease and desist from that practice. The Federal Reserve Bank and the Comptroller of the
Currency have each indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be
an unsafe and unsound banking practice. The Federal Reserve Bank, the Comptroller and the Federal Deposit Insurance
Corporation have issued policy statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.

In addition to the effect on the payment of dividends, failure to meet minimum capital requirements can also result

in mandatory and discretionary actions by regulators that, if undertaken, could have an impact on the Company’s
operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measurements of the Bank’s assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum

amounts and ratios (set forth in the table below) of Tier 1 capital and Tier 2 or total capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2008, that the Bank meets all capital adequacy requirements to which it is
subject.

As of December 31, 2008, the most recent notification from the Office of the Comptroller of the Currency

classified the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the table. There are no conditions or events since this notification that Management believes have changed
the institution’s category.

The actual and minimum capital amounts and ratios for the Bank are presented in the following table:

As of December 31, 2008
Tier 2 capital to
risk-weighted assets
Tier 1 capital to
risk-weighted assets
Tier 1 capital to
average assets
As of December 31, 2007
Tier 2 capital to
risk-weighted assets
Tier 1 capital to
risk-weighted assets
Tier 1 capital to
average assets

Actual

$97,454,000
11.10%
$88,554,000
10.09%
$88,554,000
6.90%

$88,775,000
10.99%
$81,875,000
10.13%
$81,875,000
6.99%

For capital
adequacy
purposes

To be well-capitalized
under prompt corrective
action provisions

$70,243,000
8.00%
$35,122,000
4.00%
$51,311,000
4.00%

$64,628,000
8.00%
$32,314,000
4.00%
$46,883,000
4.00%

$87,804,000
10.00%
$52,682,000
6.00%
$64,139,000
5.00%

$80,785,000
10.00%
$48,471,000
6.00%
$58,604,000
5.00%

The actual and minimum capital amounts and ratios for the Company, on a consolidated basis, are presented in the

following table:

Note 20. Legal Contingencies

Actual

$97,649,000
11.13%
$88,749,000
10.11%
$88,749,000
7.07%

$89,470,000
11.07%
$82,570,000
10.21%
$82,570,000
7.22%

For capital
adequacy
purposes

To be well-capitalized
under prompt corrective
action provisions

$70,218,000
8.00%
$35,109,000
4.00%
$50,204,000
4.00%

$64,667,000
8.00%
$32,334,000
4.00%
$45,771,000
4.00%

n/a
n/a
n/a
n/a
n/a
n/a

Various legal claims also arise from time to time in the normal course of business which, in the opinion of management,
will have no material effect on the Company’s consolidated financial statements.

Note 21. Condensed Financial Information of Parent

Condensed financial information for The First Bancorp, Inc. exclusive of its subsidiary is as follows:

Balance Sheets

As of December 31,
Assets
Cash and cash equivalents
Dividends receivable
Investments
Investment in subsidiary
Premises and equipment
Goodwill
Other assets
Total assets
Liabilities and shareholders’ equity
Dividends payable
Other liabilities
Total liabilities
Shareholders’ equity
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Net unrealized loss on available for sale securities, net
of tax benefit of $11,000 in 2008 and $3,000 in 2007
Net unrealized loss on post-retirement benefit costs, net
of tax benefit of $146,000 in 2008 and $147,000 in 2007
Total accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity

2008

2007

$ 213,000 $ 369,000
1,750,000
171,000
84,163,000
350,000
27,559,000
67,000
$ 114,429,000

1,800,000
123,000
89,323,000
-
27,559,000
64,000
$ 119,082,000

$ 1,891,000
10,000
1,901,000

$ 1,752,000
10,000
1,762,000

97,000
44,117,000
73,259,000

97,000
44,762,000
68,088,000

(21,000)

(6,000)

(271,000)
(292,000)
117,181,000
$ 119,082,000

(274,000)
(280,000)
112,667,000
$ 114,429,000

Statements of Income

For the years ended December 31,
Investment income
Other income
Other expense
Loss before Bank earnings
Equity in earnings of Bank
Remitted
Unremitted
Net income

2008
$ 11,000
-
136,000
(125,000)

2007
$ 28,000
26,000
179,000
(125,000)

2006
$ 36,000
-
120,000
(84,000)

