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JakilaTheHun (99.90)

Diving into Commerical Banks, Part II: Green Bankshares (GRNB)



November 12, 2009 – Comments (11) | RELATED TICKERS: GRNB.DL

I originally published this article at Seeking Alpha.  If you are having difficulty with the charts or want to view them closer, here's the link to the original version of the article:



"Green Bankshares:  Value in the Tennessee Valley" 

In my last article, I laid out a brief case on why I’ve been searching around in the world of small commercial banks.  My basic hypothesis is that there are some huge opportunities in that sphere right now, as investor fear is at all-time highs.  Contrast that to the rest of the market, which has been on an undeniable bull run over most of the past half year. 

It’s easy to understand why people are scared of small commercial banks.  They are not easy to analyze, the risks are high, earnings look terrible, and since these banks don’t qualify as “too big to fail,” the government isn’t going to come in and rescue them.  In fact, the FDIC seems to close down a few banks every single Friday. 

Here’s the bull case on small commercial banks --- many of them are beaten down into the gutter right now.  The US government is providing these banks with a huge gift in the form of 0% interest rates and this state could last for quite awhile.  Competition is on the decline as many banks struggle to stay afloat.  If you can find a small commercial bank that is beaten down severely, relatively good quality, and can survive, you can make great returns. 


Here are the attributes I’ve been searching for in small commercial banks:

(1) Lower to moderate leverage when compared to other commercial banks

(2) Less exposure to the huge bubble markets

(3) Revenues are increasing, staying the same, or not significantly declining

(4) Market share is increasing

(5) Interest margins are strong/increasing

(6) Inside ownership

(7) Insiders have made significant buys

(8) Strong earnings potential, and most importantly,

(9) Stock price offers very highly favorable risk-reward balance

My last article dealt with the largely Virginia and North Carolina based Hampton Roads Bankshares (HMPR).  This article deals with Tennessee-based Green Bankshares (GRNB). 


Green Bankshares is the holding company of Green Bank, formerly known as “Greene County Bank.”  It is headquartered in the small city of Greeneville, TN and nearly all of its operations are centered in either Eastern Tennessee or Central Tennessee; but they do conduct a small amount of business in the Appalachian region of Western Carolina and Southwestern Virginia. 

GRNB operates a mortgage banking operation in Knoxville, TN.  It has eight consumer finance offices mostly in the Knoxville area and Northeastern Tennessee.  It operates a sub-prime auto lending company in Johnson City, TN.  It also operates Fairway Title Company, a title insurance company in Knoxville, TN.  In May 2007, GRNB purchased Civitas BankGroup, which has 12 branch offices in the Nashville metro area. 

Green elected to participate in TARP last December.  They also suspended their quarterly cash dividend in June. 


According to Yahoo, GRNB has inside ownership of 19%.  There have been two relatively small insider buys in November.  There have also been several inside buys throughout the past nine months; the largest of which was a purchase of about $78K worth while the stock was trading around $5. 

Tier-1 Leverage is at 10.5%, while Tier 1 Risk-Based Capital is at 13.2%.

This suggests to me that GRNB has a reasonable capital cushion, particularly when you consider their core operating areas in East Tennessee were not bubble markets.  The Middle Tennessee area might have some slightly larger issues, particularly around Nashville, but even there, the RE bubble was not nearly as bad as in some of the nation’s other larger metropolitan areas.

If you don’t believe me, check out the FDIC’s failed bank list.  If you sort by state, there should be zero bank failures in Tennessee this year.  Compare that to 21 bank failures in Georgia.  This should also tell one that the banks sinking right now is not so much exotic financial instruments, but rather, falling real estate prices in bubble markets, coupled with high unemployment.  

It’s unclear whether GRNB can grow market share in the next few years, but their prospects might be reasonably good once things clear.  Their strategy largely seems to be based on acquisitions, but the East Tennessee region has not been as adversely affected by this crisis as some other regions, so organic growth is certainly a possibility as well. 

Balance Sheet

The first thing to look at with GRNB is the balance sheet. Below is my version of the balance sheet from the end of the 3rd Quarter:

Here is a chart showing GRNB’s loan concentration:

This next chart shows the trends in deposits from GRNB:

The chart is a little funky due to a massive spike in FY ’07 that resulted from the acquisition of Civitas Bank.  

Now time for my so-called “stress test” chart.  Note that the column highlighted in green shows the current version balance sheet, as of Sep 30, 2009:

This chart suggests that GRNB could potentially survive even if portfolio losses were significantly greater than the auditors estimate.  One additional risk here is that GRNB could issue a common share offering in order to increase capital.  I hope that does not happen, but I would not rule it out and it would mean significant dilution. 

For an example of a terribly dilutive share offering, take a glance at Bank of Florida (BOFL).  It originally had 13 million shares outstanding.  They recently decided to do an 86 million share offering.  That is some major dilution!   Other banks have made similar dilutive offerings, but most of the ones I’ve seen have either doubled or tripled the number of shares; BOFL appears to be one of the most egregious cases and I don’t think I could ever invest in a company after doing something like that.   The good news here is that GRNB is not exposed to Florida.

