Once labeled by an analyst as a "reclamation project," Banner Corp. is wrapping up what many industry observers say is an unbelievable turnaround.

Now the management team has to deal with heightened investor expectations.

The Walla Walla, Wash., company has done well to dig itself out from a mound of nonperforming loans. But investors wonder if it can keep the momentum going in the face of lackluster loan demand and interest rates that will remain artificially low for the foreseeable future.

"They're not immune from economic conditions," says Sara Hasan, an analyst at McAdams Wright Ragen. The "investors' expectations get so high, and that's the risk you run."

What a once-struggling bank does for an encore is a question facing numerous management teams. Banner could emulate Associated Banc-Corp in Green Bay, Wis., which reversed several quarters of losses and is now hiring. Or, it could follow the path of Citizens Republic Bancorp in Flint, Mich., which is selling itself to an out-of-state bank for $912 million.

Mark Grescovich, Banner's president and chief executive, suggests that he is leaning more toward following Associated's lead.

"I want it to be clear that our focus is on improving profitability and return to our stakeholders, not necessarily size," Grescovich says.

Pursuing organic loan growth makes the most sense for Banner, because it operates in the relatively stable Pacific Northwest, which has benefited from modest job growth in the aerospace and technology industries, Hasan says.

"They don't need to find a buyer," she says. "They can remain independent."

It's been a bumpy ride for Banner since late 2008, when it posted a $78.5 million loss in the fourth quarter largely because of bad construction loans. Banner raised $148 million in June 2010, and Grescovich was named the CEO two months later. Grescovich was handed a clean-up job, however, and Banner continued to bleed money.

Banner cut its nonperforming loans by 51% in the first quarter of this year, compared to a year earlier, and it has posted several profitable quarters. Investors have rewarded Banner; the company's stock price has increased 47% this year, closing at $25.21 a share on Wednesday.

Grescovich says he plans to keep momentum chugging along by focusing resources in Banner's two largest urban markets: Seattle and Portland, Ore.

Banner has "added new lending talent" in those markets, partly because of loan demand, Grescovich says. Banner landed commitments in the second quarter for roughly $55 million in new construction loans in Portland, and another $110 million in Seattle, Rick Barton, the company's chief credit officer, said during a July 26 conference call.

"The economic drivers in the Pacific Northwest are a little more positive than in the rest of the country," Grescovich says.

Aside from loan growth or selling to another bank, Banner has other ways to grow. The company should be able to lower deposit costs, specifically by cutting its exposure to time deposits to 15% of total deposits, compared to 33% at June 30, says Joseph Fenech, an analyst at Sandler O'Neill & Partners.

"Our cost of deposits is significantly higher than our peers," Grescovich says. "We have room to ratchet down funding costs."

Another option involves using excess capital to redeem about $124 million in preferred stock that the company issued to the Treasury Department but is now held by private investors, says Jeff Rulis, an analyst at D.A. Davidson. (Rulis is the analyst who made the "reclamation" comment in a July note to clients.)

Grescovich would not discuss when Banner could redeem the preferred shares. "What we have said is that if we executed effectively on our business plan, through earnings we would be able to repay those perpetual preferred securities over time," he says.

Rich Greenberg, the research director at Donald Smith who was listed as Banner's largest shareholder in this year's proxy statement, did not return a call seeking comment.

Smith, who had a roughly 9.5% when the proxy was filed in March, has been reducing his holdings in the company.

Smith reported ownership of about 992,000 shares at June 30, compared with roughly 1.7 million shares in February.

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