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
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.
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?
“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 4th 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.
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.
CEOCFO: So sum it up for potential investors; what is your rating, your target and why should potential investors be interested?
“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.”
“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
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