Earnings Potential

The two major questions I have with each bank I analyze right now is:

(1) Can they survive?

(2) What is their future earnings potential?

The latter question becomes particularly difficult to answer because of the aforementioned potential for dilution. 

Here are GRNB’s historical earnings over the past three years.  The last two columns are for the first three quarters of 2009 and 2008 respectively:

Notice that I highlighted the provision for loan losses in yellow.  The one thing that scares me about GRNB is that their provision was actually fairly high as early as 2006.  They do engage in some “sub-prime” lending and their portfolio might be a bit riskier than average.  This is not necessarily a bad thing; risk is fine, so long as rewards are high enough to compensate.  The banks seemed to have forgotten that truth throughout the early to mid- part of the decade. 

The next chart is an attempt at creating a “normalized earnings” picture for GRNB.  In order to do this, I eliminate goodwill impairments and adjust the provision for loan losses for my first set of data.  In the second portion, I also eliminate the losses from “OREO” (other real estate owned)

While there’s a lot to dislike with almost every bank right now, the earnings potential for GRNB actually looks fairly impressive relative to the stock’s current selling price.  It is worthwhile to note that GRNB sold at over $20 in early 2008 and sold over $35 at the height of the boom.  Don’t expect it to hit upwards of $30 any time soon, but given the earnings potential here, it might not be a stretch to see it trading back at $20 eventually.  Of course, I would temper the earnings potential with the possibility that there could be further dilution at some point in the future, however. 

While I do not in any way, shape, or form condone using the following table as a realistic estimate of “earnings potential”, it is nonetheless encouraging to see very positive cash flow figures:


There are many factors to consider in valuation.  I fully admit I’m relatively new to analyzing banks and bank stocks can be some of the trickiest to value, my estimates are as such:

Low-end Probable = $8

High-end Probable = $22

Best guess in current environment = $16

Upside potential = $35

Downside risk = Always $0 with banks; but realistically speaking, they would probably chose to dilute their stock in the event of a worst-case scenario where they needed to quickly increase capital

While GRNB might have some significant growth in the future, it’s difficult to immediately come to that conclusion after analyzing the company.  There are some signs that they continue to do well on the retail end, however, so they could pleasantly surprise here.


As I said in my previous article, don’t take my endorsement as a diehard statement that I believe every bank I write about will turn out to be a great investment.  My basic hypothesis here is that I can buy a basket of about a dozen small commercial banks and the returns from the winners should greatly exceed any losses from the losers.  All the same, Green Bankshares looks very attractive to me right now. 

GRNB has significant inside ownership and some recent insider buys.  Its Tier 1 leverage and capital ratios are good.  While revenues are not radically increasing, there’s no evidence that they are about to fall off a cliff and it appears deposits are picking up rapidly in their Knoxville and Middle Tennessee markets.   Interest margins appear to be lower than I would like in the 3.2% - 3.4% range, but they are not unreasonable, either.   GRNB’s core market areas are all areas that were not severely adversely affected by the real estate bust. 

Given the fact that GRNB is selling at a significant discount to tangible common equity (TCE) and would appear to have strong earnings potential, with some chance of reasonable future growth, this would appear to be quite a bargain right now.  In fact, it’s one of my favorite buys in the banking sector, as I believe the risk-reward balance is highly favorable on the long side.

Disclosure:  Author is long on GRNB in a fund he manages.

11 Comments – Post Your Own

#1) On November 12, 2009 at 3:14 PM, Option1307 (30.31) wrote:

Another excellent write up Jakila, thanks for taking the time to share this. I'm definitley not as optomistic about the overall economy as you seem to be, but I truely value your insights. They always are well thought out and researched. Thanks.

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#2) On November 12, 2009 at 3:18 PM, JakilaTheHun (99.90) wrote:


Thanks for the compliments. 

For the record, though, I am not "optimistic about the overall economy" in any way, shape, or form.   I buy into individual stocks that are selling at discounts.

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#3) On November 12, 2009 at 3:27 PM, Option1307 (30.31) wrote:

Fair enough, and that is a much better description.

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#4) On November 12, 2009 at 8:26 PM, Tastylunch (28.84) wrote:

Author is long on GRNB in a fund he manages.

Oh yeah what's that? Doesn't really matter just wanted to sya good for you. :)

 Jakila have you looked at any Texas banks? I consider that to be the healthiest state in the US eocnomically...

Hopefully anchak will come by, he has very good insght int the banking business.

But I like your general thesis, especially if you can find banks that are given seized assets by the FDIC on the cheap.



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#5) On November 12, 2009 at 11:08 PM, JakilaTheHun (99.90) wrote:

Tasty, the great thing about the commercial banking sector right now is that you can find just about any type of play you want. 

There are the high-risk/high-reward plays, where you either lose 100% or make a massive 500% -1000% return.

There are the moderate leverage/probably safe, but the market is dramatically overreacting plays, where you can potentially make 300% - 800% (btw, I view GRNB to be in that category).  

