Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

| x      | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934**               |
|--------|------------|---------------------------------------------------------------------------------------------------------|
|   | ** ** | **For the fiscal year ended December 31, 2009**                                                         |
|   | ** ** |                                                                                                    |
|   | ** ** | **OR**                                                                                                  |
|   | ** ** |                                                                                                    |
| o      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from                to               .**

 

**Commissionfile number 000-51281**

 

**TennesseeCommerce Bancorp, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Tennessee**                                                         | ** ** | **62-1815881**       |
|-----------------------------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction                                         |       | (I.R.S. Employer     |
| of incorporation  or organization)                                    |       | Identification  No.) |
|                                                                  |       |                 |
| **381  Mallory Station Road, Suite 207, Franklin,****Tennessee** | ** ** | **37067**            |
| (Address of  principal executive offices)                             |       | (Zip Code)           |

 

Registrant’s telephonenumber, including area code**(615) 599-2274**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Common  Stock, $0.50 par value per share** | ** ** | **NASDAQ  Global Market**  |
|----------------------------------------------|------------|----------------------------|
| (Title of each  class)                       |       | (Name of each  exchange of |
|                                         |       | which  registered)         |

 

Securities registeredpursuant to Section 12(g) of the Act:

 

(Title of eachclass)

 

Indicate by check mark ifthe registrant is a well-known, seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No  x

 

Indicate by check markwhether registrant (1) has filed reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past90 days. Yes x No o

 

Indicate by check markwhether registrant the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

Large acceleratedfiler   o      Accelerated filer   o       Non-accelerated filer   x         Smaller reportingcompany   o

(Do not check if asmaller reporting company)

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

 

The aggregate marketvalue of the registrant’s voting stock held by non-affiliates of the registrantat June 30, 2009 was $20.01 million, based upon the average sale price onthat date.

 

As of March 03,2010, there were 5,648,384 shares of the registrant’s common stock outstanding.

 

DocumentsIncorporated by Reference:

 

Part III informationis incorporated herein by reference, pursuant to Instruction G of Form 10-K,to registrant’s Definitive Proxy Statement for its 2010 annual meeting ofshareholders to be held on May 20, 2010, which will be filed with theCommission no later than April 29, 2010. Certain Part II informationrequired by Form 10-K is incorporated by reference to the registrant’sAnnual Report to Shareholders, but the Annual Report to Shareholders shall notbe deemed filed with the Commission.

 

 

 

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TABLE OF CONTENTS

 
| **PART I**   |                                                                                                                |   |   |
|-------------------|---------------------------------------------------------------------------------------------------------------------|--------|--------|
|              |                                                                                                                |   |   |
| ITEM 1.           | BUSINESS                                                                                                            |   | 1      |
| ITEM 1A.          | RISK FACTORS                                                                                                        |   | 10     |
| ITEM 1B.          | UNRESOLVED STAFF  COMMENTS                                                                                          |   | 15     |
| ITEM 2.           | PROPERTIES                                                                                                          |   | 15     |
| ITEM 3.           | LEGAL PROCEEDINGS                                                                                                   |   | 15     |
|              |                                                                                                                |   |   |
| **PART II**  |                                                                                                                |   |   |
|              |                                                                                                                |   |   |
| ITEM 5.           | MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES |   | 16     |
| ITEM 6.           | SELECTED FINANCIAL  DATA                                                                                            |   | 17     |
| ITEM 7.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION                          |   | 18     |
| ITEM 7A.          | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         |   | 38     |
| ITEM 8.           | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                        |   | 40     |
| ITEM 9.           | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               |   | 40     |
| ITEM 9A(T).       | CONTROLS AND  PROCEDURES                                                                                            |   | 40     |
| ITEM 9B.          | OTHER INFORMATION                                                                                                   |   | 41     |
|              |                                                                                                                |   |   |
| **PART III** |                                                                                                                |   |   |
|              |                                                                                                                |   |   |
| ITEM 10.          | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             |   | 41     |
| ITEM 11.          | EXECUTIVE  COMPENSATION                                                                                             |   | 41     |
| ITEM 12.          | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                    |   | 42     |
| ITEM 13.          | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                          |   | 42     |
| ITEM 14.          | PRINCIPAL  ACCOUNTING FEES AND SERVICES                                                                             |   | 42     |
|              |                                                                                                                |   |   |
| **PART IV**  |                                                                                                                |   |   |
|              |                                                                                                                |   |   |
| ITEM 15.          | EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES                                                                         |   | 43     |

 

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**PART I**

 

**ITEM 1.****                                                   ****BUSINESS**

 

**General**

 

TennesseeCommerce Bancorp, Inc. (the “Corporation” or “we” or “us”) is a bankholding company formed as a Tennessee corporation to own the shares ofTennessee Commerce Bank (the “Bank”). The Bank commenced operations January 14,2000, and is a full service financial institution located in Franklin,Tennessee, 15 miles south of Nashville. Franklin is in Williamson County, oneof the most affluent and rapidly growing counties in the nation. The Bankconducts business from a single location in the Cool Springs commercial area ofFranklin. The Bank had total assets at December 31, 2009 of $1.4 billion.Although the Bank offers a full range of banking services and products, itoperates with a focused “Business Bank” strategy.  The Business Bankstrategy emphasizes banking services for small- to medium-sized businesses,entrepreneurs and professionals in the local market. The Bank competes bycombining the personal service and appeal of a community bank institution withthe sophistication and flexibility of a larger bank. This strategydistinguishes the Bank from its competitors in efforts to attract loans anddeposits of local businesses. In addition, the Bank accesses a national marketthrough a network of financial service companies and vendor partners thatprovide indirect funding opportunities for the Bank nationwide.

 

TheBank does not compete based on the traditional definition of “convenience” anddoes not have a branch network for that purpose. Business is conducted from asingle office without a teller line, drive-through window or extended bankinghours.  The Bank competes by providing responsive and personalized serviceto meet customer needs.  Convenience is created by technology and by freecourier service which transports deposits directly from the local businesslocation to the Bank.  The Bank provides free electronic banking and cashmanagement tools and on-site training for business customers.  The Bankcompetes for local consumer business by providing superior products, attractivedeposit rates, free Internet Banking services and access to a third partyregional automated teller machine (“ATM”) network. The Bank targets service,manufacturing and professional customers and avoids retail businesses with hightransaction volume.

 

TheBank offers a full range of competitive retail and commercial bankingservices.  The deposit services offered include various types of checkingaccounts, savings accounts, money market investment accounts, certificates ofdeposits and retirement accounts.  Lending services include consumerinstallment loans, various types of mortgage loans, personal lines of credit,home equity loans, credit cards, real estate construction loans, commercialloans to small-and-medium size businesses and professionals, and letters ofcredit. The Bank issues VISA credit cards and is a merchant depository forcardholder drafts under VISA credit cards.  The Bank also offers checkcards and debit cards.  The Bank offers its local customers courierservices, access to third-party ATMs and state of the art electronic banking.The Bank has trust powers but does not have a trust department.

 

TheBusiness Bank strategy is evident in differences between the financialstatements of the Bank and more traditional financial institutions.   The Business Bank model creates a high degreeof leverage.  By avoiding the investment and maintenance costs of atypical branch network, the Bank is able to maintain earning assets at a higherlevel than peer institutions.  Management targets a minimum earning assetratio of 97% compared to the average of 86%, as of December 31, 2009, forall banks insured by the Federal Deposit Insurance Corporation (“FDIC”). Assetsof the Bank are centered in the loan portfolio which consists primarily ofcommercial and industrial loans.  Management targets a loan mix of 60%commercial loans and 40% real estate.  At December 31, 2009, thecomposition of the $1.17 billion loan portfolio was 55.45% commercial, 37.88%secured by real estate (both commercial and consumer) and 6.67% in consumer andcredit card loans.

 

Inaddition to lending in the local marketplace, the Bank generates assets in thenational market by providing collateral-based loans to business borrowerslocated in other states through two types of indirect funding programs. In bothprograms, the transactions are originated by a third party, such as anequipment vendor or financial services company, who provides the Bank with aborrower’s financial information and arranges for a borrower’s execution ofloan documentation. The Bank funds these transactions earning strong yields andhas no servicing expense or residual risk in any transaction originated bythese financial service companies and vendors. The Bank has management andpersonnel who are experienced in this type of transaction and are able toevaluate and partner effectively with the companies who originate thesetransactions. All indirect funding is secured by the business asset financed,and is subject to the Bank’s minimum credit score and documentationstandards.  These national market transactions provide geographic andcollateral diversity for the portfolio and represent 25.40% of the total loanportfolio at December 31, 2009.

