The Zacks Savings and Loan industry continues to witness weak asset quality. While the Federal Reserve lowered interest rates in 2024, it has kept rates steady since then because of the potential impacts of tariffs on prices. The lending scenario will not be impressive, given the weak economic growth expectations. Therefore, industry players will not witness solid net interest income (NII) improvement.
Nonetheless, the digitization of operations will aid industry players. Thus, companies like Banner Corporation BANR, Berkshire Hills Bancorp, Inc. BHLB and Heritage Financial Corporation, Inc. HFWA are poised to gain.
Industry Description
The Zacks Savings and Loan industry consists of specialized U.S. banks, which are generally locally owned, focusing on extending residential mortgage finance. Companies in the industry provide residential mortgages, commercial and industrial mortgages, home equity loans, vehicle loans and other business loans. The institutions fund mortgages with savings insured by Federal Deposit Insurance Corporation ("FDIC"). They offer high interest rates on savings to attract deposits, enhancing their ability to lend mortgages. Although the firms operate similarly to commercial banks by providing various banking services, such as checking and savings accounts, they were previously legally bound to invest at least 65% of their asset holdings in mortgages. Effective July 1, 2019, a ruling lifted the restriction for institutions insured by the FDIC.
3 Savings & Loan Industry Trends to Watch
Worsening Asset Quality:Mounting concerns about the economic health and uncertainty about the impacts of policies being pursued by the Trump administration are pushing up inflation. This is taking a toll on consumers’ ability to repay loans. Thus, industry players are building additional reserves to counter any fallout from unexpected defaults and payment delays. This is leading to a deterioration in asset quality, and several credit quality metrics have crept up above the pre-pandemic levels.
Fed Rate Cuts & Loan Demand: While the Federal Reserve lowered the interest rates by 100 basis points in 2024, it kept interest rates steady so far this year, given persistent inflation and uncertainty surrounding Trump’s tariff plans. The Fed has also indicated two rate cuts for this year.
The extended periods of higher rates will lead to elevated funding costs. Also, as economic growth is likely to be subdued, the lending scenario is expected to be modest in 2025 and will not improve much from 2024. As such, industry players might not witness substantial growth in NII and net interest margin (NIM) in the upcoming period.
Digital Ramp-Ups: Numerous challenges, including legacy technologies and an unbalanced customer base, have cropped up for savings and loan companies. These companies have been trying to ramp up the transition to digitally focused, technology-driven and flexible operating institutions to remain competitive and reap profits in the rapidly evolving market.
Though technology upgrades are expected to raise expenses in the near term, the same will support the industry participants' customer experience and operational efficiency, along with reducing costs over time.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #138, which places it in the bottom 44% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near-term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of the negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. The industry’s current-year earnings estimate has moved 1.9% down over the past year.
Before we present a few stocks that you may want to keep an eye on, let us take a look at the industry's recent stock market performance and the valuation picture.
Industry Outperforms Sector & the S&P 500
The Zacks Savings and Loan Industry has widely outperformed the Zacks Finance Sector and the S&P 500 composite over the past year.
The stocks in the industry have collectively gained 20%, whereas the S&P 500 Index has risen 10.1%. In the same period, the Zacks Finance Sector has appreciated 18.9%.
One-Year Price Performance
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Industry's Current Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing finance companies because of large variations in their earnings from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.78X, below the median level of 1.95X over the past five years. The industry is trading at a discount compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 composite is 12.94X and the median level is 13.95X.
Price-to-Tangible Book Ratio (TTM)
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As finance stocks typically have a low P/TB ratio, comparing savings and loan stocks with the S&P 500 might not make sense to many investors. A comparison of the group's P/TB ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector's current trailing 12-month P/TBV of 5.81X is way above the Zacks Savings and Loan industry's ratio.
Price-to-Tangible Book Ratio (TTM)
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3 Savings & Loan Stocks Worth Betting On
Banner Corp: It is a $16.2-billion bank holding company that operates a commercial bank in four Western states through a network of branches offering deposit services and business, commercial real estate, residential, construction, agricultural and consumer loans.
The company has a well-diversified loan portfolio, with a rising average yield on loan originations as of the fourth-quarter 2024 end. The company has been making efforts to reduce deposit costs and grow core deposits to support NIM.
A conservative $3.43-billion investment portfolio as of Dec 31, 2024, is another positive for BANR. This portfolio is a diversified mix of asset types, with 79% of investments consisting of Agency MBS, CMO or AAA-rated securities. Also, the company undertook a bank-wide initiative, Banner Forward, to enhance revenue growth and reduce operating costs. By focusing on accelerating growth in commercial banking and advancing technology strategies, the company’s revenues are expected to benefit in the upcoming period.
As of Dec. 31, 2024, non-performing assets were $39.6 million, or 0.24% of total assets, compared with $30.1 million, or 0.19% of total assets, at Dec. 31, 2023. The Zacks Consensus Estimate for BANR’s 2025 and 2026 earnings indicates 4.4% and 8.5% year over year, respectively.
Banner Corp has a market capitalization of $2.2 billion. This Zacks Rank #2 (Buy) company's shares have climbed 47.4% over the past year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: BANR
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Berkshire Hills: This Zacks Rank #2 stock is a bank holding company. Through its subsidiaries, the company is engaged as a community bank that accepts retail deposits from the general public in the areas surrounding its full-service banking offices and uses those funds, together with funds generated from operations and borrowings, to originate residential mortgage loans, commercial business and real estate loans and consumer loans, primarily indirect automobile loans.
BHLB has been growing organically over the years. The company’s revenues and loans have witnessed a CAGR of 2.7% and 3.8% from 2020 to 2024, respectively.
In 2024, non-performing assets were $26.7 million compared with $24 million as of Dec 31, 2023.
Berkshire Hills has a market capitalization of $1.2 billion. The Zacks Consensus Estimate for BHLB’s 2025 and 2026 earnings indicates year-over-year increases of 13.5% and 50.1%, respectively. BHLB shares have rallied 31.3% in the past year.
Price and Consensus: BHLB
Zacks Investment Research
Heritage Financial: Headquartered in Olympia, WA, and the holding company of Heritage Bank — a full-service commercial bank. Heritage Bank has a branch network of 50 banking offices in Washington, Oregon and Idaho.
The company’s NII recorded a CAGR of 45.2% during 2019-2024, while loans have witnessed a CAGR of 4.9% during the same time frame. With modest loan demand and the expected Fed rate cuts, HFWA financials are likely to witness a positive trend in the upcoming period.
The company continues to strategically reposition its balance sheet to improve future profitability. Management is optimistic that the combination of its strong balance sheet and prudent risk management will provide sustainable long-term returns for shareholders.
Last year, non-performing assets were $5.2 million compared with $5.8 million in 2023.
Heritage Financial has a market capitalization of $804.6 million. The Zacks Consensus Estimate for 2025 and 2026 earnings indicates a 9.7% and 12.5% year-over-year rise, respectively.
HFWA shares have rallied 31.7% over the past year. It currently carries a Zacks Rank #2.
Price and Consensus: HFWA
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