7,281,000
6,878,000
$ 14,034,000

7,825,000
5,401,000
$ 13,101,000

7,485,000
4,894,000
$ 12,295,000

Statements of Cash Flows

For the years ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Net realized loss on sale of securities
Equity compensation expense
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Gain on sale of real estate
Unremitted earnings of Bank
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities and calls of investments
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from sale of real estate
Payments to purchase common stock
Proceeds from sale of common stock
Dividends paid
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

Note 22. New Accounting Pronouncements

2008

2007

2006

$ 14,034,000

$ 13,101,000

$ 12,295,000

2,000
24,000
37,000
(38,000)
278,000
-
(6,878,000)
7,459,000

-
-
-

1,000
-
59,000
(134,000)
(73,000)
(27,000)
(5,401,000)
7,526,000

251,000
(350,000)
(99,000)

2,000
-
60,000
386,000
(619,000)
-
(4,894,000)
7,230,000

-
-
-

348,000
(1,414,000)
732,000
(7,281,000)
(7,615,000)
(156,000)
369,000
$ 213,000

250,000
(1,687,000)
802,000
(6,565,000)
(7,200,000)
227,000
142,000
$ 369,000

-
(3,052,000)
860,000
(5,983,000)
(8,175,000)
(945,000)
1,087,000
$ 142,000

In September 2006, FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. The statement establishes a fair value
hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a
restriction on the sale or use of an asset. This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. In February 2008, FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
Effective Date of FASB Statement No. 157, which delays the effective date for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years. Although this Statement does
not require any new fair value measurements, it has expanded our fair value disclosures. In October 2008, the FASB
issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset when the Market for that Asset is not
Active.” FSP FAS No. 157-3 amended SFAS No. 157 by incorporating an example to illustrate key considerations in
determining the fair value of a financial asset in an inactive market. The FSP was effective upon issuance.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, which gives entities the option to measure eligible financial assets and financial liabilities at fair value on an
instrument-by-instrument basis. The election to use the fair value option is available when an entity first recognizes a
financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159
contains provisions to apply the fair value option to existing eligible financial instruments at the date of adoption. This
statement is effective as of the beginning of an entity’s first fiscal year after November 15, 2007. The Company did not
take the fair value option under SFAS No. 159 for any financial assets or financial liabilities.

Effective January 1, 2008, the Company adopted the provisions of Emerging Issues Task Force (EITF) 06-10:
Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements. The EITF states that an employer
should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance

arrangement. The Company recognized the effect of applying EITF 06-10 as a change in accounting principle through a
cumulative-effect adjustment to retained earnings. The cumulative effect of the change on retained earnings on the
consolidated balance sheet was $215,000 to retained earnings.

In December 2007, FASB issued Statement No. 160, “Non-controlling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51” (SFAS No.160). This statement applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an
outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement
amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15, 2009.
The Company does not expect it will have a material effect on its financial condition or results of operations.

In March 2008, FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging

Activities – an amendment of FASB Statement No. 133” (SFAS No. 161). This statement requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. Entities
are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance,
and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The
Company is currently evaluating the impact of SFAS No. 161 but does not expect it will have a material effect on its
financial condition or results of operations.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
the Company’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a
minimum recognition threshold and measurement attributed for the financial statement recognition and measurement of
a tax provision taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2007. The Company implemented FIN 48 during 2008 and it did not have a material
impact on the Company’s financial statements.

Note 23. Subsequent Events

On January 9, 2009, the Company received $25 million from a preferred stock investment by the U.S. Treasury under
the Capital Purchase Program (the “CPP Shares”) at a purchase price of $1,000 per share. 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,
payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year. Incident to such
issuance, the Company issued to the U.S. Treasury warrants (the “Warrants”) to purchase up to 225,904 shares of the
Company’s common stock at a price per share of $16.60 (subject to adjustment). The CPP Shares and the related
Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to
third parties and the Company has filed a registration statement with the Securities and Exchange Commission to allow
for possible resale of such securities. The CPP Shares qualify as Tier 1 capital on the Company’s books for regulatory
purposes and 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.