 

Thetwo national market funding programs fund different size loans through twodifferent networks. In the first type, the Bank uses an established network offinancial service companies and vendor partners that provide the Bank fundingopportunities to national middle-market and investment grade companies. At December 31,2009, the average size of this type of loan in the loan portfolio wasapproximately $389,000 and earned an average yield of 6.72%. Funding under thisprogram represents approximately 11.15% of the $1.17 billion total loanportfolio.  In the second program, the Bank partners with a second networkof financial service companies and vendors located in Tennessee, Alabama,Georgia, California and Michigan. This program is for smaller transactions.These loans that finance business assets are less than $150,000 at origination.Management has installed a standardized credit approval process that deliversquick responsive service. At December 31, 2009, the average size of thistype of loan in the loan portfolio was approximately $45,000, and the averageyield on these loans was 6.88%. Funding under this program represents 14.26% ofthe $1.17 billion total loan portfolio.

 

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Managementbelieves the Business Bank model is highly efficient.  The Bank targetsthe non-retail sector of the commercial market, which is characterized by lowerlevels of transactions and processing costs.  The commercial customer mixand the strategic outsourcing of certain administrative functions, such as dataprocessing, allow the Bank to operate with a smaller, more highly trained staff. Management targets an average asset per employee ratio of $15.0 millioncompared to its peer group ratio of $5.12 million at the end of December 31,2009, as reported by the FDIC. The Bank also promotes the use of technology,both internally and externally, to maximize the efficiency of operations. Management targets an operating efficiency ratio (total operating expensedivided by total revenue) of 40% to 45%.

 

TheBank is subject to the regulatory authority of the Department of FinancialInstitutions of the State of Tennessee (“TDFI”) and the FDIC.

 

TheBank’s principal executive offices are located at 381 Mallory Station Road, Suite 207,Franklin, Tennessee 37067, and its telephone number is (615) 599-2274.

 

TheCorporation was incorporated on March 22, 2000, for the purpose ofacquiring 100% of the shares of the Bank by means of a share exchange, andbecoming a registered bank holding company under the Federal Reserve Act. The share exchange was completed on May 31, 2000.  The Corporation’sactivities are subject to the supervision of the Board of Governors of theFederal Reserve System (“Federal Reserve Board”).  The Corporation’soffices are the same as the principal office of the Bank.  On March 29,2005, the Corporation formed a wholly owned subsidiary, Tennessee Commerce BankStatutory Trust I (the “Trust I”).  In June 2008, the Corporationformed a wholly owned subsidiary, Tennessee Commerce Bank Statutory Trust II(the “Trust II”) and in July 2008, the Corporation formed a wholly ownedsubsidiary, TCB Commercial Asset Services, Inc (“TCB”). As of December 31,2009, the Bank, the Trust I, the Trust II and TCB were the only subsidiaries ofthe Corporation. The accompanying consolidated financial statements include theaccounts of the Corporation, the Bank and TCB. The Trust I and the Trust II arenot consolidated in accordance with Financial Accounting Standards Board (“FASB”)Interpretation No. 46(R) (revised December 2003), “Consolidationof Variable Interest Entities.” Material intercompany accounts and transactionshave been eliminated. The Bank commenced operations as a Tennessee statechartered bank on January 14, 2000, and is headquartered in Franklin,Tennessee.

 

**CorporationOverview**

 

TheCorporation, headquartered in Franklin, Tennessee, is the bank holding companyfor the Bank.  Organized in January 2000, the Bank has a focusedstrategy that serves the banking needs of small to medium-sized businesses,entrepreneurs and professionals in the Nashville metropolitan statistical area,or the Nashville MSA, as well as the funding needs of certain national andregional equipment vendors and financial services companies.  TheCorporation calls this strategy its Business Bank strategy. The Corporationprimarily conducts business from a single location in the Cool Springscommercial area of Franklin, Tennessee, 15 miles south of Nashville. TheCorporation also operates three loan production offices - one in each ofBirmingham, Alabama, Minneapolis, Minnesota and Atlanta, Georgia. Each of theseoffices is staffed with one senior lending officer.

 

TheCorporation offers a full range of competitive retail and commercial bankingservices to local customers in the Nashville MSA.  The Corporation’sdeposit services include a broad offering of checking accounts, savingsaccounts, money market investment accounts, certificates of deposits andretirement accounts.  Lending services include consumer installment loans,various types of mortgage loans, personal lines of credit, home equity loans,credit cards, real estate construction loans, commercial loans to small andmedium-sized businesses and professionals, and letters of credit. TheCorporation issues VISA credit cards and is a merchant depository forcardholder drafts under VISA credit cards.  The Corporation also offerscheck cards and debit cards and offers its local customers free courierservices, access to third-party automated teller machines, or ATMs, remotedeposit and state-of-the-art electronic banking. The Corporation has trustpowers but does not have a trust department.

 

**Employees**

 

At December 31,2009, the Bank employed 91 people on a full-time basis. The Corporation hasentered into employment agreements with two of its executive officers who arealso employees of the Bank. The Bank’s employees are not represented by anyunion or other collective bargaining agreement and management of the Bankbelieves its employee relations are satisfactory.

 

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**Supervisionand Regulation**

 

**Bank Holding Company Regulation**

 

TheCorporation is a bank holding company within the meaning of the Bank HoldingCompany Act of 1956, as amended (the “Holding Company Act”), and is registeredwith the Federal Reserve Board. The Corporation’s banking subsidiary issubject to restrictions under federal laws which limit the transfer of funds bythe Bank to the Corporation, whether in the form of loans, extensions ofcredit, investments or asset purchases. Such transfers by any subsidiarybank to its holding company or any non-banking subsidiary are limited in amountto 10% of the subsidiary bank’s capital and surplus and, with respect to theCorporation and the Bank, to an aggregate of 20% of the Bank’s capital andsurplus.  Furthermore, such loans and extensions of credit are required tobe secured in specified amounts.  The Holding Company Act also prohibits,subject to certain exceptions, a bank holding company from engaging in oracquiring direct or indirect control of more than 5% of the voting stock of anycompany engaged in non-banking activities.  An exception to thisprohibition is for activities expressly found by the Federal Reserve Board tobe so closely related to banking or managing or controlling banks as to be aproper incident thereto or financial in nature.

 

As abank holding company, the Corporation is required to file with the FederalReserve Board semiannual reports and such additional information as the FederalReserve Board may require.  The Federal Reserve Board also makesexaminations of the Corporation at its discretion.

 

Accordingto Federal Reserve Board policy, bank holding companies are expected to act asa source of financial strength to each subsidiary bank and to commit resourcesto support each such subsidiary.  This support may be required at timeswhen a bank holding company may not be able to provide such support. Furthermore, in the event of a loss suffered or anticipated by the FDIC —either as a result of default of the Bank or related to FDIC assistanceprovided to a subsidiary in danger of default — the Bank may be assessed forthe FDIC’s loss, subject to certain exceptions.

 

Variousfederal and state statutory provisions limit the amount of dividends thesubsidiary banks can pay to their holding companies without regulatoryapproval.  The payment of dividends by any bank also may be affected byother factors, such as the maintenance of adequate capital for such subsidiarybank.  In addition to the foregoing restrictions, the Federal ReserveBoard has the power to prohibit dividends by bank holding companies if theiractions constitute unsafe or unsound practices.  The Federal Reserve Boardhas issued a policy statement on the payment of cash dividends by bank holdingcompanies, which expresses the Federal Reserve Board’s view that a bank holdingcompany experiencing earnings weaknesses should not pay cash dividends thatexceed its net income or that could only be funded in ways that weaken the bankholding company’s financial health, such as by borrowing.  Furthermore,the TDFI also has authority to prohibit the payment of dividends by a Tennesseebank when it determines such payment to be an unsafe and unsound bankingpractice.

 

A bankholding company and its subsidiaries are also prohibited from engaging incertain activities, including certain merger activities, outside of the statein which the operations of the bank holding company’s subsidiaries are located,unless these activities are allowed under the statutes of the state in whichthe target is located. Further, a bank holding company and its subsidiaries areprohibited from engaging in certain tie-in arrangements in connection with theextension of credit or provision of any property or service.  Thus, anaffiliate of a bank holding company may not extend credit, lease or sellproperty, or furnish any services or fix or vary the consideration for these onthe condition that (i) the customer must obtain or provide some additionalcredit, property or services from or to its bank holding company orsubsidiaries thereof or (ii) the customer may not obtain some othercredit, property or services from a competitor, except to the extent reasonableconditions are imposed to assure the soundness of the credit extended.

 

Inapproving acquisitions by bank holding companies of banks and companies engagedin the banking-related activities described above, the Federal Reserve Boardconsiders a number of factors, including the expected benefits to the publicsuch as greater convenience, increased competition, or gains in efficiency, asweighed against the risks of possible adverse effects such as undueconcentration of resources, decreased or unfair competition, conflicts ofinterest, or unsound banking practices.  The Federal Reserve Board is alsoempowered to differentiate between new activities and activities commencedthrough the acquisition of a going concern.

