May 2008 Analyst Interview with: Stifel, Nicolaus & Company, Vice President, P. Carter Bundy, CFA, Covering: Green Bankshares, Inc. (GRNB-NASDAQ.

Green Bankshares, Inc. (GRNB-NASDAQ) - Analyst

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Green Bankshares Stands Out Because Of Its Well Run Operating Model Put In Place By An Experienced Management That Understands The Eastern Tennessee Marketplace And Its Valuable Deposit Base

Financial
Southeast Community Banks

Analyst Interview Covering:
Green Bankshares, Inc. (GRNB-NASDAQ)

P. Carter Bundy, CFA
Vice President
Stifel, Nicolaus & Company
Phone: 804-727-6365

Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published – May 16, 2008

BIO:
P. Carter Bundy joined the Stifel Nicolaus Research Team in connection with Stifel's acquisition of Legg Mason's Capital Markets Group in December 2005. He is an equity analyst following community and super-community banks as part of Stifel Nicolaus' financial services research team. Previously, Mr. Bundy worked as a portfolio analyst in the Private Bank at Bank of America. Prior to joining the Private Bank at Bank of America, Mr. Bundy served as a retail loan officer and banker with Bank of America in Richmond, Virginia.
 

Mr. Bundy has a B.A. in environmental sciences from the University of Virginia.  He is a CFA charterholder and a member of both the CFA Institute and CFA Virginia.

CEOCFO::Mr. Bundy, tell us about the universe you cover and why Green Bankshares is included?

Mr. Bundy: “I cover mid-Atlantic names. I cover names in Maryland, Virginia, North Carolina and Tennessee. Before GRNB I covered one name in Tennessee, Buy rated Pinnacle Financial Partners, ticker symbol PNFP. It kind of rounded out the Tennessee footprint. GRNB has very good profitability metrics that quickly stood out. I ran some analysis on the company and that’s how it initially attracted me. Then I called up the management team, went out to perform diligence, and spent some time with them. I went from there and rolled out coverage on Green Bankshares in mid November 2007.”

CEOCFO: Why does Green Bankshares stand out for you?

Mr. Bundy: “Green Bankshares stands out because it’s a very well run operating model, you’ve got a deep management team that understands the markets, and they’ve been in the markets for a long time. You also have a footprint in eastern Tennessee that has a nice valuable deposit base.  It is very challenging to grow deposits, but the cost of funding there is not quite as expensive as let’s say a higher growth market where you really pay up for deposit funding. Green Bankshares is interesting. They made an acquisition in mid 2007, the Civitas Bank Group and it expanded and strenghtened their franchise in the middle Tennessee Nashville MSA area to where that piece is now over 40% of the franchise and because of that, it was a pretty attractive transaction for them because they now have a nice eastern slower growth footprint with nice core funding combined with the middle Tennessee footprint that has more attractive demographics. It makes Green Bankshares’ profile more growth-oriented.”

CEOCFO: Why are they able to cope with the large expansion as they grow?

Mr. Bundy: “The fact that they understand the Tennessee markets made it pretty manageable for them. In addition, it is a function of knowing the different bankers out there. That is why they’ve been able to manage it effectively. Now, the problem is in the 4^th Quarter of this year, this is after I had initiated coverage of GRNB, they had a massive decline in asset quality. Essentially what happened was they had a lot of residential construction credits move to non-accrual. They pre-announced that they were going to have a material lift in non-accruals and that they were also going to have very elevated charge offs. They aggressively went in and took some of these credits that were having a tough time paying up and moved them to non-accrual status. They took some material charges and so what you saw in 4Q07 was about $10.4 million worth of charge offs that were more than offset with provisioning of about $10.8 million.
 

Obviously, the market didn’t like it because the stock absolutely crashed after that. It is somewhat disappointing, obviously, any time that happens. What I do like about it is that they aggressively went in there and in my view, essentially wrote these credits down let’s say quicker than maybe some other banks might. The stock got beat up and investors were very nervous following that. Eventually the stock traded up somewhat kind of middle-of-the-quarter 1Q08, and then going into the end of the quarter traded right back down into the high $15 range. The stock traded down going into 1Q08 results because I think investors were flat out scared that they were going to have another big hiccup in asset quality. What actually happened was, the quarter was a pretty good quarter. Asset quality didn’t get any materially worse.