The impact on the Company’s capital ratios as of December 31, 2008, is shown in the following table:

Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average assets

As of December 31, 2008

Historical as Presented

Pro-Forma as Approved

11.13%
10.11%
7.07%

13.97%
12.96%
9.06%

The Company may redeem the CPP Shares during the first three years only with the proceeds the Company
receives from the sale for cash of other Tier 1 qualifying perpetual preferred or common stock that results in aggregate
gross proceeds to the Company of not less than 25% of the issue price of the CPP Shares. After three years, the
Company could redeem the CPP Shares at its option, in whole or in part, at any time using any funds available to the
Company. Any redemption would be subject to the prior approval of the Federal Reserve Bank of Boston. The CPP
Shares would be “perpetual” preferred stock, which means that neither Treasury nor any subsequent holder would have
a right to require that the Company redeem any of the shares.

During the first three years following the Company’s sale of the CPP Shares, the Company will be required to
obtain Treasury’s consent to increase the dividend per share paid on the Company’s common stock unless the Company
had redeemed the CPP Shares in full or Treasury had transferred all of the CPP Shares to other parties. Also during the

first three years following the Company’s sale of the CPP Shares, the Company would be required to obtain Treasury’s
consent in order to repurchase any shares of its outstanding stock of any type (other than purchases of common stock or
preferred stock ranking junior to the CPP Shares in the ordinary course of the Company’s business and consistent with
the Company’s past practices in connection with a benefit plan) unless the Company had redeemed the CPP Shares in
full or Treasury had transferred all of the CPP Shares to other parties.

As a condition to Treasury’s purchase of the CPP Shares, during the time that Treasury holds any equity or debt

instrument the Company issued, the Company will be required to comply with certain restrictions and other
requirements relating to the compensation of the Company’s chief executive officer, chief financial officer and three
other most highly compensated executive officers. These restrictions include a prohibition on severance payments to
those executive officers upon termination of their employment and a $500,000 limit on the tax deductions the Company
can take for compensation expense for each of those executive officers in a single year as well as a prohibition on bonus
compensation to such officers other than limited amounts of long-term restricted stock.

In conjunction with the sale of the CPP shares, the Company also issued warrants (“Warrants”) to Treasury giving

it the right to purchase from the Company 225,904 shares of the Company’s common stock equal at a price of $16.60
per share. The Warrants have a term of ten years and could be exercised by Treasury or a subsequent holder at any time
or from time to time during their term. To the extent they had not previously been exercised, the Warrants would expire
after ten years. Treasury will not vote any shares of common stock it receives upon exercise of the Warrants, but that
restriction would not apply to third parties to whom Treasury transferred the Warrants. The Warrants (and any common
stock issued upon exercise of the Warrants) could be transferred to third parties separately from the CPP Shares.

Note 24. Quarterly Information

The following tables provide unaudited financial information by quarter for each of the past two years:

Dollars in thousands
Balance Sheets
Cash
Investments
Net loans
Other assets
Total assets
Deposits
Borrowed funds
Other liabilities
Shareholders’ equity
Total liabilities
& equity
Income Statements
Interest income
Interest expense
Net interest income
Provision for
loan losses
Net interest income
after provision for loan
losses
Non-interest income
Non-interest expense
Income before taxes
Income taxes
Net income
Basic earnings per
share
Diluted earnings per
share

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

221,815
913,364
70,817

178,390
840,279
68,849

200,170
870,550
69,128

219,855
886,274
69,111

$ 21,103 $ 21,349 $ 27,339 $ 17,254 $ 15,837 $ 19,997 $ 21,667 $ 16,856
262,532
971,771
84,585
$1,108,621 $1,161,197 $1,202,579 $1,223,250 $1,248,208 $1,285,373 $1,311,157 $1,325,744
$ 824,761 $ 851,090 $ 811,395 $ 781,280 $ 826,477 $ 842,120 $ 918,856 $ 925,736
272,074
10,753
117,181

267,011
12,068
112,105

188,478
11,419
110,210

162,512
12,548
108,800

316,719
12,583
112,668

261,057
953,797
74,636

232,878
928,887
70,606

246,378
946,267
72,731

264,617
11,812
115,872

295,253
12,867
113,611

317,055
11,440
114,758

$1,108,621 $1,161,197 $1,202,579 $1,223,250 $1,248,208 $1,285,373 $1,311,157 $1,325,744

$ 16,948 $ 17,502 $ 18,538 $ 18,733 $ 18,330 $ 17,514 $ 17,891 $ 17,637
7,316
10,321