 

TheUnited States Department of Justice may, within 30 days after approval by theFederal Reserve Board of an acquisition, bring an action challenging suchacquisition under the federal antitrust laws, in which case the effectivenessof such approval is stayed pending a final ruling by the courts.  Failureof the Attorney General to challenge an acquisition does not, however, exemptthe holding company from complying with both state and federal antitrust lawsafter the acquisition is consummated or immunize the acquisition from futurechallenge under the anti-monopolization provisions of the Sherman Act.

 

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**Bank Regulation**

 

TheBank is a Tennessee state-chartered bank and is subject to the regulations ofand supervision by the FDIC as well as the Commissioner of the TDFI (the “Commissioner”),Tennessee’s state banking authority.  The Bank is also subject to variousrequirements and restrictions under federal and state law, including withoutlimitation restrictions on permitted activities, requirements to maintainreserves against deposits, restrictions on the types and amounts of loans thatmay be granted and the interest that may be charged thereon and limitations onthe types of investments that may be made and the types of services that may beoffered.  Various consumer laws and regulations also affect the operationsof the Bank.  In addition to the impact of regulation, commercial banksare affected significantly by the actions of the Federal Reserve Board as itattempts to control the money supply and credit availability in order toinfluence the economy.

 

TheFDIC and the Commissioner periodically conduct examinations of the Bank. If, as a result of an examination of the Bank, the FDIC determines that thefinancial condition, capital resources, asset quality, earnings prospects,management, liquidity or other aspects of the Bank’s operations areunsatisfactory or that the Bank or its management is violating or has violatedany law or regulation, various remedies are available to the FDIC.  Suchremedies include the power to enjoin “unsafe or unsound” practices, to requireaffirmative action to correct any conditions resulting from any violation orpractice, to issue an administrative order that can be judicially enforced, todirect an increase in capital, to restrict the growth of the Bank, to assesscivil monetary penalties, to remove officers and directors and ultimately toterminate a Bank’s deposit insurance.  The Commissioner has many of thesame remedial powers, including the power to take possession of a bank whosecapital becomes impaired. 

 

Thedeposits of the Bank are insured by the FDIC in the manner and to the extentprovided by law.  For this protection, the Bank pays a quarterly statutoryassessment.

 

Althoughthe Bank is not a member of the Federal Reserve System, it is neverthelesssubject to certain regulations of the Federal Reserve Board.

 

Tennesseelaw contains limitations on the interest rates that may be charged on varioustypes of loans and restrictions on the nature and amount of loans that may begranted and on the types of investments that may be made.  The operationsof banks are also affected by various consumer laws and regulations, includingthose relating to equal credit opportunity and regulation of consumer lendingpractices.  All Tennessee banks must become and remain insured banks underthe Federal Deposit Insurance Act (the “FDIA”).

 

Capital Requirements

 

TheFederal Reserve Board has risk-based capital requirements for bank holdingcompanies, and the FDIC adopted risk-based capital requirements for banks andbank holding companies effective after December 31, 1990. Therisk-based capital guidelines are designed to make regulatory capitalrequirements more sensitive to differences in risk profile among banks toaccount for off-balance sheet exposure and to minimize disincentives forholding liquid assets.  One aspect of this is to assign assets andoff-balance sheet items to a broad number of risk categories each withappropriate weights.  The guidelines require all federally regulated banksto maintain a minimum Capital Ratio (ratio of total capital to risk-weightedassets) of  at least 8%, a Tier I CapitalRatio (as defined below) of at least 4%, and a Tier I Leverage Ratio (Tier ICapital divided by average total assets) of at least 4%.  To be considereda “well capitalized” bank or bank holding company under the guidelines, a bankor bank holding company must have a Capital Ratio of at least 10%, a Tier ICapital Ratio of at least 6% and a Tier I Leverage Ratio of at least 5%.  Regulators may require a bank to retaincapital ratios higher than the minimum statutory threshold based on the riskprofile of the bank. As of December 31, 2009, the Bank’s Capital Ratio was10.63%, its Tier I Capital Ratio was 9.37%, and its Tier I Leverage Ratio was8.74%.

 

Atleast half of the total capital of a bank is to be comprised of common equity,retained earnings and a limited amount of perpetual preferred stock, aftersubtracting goodwill and certain other adjustments (“Tier I Capital”). The remainder may consist of perpetual debt, mandatory convertible debtsecurities, a limited amount of subordinated debt, other preferred stock notqualifying for Tier I Capital and a limited amount of loan loss reserves (“TierII Capital”).  Under the risk-based capital requirements, total capitalconsists of Tier I Capital, which is generally common shareholders’ equity lessgoodwill, and Tier II Capital, which is primarily a portion of the allowancefor loan losses and certain qualifying debt instruments.  In determiningrisk-based capital requirements, assets are assigned risk-weights of 0% to100%, depending primarily on the regulatory assigned levels of credit riskassociated with such assets.  Off-balance sheet items are considered inthe calculation of risk-adjusted assets through conversion factors establishedby the regulators.  The framework for calculating risk-based capitalrequires banks and bank holding companies to meet the regulatory minimums of 4%Tier I Capital and 8% total risk-based capital.

 

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Underthe Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”),as an institution’s capital position deteriorates, it is subject to varying andincreasingly restorative enforcement actions. These sanctions may includecompliance with a capital plan or agreement with the regulator, limitations onactivities and, ultimately, a termination of deposit insurance.

 

In1999, the Basel Committee on Banking Supervision (“Basel Committee”) launchedits efforts to develop an improved capital adequacy framework by issuing itsproposals to revise the 1988 Basel Capital Accord.  In June 2004, theBasel Committee issued its final framework.  The new capital framework (“BaselII”) consists of minimum capital requirements, a supervisory review process andthe effective use of market discipline.  Basel II seeks to ensure that abank’s capital position is consistent with its overall risk profile andstrategy, encourages early supervisory intervention when a bank’s capitalposition deteriorates and calls for detailed disclosure of a bank’s capitaladequacy and how it evaluates its own capital adequacy.

 

In September 2006,the U.S. regulators published a revised Notice of Proposed Rulemaking (“NPR”)for Basel II.  The Final Rule on Advanced Capital AdequacyFramework—Basel II (the “Final Rule”), has been approved by all regulatory agenciesand took effect on April 1, 2008. The Final Rule currently appliesonly to certain core banks with total assets of $250 billion or more, butallows non-core banks to opt in.  Under the Final Rule, the Bank isconsidered to be a non-core bank. For those non-core banks that do not opt in,a NPR was issued in December 2006, known as Basel IA, which proposedcertain revisions to the current Basel II capital rules.

 

Theagencies have proposed a NPR that would provide non-core banks the option ofadopting the Standardized Approach of the Basel II Framework.

 

Payment of Dividends

 

TheCorporation is a legal entity separate and distinct from its banking and othersubsidiaries.  The principal source of cash flow of the Corporation,including cash flow to pay dividends to holders of trust preferred securitiesof the Corporation’s trusts, holders of the Fixed Rate Cumulative PerpetualPreferred Stock of the Corporation Series A (“Series A PreferredStock”) and to the Corporation’s common stock shareholders, will be dividendsthat the Bank pays to the Corporation as its sole shareholder. Under Tennesseelaw, the Corporation is not permitted to pay dividends if, after giving effectto such payment, the Corporation would not be able to pay the Corporation’sdebts as they become due in the usual course of business or the Corporation’stotal assets would be less than the sum of the Corporation’s total liabilitiesplus any amounts needed to satisfy any preferential rights if the Corporationwere dissolving. In addition, in deciding whether or not to declare a dividendof any particular size, the Corporation’s board of directors must consider theCorporation’s current and prospective capital, liquidity, and other needs.

 

Inaddition to the limitations on the Corporation’s ability to pay dividends underTennessee law, the Corporation’s ability to pay dividends on the Corporation’scommon stock is also limited by the Corporation’s participation in the TroubledAsset Relief Program (“TARP”) Capital Purchase Program (“CPP”) and by certainstatutory or regulatory limitations. Prior to December 19, 2011, unlessthe Corporation has redeemed the Series A Preferred Stock or U.S.Department of the Treasury (“Treasury”)  has transferred the Series APreferred Stock to a third party, the consent of the Treasury must be receivedbefore the Corporation can declare or pay any dividend or make any distributionon the Corporation’s common stock. Furthermore, if the Corporation is notcurrent in the payment of quarterly dividends on the Series A PreferredStock, the Corporation cannot pay dividends on the Corporation’s common stock.

 

Moreover,the terms of the Series A Preferred Stock include a restriction againstincreasing the Corporation’s common stock dividends from levels at the time ofthe initial investment by Treasury and prevent the Corporation from redeeming,purchasing or otherwise acquiring its common stock other than for certainstated exceptions. Historically, the Corporation has paid no dividends on itscommon stock. Therefore, the Corporation would have to seek Treasury’s consentto pay any dividends on shares of Corporation common stock. These restrictionswill terminate on the earlier of the third anniversary of the date of issuanceof the Series A Preferred Stock to Treasury and the date on which the Series APreferred Stock issued to Treasury has been redeemed in whole or Treasury hastransferred all of its Series A Preferred Stock to third parties.  Inaddition, the Corporation will be unable to declare or pay dividends or distributionson, or repurchase, redeem or otherwise acquire for consideration, shares of itscommon stock or other stock ranking junior to, or in parity with, the Series APreferred Stock if the Corporation fails to declare and pay full dividends (ordeclare and set aside a sum sufficient for payment thereof) on its Series APreferred Stock.