There are well-capitalized plays in the bubble markets, which might be some of the biggest beneficiaries as they gobble up other banks.  Oftentimes, these banks are selling at 50%+ discounts to their intrinsic values.  

Then there are even the almost-completely-safe banks with massive equity cushions that have almost no exposure to any junk that still sell at 50% - 75% discounts to intrinsic value.  

It's crazy!  Not sure why people continue buying junk like C and BAC when they can dip into these small commercial banks and find some really great values.  

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#6) On November 12, 2009 at 11:18 PM, JakilaTheHun (99.90) wrote:

Oh yeah what's that? Doesn't really matter just wanted to sya good for you. :)

Thanks, Tasty!  I'm actually having a lot of fun buying these banks for the fund.  I'm in on about 15 of them now.  I'm going to try to write about as many as possible, but it will take me awhile due to all my obligations these days.  I'm hoping the sector stays beaten down till Q2 '10, so I can buy some more for my personal portfolio, too. 


Jakila have you looked at any Texas banks? I consider that to be the healthiest state in the US eocnomically...

Strangely, I can't recall coming across any TX banks that looked interesting yet.  But there are hundreds and hundreds of publicly-traded banks out there, so I might come across some interesting ones eventually.  

As far as geographic concentrations, it seems like the areas where I'm buying the most banks:

(1) The Mid-Atlantic (Virginia/North Carolina)

(2) Tennessee Valley (Georgia/Tennessee)

(3) Northeast (New England, Pennsylvania, Jersey)

(4) Old Midwest (Ohio, Illinois, Kentucky, Indiana)

(5) Pacific Northwest (Oregon, Washington)

(6) Southwestern US (NV, AZ, So Cal)

Not sure why I haven't researched many banks in the Midwest.  Maybe they aren't as beaten down, so they aren't coming across my radar screen.  Or maybe they will come across my radar screen eventually. 

I'm still pretty terrified of Florida in general, particularly after seeing Bank of Florida (BOFL) dilute the living h@#! out of their stockholders.  They went from about 13 million shares to 100 million in a blink of an eye.  Wow!

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#7) On November 13, 2009 at 10:11 AM, anchak (99.89) wrote:

I missed this post......Anyway what to say - you are a crazy bugger Jakila and it has worked for you. If your fund is accepting small amounts - I might invest throwaway dollars -and hope for the best.

Here's my pitch on GRNB from last year: ( They held up till late Jan - and I closed my pick - typical of me)

anchak (99.77) Submitted: 8/25/2008 11:04:52 AM : Start Price: $15.91 GRNB Score: +1.40

Screener Pick + Precarious Balance Sheet + FB = One safe pick in CAPS

Green is a little different from the rest. This is a Commercial Real Estate (CRE) bet. They have a concentrated exposure in this arena. And they have already 2% in NPA - higher compared to other banks CRE portfolios. I would say this is obvious - any concentration in this environment has led to patchy Underwriting and pushed loans.

Additionally, net of Goodwill their Tangible Equity is fairly low. They may have a charge coming.

A lot has changed since then - TARP , massive stimulus etc. At  least I was right about the Goodwill charge.

This space is tricky - I had picked CRBC for Stinkyfeet - look where they are. Suggest you find out if possible where the CRE exposure is - like any REIT you have analyzed and like - and linked to a bank. Focus on those - and if you find gems - mention in CAPS!


All the best! 


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#8) On November 13, 2009 at 10:09 PM, Tastylunch (28.84) wrote:

yo man where did your blog from today go?

WApo make the fool take it down?

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#9) On November 14, 2009 at 1:45 PM, JakilaTheHun (99.90) wrote:


Apparently. Or maybe they've made them take down WaPo articles before, so they just delete every WaPo article they see.

Pretty lame. 

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#10) On November 19, 2009 at 7:58 AM, floridabuilder2 (98.60) wrote:

Jakila you won, I need you to confirm through an email so I can send you $100 cashier' check.  congrats I really didn't think anyone would stump me.  In the past 3 months I have only been stumped once and that was in SE Florida

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#11) On November 29, 2009 at 1:19 PM, TMFEditorsDesk (< 20) wrote:


I'm late to this party...enjoyed these two bank write-ups. Agreeing with you that there's a lot of opportunity in smaller banks. I've been looking more upmarket...high quality small banks that are still paying sizable dividends and trading at a discount, but those are more like doubles, not ten-baggers.

The reason I haven't gotten into the small banks with poor balance sheets is that I haven't figured out a great way to properly adjust for the risk without spending tons and tons of time vetting each bank (and even then, loan portfolios are a bit of a leap of faith). 

That said, a portfolio approach makes sense given proper vetting.

One thing to make note of is the ratio of allowance for credit losses to non-performing loans...remember that future earning power will be dampened by any additional provisioning. For example, if I'm reading the Hampton press release correctly, they'd need an additional $80-90 million of provisioning to equal their current nonperforming loans (their market cap is $49 million).  

-Anand Chokkavelu (TMFBomb)

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