10,381
8,157

10,231
8,502

9,890
7,612

9,383
7,565

8,268
9,623

9,513
8,817

8,572
8,942

300

250

300

582

500

939

875

2,386

7,265
2,148
5,250
4,163
1,160

7,935
2,096
5,836
4,195
1,187
$ 3,003 $ 3,195 $ 3,414 $ 3,489 $ 3,591 $ 3,603 $ 3,832 $ 3,008

7,362
2,470
5,353
4,479
1,284

7,857
2,985
6,000
4,842
1,428

7,920
2,542
5,580
4,882
1,393

8,748
2,856
6,284
5,320
1,488

8,317
2,176
5,449
5,044
1,453

8,003
2,518
5,425
5,096
1,493

$ 0.30 $ 0.33 $ 0.35 $ 0.36 $ 0.37 $ 0.37 $ 0.40 $ 0.31

$ 0.30 $ 0.33 $ 0.35 $ 0.36 $ 0.37 $ 0.37 $ 0.39 $ 0.31

Report of Independent Registered Public Accounting Firm
Berry, Dunn, McNeil & Parker

The Shareholders and Board of Directors
The First Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of The First Bancorp, Inc. and Subsidiary as of
December 31, 2008 and 2007, and the related consolidated statements of income, changes in shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2008. We have also audited The First Bancorp,
Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The First Bancorp, Inc.’s management is responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control
over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of The First Bancorp, Inc. and Subsidiary as of December 31, 2008 and 2007, and the consolidated
results of their operations and their consolidated cash flows for each of the three years in the period ended December 31,
2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion,
The First Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).

As described in Note 22, the Company changed its method of accounting for split-dollar life insurance arrangements
effective January 1, 2008, in accordance with EITF 06-10: Accounting for Collateral Assignment Split-Dollar Life
Insurance Agreements.

Portland, Maine
March 13, 2009

Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), as of December 31, 2008,
the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the
participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. In
designing and evaluating the Company’s disclosure controls and procedures, the Company and its management
recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and the Company’s management necessarily was required to
apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures
are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms. Also, based on Management’s evaluation, there
was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended
December 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its
internal controls over financial reporting, on an ongoing basis, and may from time to time make changes aimed at
enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

Management’s Annual Report on Internal Control over Financial Reporting

The Management of the Company is responsible for the preparation and fair presentation of the financial statements and
other financial information contained in this Form 10-K. Management is also responsible for establishing and
maintaining adequate internal control over financial reporting and for identifying the framework used to evaluate its
effectiveness. Management has designed processes, internal control and a business culture that foster financial integrity
and accurate reporting. The Company’s comprehensive system of internal control over financial reporting was designed
to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the consolidated
financial statements of the Company in accordance with generally accepted accounting principles. The Company’s
accounting policies and internal control over financial reporting, established and maintained by Management, are under
the general oversight of the Company’s Board of Directors, including the Board of Directors’ Audit Committee.

Management has made a comprehensive review, evaluation, and assessment of the Company’s internal control over
financial reporting as of December 31, 2008. The standard measures adopted by Management in making its evaluation
are the measures in Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations
of the Treadway Commission (“the COSO”). Based upon its review and evaluation, Management concluded that, as of
December 31, 2008, the Company’s internal control over financial reporting was effective and that there were no
material weaknesses.

Berry, Dunn, McNeil & Parker, an independent registered public accounting firm, which has audited and reported on
the consolidated financial statements contained in this Form 10-K, has issued its written attestation report on
Management’s assessment of the Company’s internal control over financial reporting which follows this report.

Daniel R. Daigneault, President and Director
(Principal Executive Officer)
March 13, 2009

F. Stephen Ward , Treasurer and Chief Financial Officer
(Principal Financial Officer, Principal Accounting Officer)
March 13, 2009

Shareholder Information

Common Stock Prices and Dividends
The common stock of The First Bancorp, Inc. (ticker
symbol FNLC) trades on the NASDAQ Global Select
Market. The following table reflects the high and low
prices of actual sales in each quarter of 2008 and 2007.
Such quotations do not reflect retail mark-ups, mark-
downs or brokers’ commissions.

Annual Report on Form 10-K
The Company’s Annual Report on Form 10-K to be filed
with the Securities and Exchange Commission is
available online at the Commission’s website:
www.sec.gov. Shareholders may obtain a written copy,
without charge, upon written request to the address listed
below.