 

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Thereare state and federal statutory and regulatory limitations on the payment ofdividends by the Bank to the Corporation, as well as by the Corporation to itsshareholders. Under the FDIA, the Bank may not make any capital distributions(including the payment of dividends) or pay any management fees to its holdingcompany or pay any dividend if it is undercapitalized or if such payment wouldcause it to become undercapitalized.  In addition, the Bank is restrictedfrom paying dividends under certain circumstance by the Tennessee Banking Act.The payment of dividends by any bank is dependent upon its earnings andfinancial condition and subject to the statutory power of certain federal andstate regulatory agencies to act to prevent what they deem unsafe or unsoundbanking practices.  The payment of dividends could, depending upon thefinancial condition of the Bank, be deemed to constitute such an unsafe orunsound banking practice.  Under Tennessee law, the board of directors ofa state bank may not declare dividends in any calendar year that exceeds thetotal of its retained net income of the preceding two years without the priorapproval of the TDFI.  The FDIA prohibits a state bank, the deposits ofwhich are insured by the FDIC, from paying dividends if it is in default in thepayment of any assessments due the FDIC.  The Bank is also subject to theminimum capital requirements of the FDIC which impact the Bank’s ability to paydividends.  If the Bank fails to meet these standards, it may not be ableto pay dividends or to accept additional deposits because of regulatoryrequirements.

 

If, inthe opinion of the FDIC or the Federal Reserve Board, a depository institutionor a holding company is engaged in or is about to engage in an unsafe orunsound practice (which, depending on the financial condition of the depositoryinstitution or holding company, could include the payment of dividends), suchauthority may require that such institution or holding company cease and desistfrom such practice.  The FDIC and the Federal Reserve Board have indicatedthat paying dividends that deplete a depository institutions or holding company’scapital base to an inadequate level would be such an unsafe and unsound bankingpractice. Moreover, the Federal Reserve Board and the FDIC have issued policystatements which provide that bank holding companies and insured depositoryinstitutions generally should only pay dividends out of current operatingearnings.

 

Thepayment of dividends by the Corporation and the Bank may also be affected orlimited by other factors, such as the requirement to maintain adequate capitalabove regulatory guidelines and debt covenants.

 

FIRREA

 

FIRREAprovides that a depository institution insured by the FDIC can be held liablefor any loss incurred by, or reasonably expected to be incurred by, the FDICafter August 9, 1989 in connection with (i) the default of a commonlycontrolled FDIC-insured depository institution or (ii) any assistanceprovided by the FDIC to a commonly controlled FDIC-insured depositoryinstitution in danger of default.  FIRREA provides that certain types ofpersons affiliated with financial institutions can be fined by the federalregulatory agency having jurisdiction over a depository institution withfederal deposit insurance (such as the Bank) up to $1 million per day for eachviolation of certain regulations related (primarily) to lending to andtransactions with executive officers, directors, principal shareholders and theinterests of these individuals.  Other violations may result in civil moneypenalties of $5,000 to $30,000 per day or in criminal fines andpenalties.  In addition, the FDIC has been granted enhanced authority towithdraw or to suspend deposit insurance in certain cases.

 

FDICIA

 

TheFederal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)requires, among other things, the federal banking regulators to take “promptcorrective action” in respect of FDIC-insured depository institutions that donot meet minimum capital requirements. FDICIA establishes five capital tiers - “wellcapitalized,” “adequately capitalized,” “undercapitalized,” “significantlyundercapitalized” and “critically undercapitalized.” Under applicableregulations, a FDIC-insured depository institution is well capitalized if itmaintains a Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratioof at least 6% and a Total Capital Ratio of at least 10%.  An insureddepository institution is adequately capitalized if it meets all of the minimumcapital requirements as described above.  In addition, an insureddepository institution will be considered undercapitalized if it fails to meetany minimum required measure, significantly undercapitalized if it issignificantly below such measure and critically undercapitalized if it fails tomaintain a level of tangible equity equal to not less than 2% of totalassets.  An insured depository institution may be deemed to be in acapitalization category that is lower than is indicated by its actual capitalposition if it receives an unsatisfactory examination rating.

 

Thecapital-based prompt corrective action provisions of FDICIA and theirimplementing regulations apply to FDIC-insured depository institutions and arenot directly applicable to holding companies that control suchinstitutions.  However, the Federal Reserve Board has indicated that, inregulating bank holding companies, it will take appropriate action at theholding company level based on an assessment of the effectiveness ofsupervisory actions imposed upon subsidiary depository institutions pursuant tosuch provisions and regulations.

 

Undercapitalizeddepository institutions are subject to restrictions on borrowing from theFederal Reserve System.  In addition, undercapitalized depositoryinstitutions are subject to growth limitations and are required to submitcapital restoration plans.  A depository institution’s holding companymust guarantee the capital plan, up to an amount equal to the lesser of 5% ofthe depository institution’s assets at the time it becomes undercapitalized orthe amount of the capital deficiency when the institution fails to comply withthe plan.  The federal banking agencies may not accept a capital planwithout determining, among other things, that the plan is based on realisticassumptions and is likely to succeed in restoring the depository institution’scapital.  If a depository institution fails to submit an acceptable plan,it is treated as if it is significantly undercapitalized.

 

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Significantlyundercapitalized depository institutions may be subject to a number ofrequirements and restrictions, including orders to sell sufficient voting stockto become adequately capitalized, requirements to reduce total assets andcessation of receipt of deposits from correspondent banks.  Criticallyundercapitalized depository institutions are subject to appointment of areceiver or conservator generally within 90 days of the date on which theybecame critically undercapitalized.

 

FDICIAcontains numerous other provisions, including accounting, audit and reportingrequirements, termination of the “too big to fail” doctrine except in specialcases, limitations on the FDIC’s payment of deposits at foreign branches, newregulatory standards in such areas as asset quality, earnings and compensationand revised regulatory standards for, among other things, powers of statebanks, real estate lending and capital adequacy.  FDICIA also requiresthat a depository institution provide 90 days prior notice of the closing ofany branches.

 

Riegle-Neal InterstateBanking and Branching Efficiency Act

 

TheRiegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“InterstateAct”), among other things and subject to certain conditions and exceptions,permits on an interstate basis (i) bank holding company acquisitionscommencing one year after enactment of banks of a minimum age of up to fiveyears as established by state law in any state, (ii) mergers of nationaland state banks after May 31, 1997 unless the home state of either bankhas opted out of the interstate bank merger provision, (iii) branching denovo by national and state banks if the host state has opted-in to thisprovision of the Interstate Act, and (iv) certain bank agency activitiesone year after enactment.  The Interstate Act contains a 30% intrastatedeposit cap, except for the initial acquisition in the state, a restrictionthat applies to certain interstate acquisitions unless a different intrastatecap has been adopted by the applicable state pursuant to the provisions of theInterstate Act and a 10% national deposit cap restriction.  Tennessee hasopted-in to the Interstate Act.  Management cannot predict the extent towhich the business of the Bank may be affected by the Interstate Act. Tennessee has also adopted legislation allowing banks to acquire branchesacross state lines subject to certain conditions, including the availability ofsimilar legislation in the other state.

 

Brokered Deposits andPass-Through Insurance

 

TheFDIC has adopted regulations under FDICIA governing the receipt of brokereddeposits and pass-through insurance.  Under the regulations, a bank cannotaccept or rollover or renew brokered deposits unless (i) it is wellcapitalized or (ii) it is adequately capitalized and receives a waiverfrom the FDIC.  A bank that cannot receive brokered deposits also cannotoffer “pass-through” insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized bankmay not pay an interest rate on any deposits in excess of 75 basis points overcertain index prevailing market rates specified by regulation.  There areno such restrictions on a bank that is well capitalized.  The FDIC hasproposed an amendment to this regulation that would change the comparison ratefrom a specific market rate to a prevailing national average rate, as publishedby the FDIC.  Because the Bank was well capitalized as of December 31,2009, management of the Bank believes the brokered deposits regulation willhave no material effect on the funding or liquidity of the Bank.

 

FDIC Insurance Premiums

 

TheBank is required to pay semiannual FDIC deposit insurance assessments to theDeposit Insurance Fund (“DIF”).  The FDIC merged the Bank Insurance Fundand the Savings Association Insurance Fund to form the DIF on March 31,2006 in accordance with the Federal Deposit Insurance Reform Act of 2005. The FDIC maintains the DIF by assessing depository institutions an insurancepremium.  The amount each institution is assessed is based upon statutoryfactors that include the balance of insured deposits as well as the degree ofrisk the institution poses to the insurance fund.  The FDIC uses arisk-based premium system that assesses higher rates on those institutions thatpose greater risks to the DIF.

