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Green Bankshares Crushed by Credit Costs

Anyone who doesn't think there's still some headline risk on credit costs for the banks should check out Thursday's action in Green Bankshares.



) -- Anyone who doesn't think there's still some headline risk on credit costs for the banks should check out Thursday's action in

Green Bankshares



Shares of the tiny Greenville, Tenn.-based bank holding company topped the Nasdaq's percentage decliners list after an ugly third quarter where its net charge-offs increased sevenfold on a sequential basis to $36.5 million from $4.9 million in the second quarter.

"As the economy remained stubbornly sluggish during the third quarter of 2010, highlighted by the lack of meaningful improvement in employment statistics and the residential real estate construction and development environment in the Company's markets, a number of the Bank's borrowers experienced further stress, prompting the Company to engage an independent third-party loan reviewer," the company said in its


. "This review contributed to the asset quality-impact reflected in our third quarter results."

Overall the company, which operates 63 GreenBank branches and has assets of roughly $2.5 billion, reported a net loss of $36.4 million, or $2.78 a share, in its fiscal third quarter ended on Sept. 30, well beyond its year-ago equivalent loss of $7.7 million, or 59 cents a share, and far wider than the average estimate of analysts polled by

Thomson Reuters

for a loss of 7 cents a share in the September period.

Wall Street's reaction was swift and harsh. The stock plunged 44% to $3.62 with volume reaching 1.3 million just ahead of the closing bell, more than 24 times the issue's trailing three-month daily average of around 48,000. The shares were downgraded by Keefe, Bruyette & Woods and Wunderlich Securities following the news.

KBW called the quarter a "game changer" and dropped its rating to underperform from market perform while slashing its 12-month price target to $2.50 from $10.

"GRNB fell far short of our low on the Street estimate, printing a sizeable loss that pushed TCE

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tangible common equity to 5%, NPA

non-performing assets to over 10%, and its Texas ratio to 114%," the firm told clients. Generally, a bank with a Texas ratio

which is arrived at by dividing non-performing assets by tangible common equity and loan loss reserves of more than 100% is considered to be seriously at risk of failure.

Wunderlich went to sell from hold and cut its 12-month price target to $2 from $7, although the firm made a point of saying the $2 target "may ultimately prove somewhat generous" and expressed skepticism that the bank will be able to keep its head above water, given the "massive deterioration in asset quality" it experienced in the third quarter.


We believe GRNB must raise additional capital immediately to survive," Wunderlich said. "Unfortunately, we have doubts as to whether the company can pull this off successfully."

Green Bankshares was already looking to squash the perception that it would now needs to raise capital in its press release, putting it at odds with Wunderlich's assessment.

"Despite the challenging environment and the losses we incurred this quarter, our regulatory capital ratios remain quite strong," it said.

But the company did ominously acknowledge that it does "envision the possibility of further credit challenges through the remainder of 2010" depending upon economic conditions, and it's fairly disconcerting that the bank could come in so far removed from analyst expectations.

Typically, a miss of this magnitude would be preempted by a warning from the company, but in this case, it looks like the issue arose rather quickly with Green Bankshares saying its credit and impairment charges for the period resulted "from a handful of events that occurred in the second half of the quarter."

What isn't a surprise is that analysts are now incredibly skeptical of the bank with five of the seven analysts covering the stock already at hold, according to

Thomson Reuters

and underperform and sell getting one vote each.


Written by Michael Baron in New York.

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Michael Baron


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