2008

2007

Low

High

Low
High
$15.74 $13.95 $16.84 $15.64
15.50
18.00
13.60
23.05
14.20
22.98

13.65
12.88
12.84

17.00
17.50
15.95

1st Quarter
2nd Quarter
3rd Quarter
4th Quarter

The last known transaction of the Company’s stock
during 2008 was on December 31 at $19.89 per share. As
of December 31, 2008, there are no warrants outstanding
with respect to the Company’s common stock, and the
Company has no securities outstanding which are
convertible into common equity. The table below sets
forth the cash dividends declared in the last two fiscal
years:

Date
Declared
March 22, 2007
June 21, 2007
September 19, 2007
December 20, 2007
March 20, 2008
June 19, 2008
September 18, 2008
December 18, 2008

Amount
Per Share
$0.165
$0.170
$0.175
$0.180
$0.185
$0.190
$0.195
$0.195

Date
Payable
April 30, 2007
July 31, 2007
October 31, 2007
January 31, 2008
April 30, 2008
July 31, 2008
October 31, 2008
January 30, 2009

Pending Legal Proceedings
There are no material pending legal proceedings to which
the Company or the Bank is the party or to which any of
its property is subject, other than routine litigation
incidental to the business of the Bank. None of these
proceedings is expected to have a material effect on the
financial condition of the Company or of the Bank.

Annual Meeting
The Annual Meeting of the Shareholders of The First
Bancorp, Inc. will be held Wednesday, April 29, 2009 at
11:00 a.m. at The Samoset Resort, 220 Warrenton Street,
Rockport, Maine 04856.

Number of Shareholders
The number of shareholders of record as of
February 19, 2009 was approximately 3,353.

Accessing Reports Online
The First Bancorp, Inc.’s press releases, SEC filings and
other reports or information issued by the Company are
available at: www.TheFirstBancorp.com. In addition, all
SEC filings are accessible at the Commission’s website:
www.sec.gov.

Corporate Headquarters
Contact:
F. Stephen Ward, Chief Financial Officer
The First Bancorp, Inc.
223 Main Street, P.O. Box 940
Damariscotta, Maine 04543
207-563-3195; 1-800-564-3195

Transfer Agent
Shareholder inquiries regarding change of address or title
should be directed to:
Shareholder Relations
The First Bancorp, Inc.
223 Main Street, P.O. Box 940
Damariscotta, Maine 04543
207-563-3195; 1-800-564-3195

Independent Certified Public Accountants
Berry, Dunn, McNeil & Parker
100 Middle Street, P.O. Box 1100
Portland, Maine 04104-1100

Corporate Counsel
Pierce Atwood, Attorneys
One Monument Square
Portland, Maine 04101

Photography Credits
All photographs contained in this report are
copyright of the following photographers:
Covers and page 1: Peter Ralston
Pages 2, 6, and 20: Benjamin Magro.

Directors and Executive Officers

Board of Directors

The First, N.A. Management Executive Committee

Stuart G. Smith, Chairman of the Board
Katherine M. Boyd
Daniel R. Daigneault
Robert B. Gregory
Tony C. McKim
Carl S. Poole, Jr.
Mark N. Rosborough
David B. Soule, Jr.
Bruce B. Tindal

Directors of The First Bancorp also serve as
Directors of The First, N.A.

Daniel R. Daigneault
President & Chief Executive Officer
Tony C. McKim
Executive Vice President & Chief Operating Officer
Susan A. Norton
Executive Vice President, Human Resources &
Compliance
F. Stephen Ward
Executive Vice President & Chief Financial Officer
Charles A. Wootton
Executive Vice President & Senior Loan Officer

Office Locations

Bar Harbor
Blue Hill
Boothbay Harbor
Calais
Camden
Damariscotta
Eastport
Ellsworth
Northeast Harbor
Rockland
Rockport
Southwest Harbor
Waldoboro
Wiscasset

Office Locations
Bar Harbor
Damariscotta

The First Bancorp Executive Officers

Daniel R. Daigneault
President & Chief Executive Officer
Tony C. McKim
Executive Vice President & Chief Operating Officer
F. Stephen Ward
Executive Vice President & Chief Financial Officer
Charles A. Wootton
Executive Vice President & Clerk

w w w . t h e f i r s t b a n c o r p . c o m