 

As of January 1,2007, the previous nine risk categories utilized in the risk matrix werecondensed into four risk categories which continue to be distinguished bycapital levels and supervisory ratings. In an effort to restore capitalizationlevels and to ensure the DIF will adequately cover projected losses from futurebank failures, the FDIC raised the base assessment rates uniformly by sevenbasis points for the assessment for the first quarter of 2009. In addition, theFDIC imposed a 5 basis point emergency special assessment on June 30,2009, that was collected on September 30, 2009.  The FDIC alsoadopted an interim rule that permits an emergency special assessment afterJune 30, 2009 of up to ten basis points.  On September 29, 2009,the FDIC, adopted a notice of proposed rulemaking with request for comment toamend its assessment regulations to require all institutions to prepay, on December 30,2009, their estimated risk-based assessments for the fourth quarter of 2009,and for all of 2010, 2011, and 2012, at the same time that institutions paytheir regular quarterly deposit insurance assessments for the third quarter of2009. This proposal rule was adopted and the Bank prepaid theseassessments and accounted for the prepaid assessment as a prepaid expense (anasset). The DIF will initially account for the amount collected as both anasset (cash) and an offsetting liability (deferred revenue). The Bank’squarterly risk-based deposit insurance assessments will be paid from the amountit prepaid until that amount is exhausted or until December 30, 2014, whenany amount remaining would be returned to it. On December 31, 2009the Bank paid the FDIC $8.05 million for the fourth quarter 2009 and the nextthree years.

 

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Underthe FDIA, insurance of deposits may be terminated by the FDIC upon a findingthat the institution has engaged in unsafe or unsound practices, is in anunsafe or unsound condition to continue operations or has violated anyapplicable law, regulation, rule, order or condition imposed by a federal bankregulatory agency.

 

Gramm-Leach-Bliley Act

 

TheGramm-Leach-Bliley Act of 1999 (the “GLBA”) ratified new powers for banks andbank holding companies, especially in the areas of securities andinsurance.  The GLBA also includes requirements regarding the privacy andprotection of customer information held by financial institutions, as well asmany other providers of financial services.  There are provisionsproviding for functional regulation of the various services provided byinstitutions among different regulators.  There are other provisions whichlimit the future expansion of unitary thrift holding companies.  Finally,among many other sections of the GLBA, there is some relief for small banksfrom the regulatory burden of the Community Reinvestment Act.  Theregulatory agencies have been adopting many new regulations to implement theGLBA.

 

USA Patriot Act

 

TheUniting and Strengthening America by Providing Appropriate Tools Required toIntercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) containsthe International Money Laundering Abatement and Financial Anti-Terrorism Actof 2001 (the “IMLAFA”).  The IMLAFA substantially broadened existinganti-money laundering legislation and the extraterritorial jurisdiction of theUnited States, imposed new compliance and due diligence obligations, creatednew crimes and penalties, compelled the production of documents located bothinside and outside the United States, including those of foreign institutionsthat have a correspondent relationship in the United States, and clarified thesafe harbor from civil liability to customers.  The U.S. TreasuryDepartment has issued a number of regulations implementing the USA Patriot Actthat apply certain of its requirements to financial institutions such as theBank. The regulations imposed new obligations on financial institutions tomaintain appropriate policies, procedures and controls to detect, prevent andreport money laundering and terrorist financing.

 

TheIMLAFA required all “financial institutions,” as defined therein, to establishanti-money laundering compliance and due diligence programs no later than April 2003. Such programs must include, among other things, adequate policies, thedesignation of a compliance officer, employee training programs, and anindependent audit function to review and test the program.  The Bank hasestablished anti-money laundering compliance and due diligence programs whichmanagement believes comply with the IMLAFA.

 

Depositor Preference

 

TheOmnibus Budget Reconciliation Act of 1993 provides that deposits and certainclaims for administrative expenses and employee compensation against an insureddepositary institution would be afforded a priority over other generalunsecured claims against such an institution, including federal funds andletters of credit, in the “liquidation or other resolution” of such aninstitution by any receiver.

 

Emergency EconomicStabilization Act

 

Inresponse to recent, unprecedented market turmoil, Congress enacted theEmergency Economic Stabilization Act (“EESA”) on October 3, 2008. EESAauthorizes the Secretary of Treasury (the “Secretary”) to purchase up to $700billion in troubled assets from financial institutions under TARP. Troubledassets include residential or commercial mortgages and related instrumentsoriginated prior to March 14, 2008 and any other financial instrument thepurchase of which the Secretary determines, after consultation with theChairman of the Board of Governors of the Federal Reserve System, is necessaryto promote financial stability.  The Secretary was authorized to purchaseup to $250 billion in troubled assets immediately and up to $350 billion uponrequest by the President, subject to action by Congress.  EESA also increasedthe maximum deposit insurance amount up to $250,000 until December 31,2013.  Pursuant to his authority under EESA, the Secretary created theTARP CPP under which Treasury is investing up to $250 billion in seniorpreferred stock of U.S. banks and savings associations or their holdingcompanies.

 

TheCorporation applied for, and Treasury approved, a capital purchase in theamount of $30 million under the CPP.  The Corporation entered into aLetter Agreement with Treasury, pursuant to which the Corporation issued andsold to Treasury, for an aggregate purchase price of $30 million in cash, (i) 30,000shares of Series A Preferred Stock having a liquidation preference of$1,000, and (ii) a ten-year warrant to purchase up to 461,538 shares ofcommon stock, at an exercise price of $9.75 per share, subject to certainanti-dilution and other adjustments.  The Series A Preferred Stockwill pay cumulative dividends at a rate of 5% per annum for the first fiveyears and 9% per annum thereafter.  The CCP transaction closed on December 19,2008.

 

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American Recovery andReinvestment Act of 2009

 

TheAmerican Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law on February 17,2009.  ARRA contains a wide variety of programs intended to stimulate theeconomy and provide for extensive infrastructure, energy, health and educationneeds.  In addition, ARRA imposes certain new executive compensation andcorporate expenditure limits on all current and future TARP recipients untilthey have repaid Treasury, which is permitted under ARRA without the need toraise new capital, subject to Treasury consulting with the recipient’s appropriateregulatory agency.

 

Effect of GovernmentalPolicies

 

TheCorporation and the Bank are affected by the policies of regulatoryauthorities, including the Federal Reserve System. An important function of theFederal Reserve System is to regulate the national money supply.  Amongthe instruments of monetary policy used by the Federal Reserve are: (i) purchasesand sales of U.S. Government securities in the marketplace; (ii) changesin the discount rate, which is the rate any depository institution must pay toborrow from the Federal Reserve; (iii) and changes in the reserverequirements of depository institutions.  These instruments are effectivein influencing economic and monetary growth, interest rate levels andinflation.

 

Themonetary policies of the Federal Reserve System and other governmental policieshave had a significant effect on the operating results of commercial banks inthe past and are expected to continue to do so in the future.  Because ofchanging conditions in the national economy and in the money market, as well asthe result of actions by monetary and fiscal authorities, it is not possible topredict with certainty future changes in interest rates, deposit levels, loandemand or the business and earnings of the Bank or whether the changingeconomic conditions will have a positive or negative effect on operations andearnings.

 

Billsare pending before the United States Congress and the Tennessee GeneralAssembly and proposed regulations are pending before the various state andfederal regulatory agencies that could affect the business of the Corporationand the Bank, and there are indications that other similar bills and proposedregulations may be introduced in the future.  It cannot be predictedwhether or in what form any of these or future proposals will be adopted or theextent to which the business of the Corporation and the Bank may be affectedthereby.

 

**Sarbanes-OxleyAct of 2002**

 

TheSarbanes-Oxley Act of 2002 represents a comprehensive revision of lawsaffecting corporate governance, accounting obligations and corporate reporting.The Sarbanes-Oxley Act is applicable to all companies with equity securitiesregistered, or that file reports, under the Securities Exchange Act of 1934, asamended.  In particular, the act established (i) requirements foraudit committees, including independence, expertise and responsibilities; (ii) responsibilitiesregarding financial statements for the chief executive officer and chieffinancial officer of the reporting company and new requirements for them tocertify the accuracy of periodic reports; (iii) standards for auditors andregulation of audits; (iv) disclosure and reporting obligations for thereporting company and its directors and executive officers; and (v) civiland criminal penalties for violations of the federal securities laws. Thelegislation also established a new accounting oversight board to enforceauditing standards and restrict the scope of services that accounting firms mayprovide to their public company audit clients

 

**Availabilityof Information**

 

TheCorporation files periodic reports with the SEC. The SEC maintains an internetwebsite, www.sec.gov that contains reports, proxy and information statements,and other information regarding the Corporation that it files electronicallywith the SEC.  The Corporation makes its annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and allamendments to those reports available free of charge on the Bank’s website atwww.tncommercebank.com under the “Investor Relations” heading.