NPLs actually came down a little bit. Non-performing assets were pretty stable for the most part, although they were up somewhat, and their charge off activity was not by any means out of line. It was about 18 basis points. Essentially what happened was they didn’t have as bad a quarter as what the market was pricing in. I don’t know if you saw my note? I upgraded the stock because there is a lot of franchise value and earnings capacity that I think the market was not pricing in and I think it was over done. If you screen GRNB it is one of the cheapest stocks that I cover on a price earnings multiple. If you also look at it on price to tangible book, it was trading at a material discount to the group, to peers, even though GRNB is expected return mid teens on tangible equity, which is in line with peers even though the stock was trading at a massive discount. The market over did it going into the quarter and consequently I upgraded the stock. It has moved up pretty nicely since then as I think the earning power of Green is pretty substantial. It has widening tangible capital ratios, strong ROA, and runs a nice net interest margin and if the company can get through the next few quarters without any significant increases in NPAs and further material credit losses, the earning power there is pretty substantial.”

CEOCFO: Any concerns with the current economy, and where do they stand compared to so many others?

Mr. Bundy: “If you screen them on just a non-performing asset balance, they certainly have elevated non-performing assets. They ended the quarter at 1.35% on non-performing assets. Non-performing loans were 1.29%. They certainly screen higher than peers but it appears they’ve gotten through at least a fair amount of credit issues. However, they did have some additional credits move to non-accrual in the quarter, about $2 million dollar’s worth.  Additionally, you will see non-accruals moving to OREO over time.

How did they stack up? The 4Q certainly put them in a position where they don’t stack up as well versus peers, but the thought process is hopefully that, provided things don’t get significantly worse from here, clearly, you are probably going to have some additional loans going to non-performing status given what’s going on in the housing market, then earnings capacity could clearly rebound. Some of the credits that they move to other real estate owned and eventually sell can be re-deployed into earning assets. Hopefully, they don’t have too many more to deal with from here but I would expect some additional increases in non-performing assets, maybe over the next few quarters. I think over time we are going to start seeing these trend down. Do they stack up well versus peers right now? No, not on non-performing assets, but I think a lot of what happened in the 4Q has maybe put them in a position where they know where they are currently positioned and can ideally positively move forward and hopefully work through those credits.”

CEOCFO: So sum it up for potential investors; what is your rating, your target and why should potential investors be interested?

Mr. Bundy: “I’ve given Green Bankshares a ‘buy’ rating, with a $23 target price. People should be looking at the stock because it returns excellent returns on tangible equity. It’s projected this year to do, let’s just say mid-teens about 15% returns on tangible equity and likely to do that out in 2009 and potentially better. You have a net interest margin at the company that is poised to widen from here as long as we don’t get any additional material Fed cuts going forward. They can handle another 25 basis points or so, but the net interest margin is poised to lift in the second half the year given that a significant piece of the loan portfolio that floats which is about 50%, has a lot of floors that have been reached. Green also has significant CD funding that’s going to be repricing this year, so theoretically you are going to see the margin start lifting. In addition, you have a very efficient bank as they are running just over 60% operating efficiency. They operate in good markets and yes they have had some credit issues here recently, but the market appears to have priced that in already. Over time, I think you will see the stock continue to move up towards our target price, because if you look at peers right now they are about 1.6 times tangible book. My price target, 12 months out-based on a 1Q09 estimate, is essentially in line with peers. Therefore, it appears that the stock could perceivably reach that price target given that they are doing similar returns on assets and on tangible equity versus peers and you are currently getting it at a discount. In addition, GRNB has a lot of capital and has widening tangible capital ratios on top of the full capital base and I feel very comfortable with their tangible book value here. The stock theoretically has a lot of support here also because you have a tangible book value that appears to not be at risk.”

Green Bankshares, Inc. (GRNB)
Disclosures: Stifel, Nicolaus & Company, Inc. makes a market in the securities of Green Bankshares, Inc. Stifel, Nicolaus & Company, Inc. expects to receive or intends to seek compensation for investment banking services from Green Bankshares, Inc. in the next 3 months.

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“I’ve given Green Bankshares a ‘buy’ rating, with a $23 target price. People should be looking at the stock because it returns excellent returns on tangible equity. It’s projected this year to do, let’s just say mid-teens about 15% returns on tangible equity and likely to do that out in 2009 and potentially better.” - P. Carter Bundy, CFA