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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

7 Cheapest Bank Takeout Target Stocks From KBW (Update 2)

6. Banner Corp.

Shares of Banner Corp. (BANR) of Walla Walla, Wash., closed at $19.00 Friday, returning 11% year-to-date, following a 7% return during 2011.

The shares trade for 82% of tangible book value, and for 19 times the consensus 2013 earnings estimate of $1.02. The consensus 2012 EPS estimate is $1.55.

Banner Corp. owes $124 million in bailout funds received through TARP in December 2008, although the U.S. Treasury no longer holds preferred shares in the company, having auctioned the shares in March for a discounted price of roughly $108 million.

When asked during the company's first-quarter conference call when Banner might consider redeeming the (formerly TARP) preferred shares, CEO Mark Grescovich said "we want to make sure we have complete clarity as to where the economy is going, and we will be prudent with our capital management and redeeming that debt," according to a transcript provided by Thomson Reuters.

Banner Corp. had $4.2 billion in total assets as of March 31. The company reported first-quarter earnings available to common shareholders of $7.2 million, or 40 cents a share, increasing from $3.1 million, or 18 cents a share, in the fourth quarter, and a net loss of $9.8 million, or 60 cents, in the first quarter of 2011.

The improved first-quarter results reflected an increase in mortgage banking revenue to $2.6 million in the first quarter, from $1.9 million the previous quarter, and $962,000 a year earlier. Banner also bucked the industry trend with a first-quarter net interest margin of 4.11%, expanding from 4.07% in the fourth quarter and 3.94% in the first quarter of 2011.

The year-over-year earnings improvement mainly resulted from a decline in the provision for loan losses to $5 million from $17 million.

Cannon rates Banner "Market Perform," with a $21 price target, calling the company's first-quarter performance a "solid beat" of expectations, "with credit improving and the net interest margin expanding," but said that the shares (closing at $22.44 on April 24) were "fully valued" at a "premium to peers" that was "warranted due to the stable margin, loan growth, and the stock [trading] at a discount to tangible book value.

The shares pulled back 26% from April 24 through Friday's close.

The analyst said that "Banner was able to improve the net interest margin this quarter even with higher average loan growth (up 2% annualized)," but that he expect that loan growth would "go lower for the remainder of this year," and "modest loan growth to return in 2013."

Cannon says that KBW's bank analysis team has been "debating whether or not it is time" to take Banner Corp. off of the Consolidation List, in light of the company's success.

"They have really turned the bank around especially since Mark Grescovich came in a year and a half ago," but "we still view them as a company that may look for a partner."

Interested in more on Banner Bancorp? See TheStreet Ratings' report card for this stock.

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