 

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**ITEM 1A.****                                          ****RISK FACTORS**

 

**Our concentration of commercial loans andcommercial real estate loans expose us to credit risks.**

 

At December 31,2009, our portfolio of commercial loans totaled $649.5 million, or 55.45% oftotal loans, and our commercial real estate loan portfolio was $443.8 million,or 37.88% of total loans.  These types ofloans generally expose us to a greater risk of nonpayment and loss thanresidential real estate loans because repayment of such loans often depends onthe successful operations and income stream of the borrowers. Additionally,such loans typically involve larger loan balances to single borrowers or groupsof related borrowers compared to residential real estate loans and many of ourborrowers have more than one such loan outstanding. Consequently, an adversedevelopment with respect to one loan or one credit relationship can expose usto a significantly greater risk of loss compared to an adverse development withrespect to a residential real estate loan. Further, we could sustain losses ifwe incorrectly assess the creditworthiness of such borrowers or fail to detector respond to deterioration in asset quality in a timely manner.  Problems with asset quality could cause ourinterest income and net interest margin to decrease and our provision for loanlosses to increase, which could adversely affect our results of operations andfinancial condition.

 

Commercial loans are generally secured by a variety offorms of collateral related to the underlying business, such as equipment,accounts receivable and inventory. Should a commercial loan require us toforeclose on the underlying collateral, the foreclosure expense may besignificant if the collateral is of a unique nature. The collateral may bedifficult to liquidate, and deteriorating market conditions may depress thevalue of such collateral, increasing the risk to us of recovering the principalamount of the loan. Accordingly, our financial condition may be adverselyaffected by defaults in this portfolio.

 

Some economists believe that deterioration in incomeproducing commercial real estate is likely to worsen as vacancy rates continueto rise and absorption rates of existing square footage and/or units continueto decline. Because of the current, general economic slowdown, these loansrepresent a high risk, could result in a sharp increase in our total net charge-offsand could require us to significantly increase our allowance for loan losses,which could have a material adverse effect on our financial condition orresults of operations.

 

**Ourcurrent sources of funds might not be sufficient to meet our future liquidityneeds.**

 

**Theprimary sources of our funds are loan repayments and customer deposits. Whilescheduled loan repayments are a relatively stable source of funds, they aresubject to the ability of borrowers to repay the loans. The ability ofborrowers to repay loans can be adversely affected by a number of factors,including changes in general economic conditions, adverse trends or eventsaffecting business industry groups, reductions in real estate values ormarkets, business closings or lay-offs, rising fuel prices, inclement weather,natural disasters and international instability. Customer deposit levels may beaffected by a number of factors, including rates paid by competitors, generalinterest rate levels, returns available to customers on alternative investmentsand general economic conditions. Accordingly, we may be required from time totime to rely on secondary sources of liquidity to meet withdrawal demands orotherwise fund operations. These sources include brokered deposits, internetdeposits Federal Home Loan Bank advances and federal funds lines of credit fromcorrespondent banks. While our management believes that these sources arecurrently adequate, there can be no assurance they will be sufficient to meetfuture liquidity demands. We may be required to slow or discontinue loangrowth, capital expenditures or other investments or liquidate assets shouldthese sources not be adequate.**

 

**Ourreliance on internet and brokered deposits could adversely affect our liquidityand results of operations.**

 

Recentlyour loan demand has exceeded the rate at which we have been able to increaseour deposits and, as a result, we have relied on internet and brokered depositsas a source of funds with which to make loans and provide liquidity. Wepost rates to an Internet-based program that retail and institutional investorsnationwide subscribe to in order to invest funds. As of December 31,2009, internet and brokered deposits, amounted to $526.4 million, or 42.36% oftotal deposits.  Generally, brokered depositsmay not be as stable as other types of deposits and, in the future, thosedepositors may not renew their time deposits when they mature, or we mayhave to pay a higher rate of interest to keep those deposits or to replace themwith other deposits or with funds from other sources. Additionally, if wecease to be “well capitalized” for bank regulatory purposes or are placed undera formal enforcement action with corresponding restrictions, we willnot be able to accept, renew or rollover brokered deposits without awaiver from the FDIC. An inability to maintain or replace these brokereddeposits as they mature could adversely affect ourliquidity. Further, paying higher interest rates to maintain orreplace these deposits could adversely affect our net interest marginand our results of operations.

 

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**Capital constraints mayaffect our pace of growth and our ability to raise additional capital whenneeded is dependent on conditions outside our control.**

 

**Ourpace of growth may require us to raise additional capital in the future, butthat capital may not be available when it is needed.  We are required by federal and stateregulatory authorities to maintain specific levels of capital to support ouroperations, so we may at some point need to raise additional capital to supportany continued growth.**

 

**Ourability to raise additional capital, if needed, will depend on conditions inthe capital markets at that time, which are outside our control, and on ourfinancial performance. Accordingly, we cannot provide any assurance that wewill be able to raise additional capital if needed on terms acceptable to us.If we cannot raise additional capital when needed, our ability to continue ourgrowth could be materially impaired.**

 

**Aninadequate allowance for loan losses would reduce our earnings.**

 

**Therisk of credit losses on loans varies with, among other things, general economicconditions, the type of loan being made, the creditworthiness of the borrowerover the term of the loan and, in the case of a collateralized loan, the valueand marketability of the collateral for the loan. Management maintains anallowance for loan losses based upon, among other things, historicalexperience, an evaluation of economic conditions and regular reviews ofdelinquencies and loan portfolio quality. Based upon such factors, managementmakes various assumptions and judgments about the ultimate collectability ofthe loan portfolio, provides an allowance for loan losses based upon apercentage of the outstanding balances and takes a charge against earnings withrespect to specific loans when their ultimate collectability is consideredquestionable. If management’s assumptions and judgments prove to be incorrectand the allowance for loan losses is inadequate to absorb losses, or if thebank regulatory authorities require us to increase the allowance for loanlosses as a part of their examination process, our earnings and capital couldbe significantly and adversely affected.**

 

****In the future we may becomesubject to informal or formal enforcement actions that could have amaterial adverse effect on our business, operations, financial condition,results of operations or the value of our common stock.****

 

Ourbank subsidiary is not currently under, nor does management expect it to beplaced under, a formal enforcement action. Nonetheless, we can provide noassurance that we will not become subject to a regulatory action, possiblyincluding a memorandum of understanding, cease and desist order, promptcorrective action and/or other regulatory enforcement action. If our regulatorstake any informal or formal enforcement actions, then we could, among other things,become subject to restrictions on our ability to develop any new business, aswell as restrictions on our existing business, and we could be required toraise additional capital, dispose of certain assets and liabilities within aprescribed period of time, or both. The terms of any such enforcement actioncould have a material adverse effect on our business, operations, financialcondition, results of operations and the value of our common stock.

 

**Werely heavily on the services of key personnel.**

 

**We dependsubstantially on the strategies and management services of our executiveofficers — Michael R. Sapp, Chairman, Chief Executive Officer and President,Frank Perez, Chief Financial Officer and H. Lamar Cox, Chief Operating Officer.The loss of the services of any of these executive officers could have amaterial adverse effect on our business, results of operations and financialcondition. We are also dependent on certain other key officers who haveimportant customer relationships or are instrumental to our operations. Changesin key personnel and their responsibilities may be disruptive to our businessand could have a material adverse effect on our business, financial conditionand results of operations.  We believethat our future results will also depend in part upon our attracting andretaining highly skilled and qualified management, as well as sales andmarketing personnel. We compete with a large number other financialinstitutions in the Nashville MSA for such personnel, and we cannot assure youthat we will be successful in attracting or retaining such personnel.**

 

**Prepayment of FDIC insurance premiums and higherFDIC assessment rates could adversely affect our results of operations.**

 

As a result of the largenumber of recent bank failures that have depleted the DIF, the FDIC requiredfinancial institutions, such as our bank subsidiary, to prepay on December 30,2009 their estimated quarterly risk-based assessments for the fourth quarter of2009 and for all of 2010 through and including 2012 in order to re-capitalizethe DIF. The amount of our prepayment was $8.05 million. The FDIC alsoincreased the assessment rates by three basis points effective January 1,2011. We cannot predict if the aggregate amount of all FDIC premium prepaymentswill be sufficient to cover expected bank failures. Therefore, we can give noassurance that the FDIC will not impose additional special assessments in thefuture to cover the costs associated with such failures.

