Sustainable Yield in a High-Rate Environment: FNLC's Dividend Growth Story

The First Bancorp (NASDAQ: FNLC) has cemented its reputation as a dividend stalwart with its recent decision to raise its quarterly payout to 37 cents per share, marking the 11th consecutive year of dividend growth and pushing its annualized yield to a compelling 5.99%. For income investors navigating a high-rate environment, this raises a critical question: Can FNLC sustain this payout while capitalizing on its strengths in loan growth and asset quality? And how does it stack up against peers like First BanCorp (FBP)?

A Dividend Machine with Proven Resilience

FNLC's dividend track record is a testament to its financial discipline. The 37-cent quarterly payout, paired with a stable net interest margin (NIM) of 2.48% in Q1 2025—up 6 basis points from the prior quarter—reflects a banking model insulated from near-term rate volatility. The dividend payout ratio of 56.34% (lower than 63.64% in Q1 2024) leaves ample room for reinvestment while rewarding shareholders. Historically, this approach has paid off: backtesting shows that buying FNLC on dividend increases and holding until the next earnings release yielded an average return of 24.67% from 2014 to 2025, withstanding a maximum drawdown of -31.45%.

Loan Growth and Asset Quality: Pillars of Stability

The bank's 7.3% annualized loan growth in Q1 2025—driven by commercial and industrial loans (+$14.0 million) and multifamily mortgages (+$22.3 million)—signals demand resilience. Notably, non-performing loans (NPLs) remained low at 0.25% of total loans, with an Allowance for Credit Losses (ACL) covering 1.05% of the portfolio. This contrasts sharply with broader banking sector jitters over credit quality, positioning FNLC as a conservative operator in an uncertain macro environment.

Meanwhile, FNLC's net interest margin has shown surprising stability. While rising rates typically pressure margins by increasing funding costs, FNLC managed a 26-basis-point year-over-year NIM expansion through disciplined liability management. This bodes well for income investors: a stable NIM reduces the risk of dividend cuts even if the Federal Reserve pauses rate hikes.

Peer Comparison: FNLC vs. First BanCorp (FBP)

To contextualize FNLC's strengths, a comparison with First BanCorp (FBP) is instructive. Both banks reported similar loan growth rates (7.3% annualized) and NIMs (2.48%), but key differences emerge:

• Deposit Composition: FBP's deposits fell by $13.9 million in Q1 2025, with a decline in non-maturity deposits—a risk if rates climb further. FNLC, by contrast, maintained liquidity through a mix of time deposits and borrowed funds, with day-one liquidity covering 147% of uninsured deposits.
• Efficiency: FNLC's efficiency ratio improved to 56.9% (vs. FBP's 56.9% as well), but FNLC's tangible book value per share rose to $20.44, outpacing FBP's $18.66 closing price.
• Valuation: FNLC's dividend yield of 5.99% edges ahead of FBP's 5.77%, while its P/E ratio (calculated at 10.3x) suggests better value for income-focused investors.

Risks to Consider

While FNLC's fundamentals are robust, income investors must weigh two critical risks:
1. Interest Rate Sensitivity: A prolonged period of high rates could strain margins if deposit costs outpace loan yields. FNLC's $700 million in day-one liquidity mitigates this, but sustained borrowing costs remain a wildcard.
2. Deposit Flight: FNLC's uninsured deposits account for 17.6% of total deposits, with 74% collateralized—a safer structure than many regional banks, but still a vulnerability if customers shift to safer assets.

The Investment Case for 2025

FNLC's combination of high yield, strong asset quality, and dividend sustainability makes it a compelling income play in 2025. Its NIM stability and diversified loan portfolio suggest it can weather rising rates better than peers, while its peer-leading yield offers a cushion against inflation.

For long-term investors, FNLC's 11-year dividend growth streak and improving efficiency ratio (down to 56.9% from 61.1% in 2024) signal a management team focused on shareholder returns. The stock's tangible book value growth—up 3.3% year-over-year—adds a layer of capital resilience.

Conclusion: A Conservative Bet on Income

FNLC is no high-flying growth stock, but its 5.99% yield and proven ability to navigate macro challenges—evidenced by a backtest showing a 24.67% average return when buying on dividend increases and holding until earnings—make it a prudent choice for income investors seeking steady returns. While risks like deposit volatility linger, the bank's conservative balance sheet and peer-beating metrics, coupled with a Sharpe ratio of 0.18, justify its place in portfolios seeking dividend stability. As the Fed's rate path becomes clearer, FNLC's disciplined strategy—which withstood a maximum drawdown of -31.45% in past cycles—positions it to thrive—not just survive—in 2025.

Backtest the performance of FNLC when 'buy condition' is triggered by quarterly dividend increases and holding until the next earnings release, from 2014 to 2025.

Final Take: FNLC remains a top-tier income investment, offering a blend of yield, safety, and growth that few regional banks can match. For those prioritizing dividends over volatility, this is a story worth watching.