A Nashville-based analyst says Green Bankshares, the troubled parent company of Tennessee's seventh-largest deposit holder, faces the unpalatable choice between selling out and massively diluting its shareholders via a stock offering.

In a research report, Mark Muth at Howe Barnes Hoefer & Arnett on Friday says the company's board and shareholders face "only painful options" as they seek to recover from losses of more than $240 million since 2007. Green Bankshares' fourth-quarter numbers, Muth said, were "extremely disappointing" and severely dented previous hopes that the company had digested most of its credit quality problems.

Muth, who has downgraded Green Bankshares' stock (Ticker: GRNB) to ‘sell' and expects it to fall to $2.50 from its current levels of about $3.50, said he expects regulators to push the company to raise equity immediately.

"A total recap (at least $100 million common raise likely needed) or a sale of the company seemingly [are] the only viable options," Muth wrote. "We believe a recap of the company via a public offering represents a difficult proposition as potential institutional investors may have a hard time gaining comfort with the necessary credit marks on the portfolio."

A sale, Muth said, might make more sense. Green Bankshares could attract some interest from private-equity groups looking to roll up troubled banks with the help of government-backed loss-sharing plans. Muth said Green Bankshares' Knoxville and Middle Tennessee franchises — it spent almost $200 million last decade to $1 billion in area assets — would be "a solid base bank on which to build or to augment an existing base franchise."

One such private-equity group, Texas-based Community Bancorp, is set to close its purchase of Cadence Financial in two weeks and, with about $1 billion in pocket, has the financial wherewithal to handle more deals. A call to a Community Bancorp representative was not returned Tuesday.

Green Bankshares CFO Jim Adams did not return a call for comment.