 

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**Our business is subject tothe success of certain local economies.**

 

**Oursuccess significantly depends upon the growth in population, income levels,deposits and new businesses in the Nashville metropolitan statistical area, orNashville MSA, and the other markets in which we have significant loanproduction efforts. If the communities in which we operate do not grow or ifprevailing economic conditions locally or nationally are unfavorable, ourbusiness may not succeed. Adverse economic conditions in our specific marketareas could reduce our growth rate, affect the ability of our customers torepay their loans to us and generally affect our financial condition and resultsof operations. Moreover, we cannot give any assurance that we will benefit fromany market growth or favorable economic conditions in our primary market areasif they do occur.**

 

**National market fundingoutside of the Nashville MSA has risks related to the potential disposition ofcollateral upon foreclosure.**

 

**At December 31,2009, 25.71%**ofour loan portfolio was composed of national market funding loans to non-MiddleTennessee businesses referred to us by a small network of equipment vendors andfinancial service companies.  Thislending causes us to have somewhat different risks than those typical forcommunity banks generally. Our loan portfolio is somewhat geographicallydiverse, and as a result the loan collateral is also dispersed geographically. Thismay result in longer time periods to locate collateral and higher costs todispose of collateral in the event that the collateral is used to satisfy theloan obligation.

 

**Our business strategyincludes the continuation of growth plans, and our financial condition andresults of operations could be negatively affected if our business strategiesare not effectively executed.**

 

**Weintend to continue pursuing a growth strategy for our business through organicgrowth of the loan portfolio. Our prospects must be considered in light of therisks, expenses and difficulties that can be encountered by financial servicecompanies in rapid growth stages, which include the risks associated with thefollowing:**

 

**·**                 maintaining loan quality;

** **

**·**                 maintaining adequate management personnel andinformation systems to oversee such growth;

** **

**·**                 maintaining adequate control and compliancefunctions; and

** **

**·**                 securing capital and liquidity needed tosupport our anticipated growth.

 

**Therecan be no assurance that we will maintain or achieve deposit levels, loanbalances or other operating results necessary to avoid losses or produceprofits. Our growth will cause growth in overhead expenses as we add staff. Asa result, historical results may not be indicative of future results. Failureto successfully address these issues identified above could have a materialadverse effect on our business, future prospects, financial condition orresults of operations.**

 

**Competition from financialinstitutions and other financial service providers may adversely affect ourprofitability.**

 

**Thebanking business is highly competitive and we experience competition in ourmarkets from many other financial institutions. We compete with commercial banks, credit unions, savings and loanassociations, mortgage banking firms, consumer finance companies, securitiesbrokerage firms, insurance companies, money market funds, and other mutualfunds, as well as other community banks and super-regional and nationalfinancial institutions that operate in the Nashville MSA and elsewhere.  We not only compete with these companies inthe Nashville MSA, but also in the regional and national markets in which weengage in our indirect funding programs.**

 

**Weexpect competition to increase in the future as a result of legislative, regulatoryand technological changes and the continuing trend of consolidation in thefinancial services industry. Our profitability depends upon our continuedability to successfully compete with an array of financial institutions in theNashville MSA, and regionally and nationally with respect to our indirectfunding programs.**

 

**Materialfluctuations in non-interest income may occur.**

 

Historically,a substantial portion of our non-interest income is derived from the sale ofloans. We sell loans, particularly loans generated for our national marketfunding portfolio. The timing and extent of these loan sales may not bepredictable, and could cause material variation in our non-interest income on aquarter-to-quarter basis.

 

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**Negative developments in the financial services industry and U.S. andglobal credit markets may adversely impact our operations and results.**

 

Negativedevelopments in the latter half of 2007 and throughout 2008 and 2009 in thecapital markets have resulted in uncertainty in the financial markets ingeneral with the expectation of the general economic downturn continuingthrough 2009 and into 2010. The performance of loan portfolios has deterioratedat many institutions resulting from, among other factors, a weak economy and adecline in the value of the collateral supporting the loans. The competitionfor our deposits has increased significantly as a result of liquidity concernsat other institutions. Stock prices of bank holding companies, like ours, havebeen negatively affected by the current condition of the financial markets, ashas our ability, if needed, to raise capital or borrow in the debt markets. Asa result, there is a potential for new federal or state laws and regulationsregarding lending and funding practices and capital and liquidity standards,and financial institution regulatory agencies are expected to be veryaggressive in responding to concerns and trends identified in examinations,including the expected issuance of many formal enforcement actions.

 

**Recent legislative andregulatory initiatives to address difficult market and economic conditions maynot stabilize the U.S. banking system.**

 

**The Emergency EconomicStabilization Act of 2008 and the American Recovery and Reinvestment Act of2009 followed, and have been followed by, numerous actions by the FederalReserve Board, Congress, Treasury, the FDIC, the SEC and others to address thecurrent liquidity and credit crisis that has followed the sub-prime meltdownthat commenced in 2007.  These measuresinclude homeowner relief that encourages loan restructuring and modification;the establishment of significant liquidity and credit facilities for financialinstitutions and investment banks; the lowering of the federal funds rate;emergency action against short selling practices; a temporary guaranty programfor money market funds; the establishment of a commercial paper funding facilityto provide back-stop liquidity to commercial paper issuers; and coordinatedinternational efforts to address illiquidity and other weaknesses in thebanking sector. The purpose of these legislative and regulatory actions is tostabilize the U.S. banking system. These initiatives may not have their desiredeffects.  If the volatility**in the markets continues and economic conditions fail to improvesignificantly or worsen, our business, financial condition and results ofoperations could be materially and adversely affected.

 

**Changes ininterest rates could adversely affect our results of operations and financialcondition.**

 

**Changes in interest rates may affect our level ofinterest income, the primary component of our gross revenue, as well as thelevel of our interest expense. Interest rates are highly sensitive to manyfactors that are beyond our control, including general economic conditions andthe policies of various governmental and regulatory authorities.  Accordingly, changes in interest rates coulddecrease our net interest income. Changes in the level of interest rates also may negatively affect ourability to originate loans, the value of our assets and our ability to realizegains from the sale of our assets, all of which ultimately affect our earnings.**

 

**We are subject toextensive regulation that could limit or restrict our activities.**

 

**We operate in a highly regulated industry and aresubject to examination, supervision and comprehensive**regulation by various federal and stateagencies including the Federal Reserve Board, the FDIC and the TDFI. Ourregulatory compliance is costly and restricts certain of our activities,including payment of dividends, mergers and acquisitions, investments, loansand interest rates charged, and interest rates paid on deposits. We are alsosubject to capitalization guidelines established by our regulators, whichrequire us to maintain adequate capital to support our growth.

 

**The laws and regulationsapplicable to the banking industry could change at any time, and we cannotpredict the effects of these changes on our business and profitability. Becausegovernment regulation greatly affects the business and financial results of allcommercial banks and bank holding companies, our cost of compliance couldadversely affect our ability to operate profitably. Further, the impact of newlegislation in response to negative developments in the financial industrycould adversely affect our operations by restricting our business operations.**

 

**The Sarbanes-Oxley Act of 2002,and the related rules and regulations promulgated by the SEC and TheNASDAQ Stock Market that are applicable to us, have increased the scope,complexity and cost of our corporate governance, reporting and disclosurepractices. As a result, we have experienced, and may continue to experience,significant compliance costs.**

 

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**Even though our common stockis currently listed on The NASDAQ Global Market, the trading volume of ourcommon stock has been low and the sale of substantial amounts of our commonstock in the public market could depress the price of our common stock.**

 

**While our common stock is listedon The NASDAQ Global Market, the trading volume of our common stock isrelatively low and we cannot be certain when a more active and liquid tradingmarket for our common stock will develop or whether such a market could besustained. Because of this, our shareholders may not be able to sell theirshares at the volumes, prices or times that they desire.**

 

**We cannot predict the effect, ifany, that future sales of our common stock, or availability of shares of ourcommon stock for sale, will have on the market price of our common stock. We,therefore, can give no assurance that sales of substantial amounts of ourcommon stock, or the potential for large amounts of sales, would not cause theprice of our common stock to decline or impair our ability to raise capitalthrough sales of our common stock.**

 

**The market price of our commonstock may fluctuate in the future, and these fluctuations may be unrelated toour performance. General market price declines or overall market volatility inthe future could adversely affect the price of our common stock, and thecurrent market price may not be indicative of future market prices.**

 

**Our issuance of securitiesto Treasury may limit our ability to return capital to our shareholders, may bedilutive to the holders of our common stock and may result in otherrestrictions to our operations.**

 

**In connection with our sale of$30 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A,or Series A Preferred Stock, to Treasury on December 19, 2008, wealso issued to Treasury a warrant to purchase 461,538 shares of our commonstock. The terms of the transaction with Treasury will result in limitations onour ability to pay dividends and repurchase our shares. Until December 19,2011 or until Treasury no longer holds any shares of the Series APreferred Stock, we will not be able to pay dividends or repurchase any of ourshares without the approval of Treasury, with limited exceptions. In addition,we will not be able to pay any dividends at all on our common stock unless weare current on our dividend payments on the Series A Preferred Stock.These restrictions, as well as the dilutive impact of the warrant, may have anegative effect on the market price of our common stock and may be dilutive ofour earnings per share. In addition, we are required to pay cumulativedividends at a rate of 5% per annum for the first five years, and thereafter ata rate of 9% per annum. Depending on our financial condition at the time, thesedividends could have a negative effect on our liquidity. The shares of Series APreferred Stock will receive preferential treatment in the event of ourliquidation, dissolution or winding up.**

 

**Holders of the Series APreferred Stock may, under certain circumstances, have the right to elect twodirectors to our board of directors.**

 

**In the event that we fail to paydividends on the Series A Preferred Stock for an aggregate of sixquarterly dividend periods or more (whether or not consecutive), the authorizednumber of directors then constituting our board of directors will be increasedby two. Holders of the Series A Preferred Stock, together with the holdersof any outstanding parity stock with like voting rights voting as a singleclass, will then be entitled to elect the two additional members of our boardof directors at the next annual meeting (or at a special meeting called for thepurpose of electing such directors prior to the next annual meeting) and ateach subsequent annual meeting until all accrued and unpaid dividends for allpast dividend periods have been paid in full.**

 

**Holders of our subordinateddebentures have rights that are senior to those of our common shareholders.**

 

**In 2005 and 2008, we supportedour continued growth through the issuance of trust preferred securities fromtwo affiliated special purpose trusts and accompanying subordinated debentures.At September 30, 2009, we had outstanding trust preferred securities andaccompanying subordinated debentures totaling $23 million. Our board ofdirectors may decide to issue additional tranches of trust preferred securitiesin the future if markets for these securities improve. We conditionallyguarantee payments of the principal and interest on the trust preferredsecurities. Further, the accompanying subordinated debentures we issued to thetrust are senior to our shares of common stock. As a result, we must makepayments on the subordinated debentures before any dividends can be paid on ourcommon stock and, in the event of our bankruptcy, dissolution or liquidation,the holders of the subordinated debentures must be satisfied before anydistributions can be made on our common stock. We have the right to deferdistributions on our subordinated debentures (and the related trust preferredsecurities) for up to five years (from the date of issuance) during which timewe may not pay dividends on our common stock.**

 

**We may issue additionalcommon stock or other equity securities in the future which could dilute theownership interest of existing shareholders.**

 

**In order to maintain our capitalat desired levels or required regulatory levels, or to fund future growth, ourboard of directors may decide from time to time to issue additional shares ofcommon stock, or securities convertible into, exchangeable for or representingrights to acquire shares of our common stock. The sale of these securities maysignificantly dilute our shareholders’ ownership interest as a shareholder andthe market price of our common stock. New investors in other equity securitiesissued by us in the future may also have rights, preferences and privilegessenior to our current shareholders which may adversely impact our currentshareholders.**

 

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**ITEM 1B.****                                          ****UNRESOLVED STAFFCOMMENTS**

 

None.

 

**ITEM 2.****                                                   ****PROPERTIES**

 

The Corporation’s mainoffice is located in Williamson County at 381 Mallory Station Road, Suite 207,Franklin, Tennessee 37067, which is also the main office of the Bank. This location is centrally located and in a high traffic/exposure area. TheBank leases 66,167 square feet at a competitive rate and the term of the leaseexpires in December 2017.  The Bank provides services throughout thecommunity by use of a network of couriers, third party ATMs andstate-of-the-art electronic banking. The Bank also operates loan productionoffices located at One Chase Corporate Center, Suite 400, Birmingham, Alabama35244, at 7900 International Drive, Suite 200, Bloomington, Minnesota55425 and at 125 TownPark Drive, Suite 300, Kennesaw, Georgia 30144. Allthree loan production office facilities are leased.

 

**ITEM 3.****                                                   ****LEGAL PROCEEDINGS**

 

The Corporation is partyto proceedings arising from the May 6, 2008 termination of its formerChief Financial Officer, George Fort. Those proceedings include a complaintfiled by Mr. Fort under the Sarbanes-Oxley Act of 2002 (“SOX”) with theUnited States Department of Labor (the “SOX Complaint”) and a lawsuit styled*George Fort v. Tennessee Commerce Bancorp, Inc.and Tennessee Commerce Bank* (Case No. 3:08-cv-0668), filed on July 9,2008 in the United States District Court for the Middle District of Tennessee(the “Federal Litigation”).

 

In the SOX Complaint, Mr. Fortalleges that his March 7, 2008 placement on administrative leave and hissubsequent termination on May 6, 2008 were in retaliation for his raisingvarious alleged weaknesses in the Corporation’s internal controls to the AuditCommittee of the Corporation’s Board of Directors. In the Federal Litigation, Mr. Fortalleges that his termination constituted a breach of his Employment Agreement(the “Employment Agreement”) with the Bank and retaliation under the TennesseePublic Protection Act and the Federal Deposit Insurance Corporation ImprovementAct. Mr. Fort also asserts a claim for libel based upon certain pressreleases issued by the Corporation in connection with his former employment.The Corporation has brought a counter-claim against Mr. Fort that heengaged in misfeasance and malfeasance as the Corporation’s Chief FinancialOfficer, in breach of his fiduciary duty as an officer of the Corporation underTennessee law.

 

In 2009, the Departmentof Labor (the “DOL”) indicated that it will likely issue a preliminary order onthe SOX Complaint finding probable cause that the Corporation placed Mr. Forton administrative leave and subsequently discharged him in retaliation forengaging in protected activity under SOX. The Corporation has objected to theissuance of a preliminary order and the DOL has not opined with respect tothose objections.  If the DOL issues anadverse preliminary order, then the Corporation intends to appeal any suchfinding through the DOL’s administrative review process. Trial in the FederalLitigation is currently scheduled to begin late in the fourth quarter of 2010.

 

The Corporation deniesany liability to Mr. Fort or violation of any law, contract or otherwiseand intends to contest all matters brought by Mr. Fort vigorously. Insummary, the Corporation maintains that (i) Mr. Fort did not engagein protected activity, because his report did not involve any of the specificactivities enumerated in Section 806 of SOX, (ii) it placed Mr. Forton administrative leave so that he could focus his attention on addressing theissues he raised to the Audit Committee after he refused to participate in goodfaith in such efforts and (iii) Mr. Fort grossly neglected his dutiesin the implementation of the Corporation’s SOX program based on reports fromexternal auditors that revealed that, despite Mr. Fort’s assurances thatSOX implementation was “on track,” it was not. The Corporation furthermaintains that the terms of the Employment Agreement created an at-will employmentrelationship as a matter of law and that, regardless, Mr. Fort’s grossneglect of his duties constituted cause for termination under the EmploymentAgreement.

 

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**PART II**

 
| **ITEM 5.** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------------------------------------------------------------------------------------------------------------------|

 

The Corporation’s commonstock has been listed on The NASDAQ Global Market since June 2006. Thenumber of shareholders of record at March 1, 2010, was 400. The tablebelow shows the quarterly range of high and low sale prices for the Corporation’scommon stock during the fiscal years 2009 and 2008.

 
| **Year** |   | **High**       |   | **Low** |   |
|----------|--------|----------------|--------|---------|--------|
|     |   |           |   |    |   |   |   |
| 2008:    |   | First Quarter  |   | $       | 26.23  |   | $ | 13.72 |   |
|     |   | Second Quarter |   | $       | 19.94  |   | $ | 15.67 |   |
|     |   | Third Quarter  |   | $       | 17.25  |   | $ | 10.35 |   |
|     |   | Fourth Quarter |   | $       | 14.48  |   | $ | 5.00 |   |
| 2009:    |   | First Quarter  |   | $       | 11.74  |   | $ | 5.43 |   |
|     |   | Second Quarter |   | $       | 9.39   |   | $ | 4.76 |   |
|     |   | Third Quarter  |   | $       | 5.70   |   | $ | 4.00 |   |
|     |   | Fourth Quarter |   | $       | 6.00   |   | $ | 3.07 |   |

 

**Dividends**

 

The Corporation has neverdeclared or paid dividends on its common stock. The payment of cash dividendsis subject to the discretion of the Board of Directors, the Bank’s ability topay dividends and the priority of holders of the Corporation’s subordinateddebentures and Series A Preferred Stock.  The Bank’s ability to paydividends is restricted by applicable regulatory requirements. For moreinformation on these restrictions, see ITEM 1 “BUSINESS — Supervision andRegulation — Payment of Dividends” of this Annual Report on Form 10-K. No assurances can be given that any dividend will be declared or, if declared,what the amount of such dividend would be or whether such dividends wouldcontinue in the future.

 

**Recent Sales of UnregisteredSecurities**

 

During 2009, Corporationdid not sell any of its securities which were not registered under theSecurities Act of 1933.

 

**Purchases of Equity Securities by theRegistrant and Affiliated Purchasers**

 

The Corporation made norepurchases of its equity securities, and no Affiliated Purchasers (as definedin Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) purchasedany shares of the Corporation’s equity securities during the fourth quarter ofthe fiscal year ended December 31, 2009.

 

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**ITEM 6.****                                                   ****SELECTED FINANCIAL DATA**

 

The following selectedfinancial data for the years ended December 31, 2009, 2008, 2007, 2006 and2005 should be read in conjunction with the financial statements included inItem 8 of this Annual Report on Form 10-K:

 
| ** **                                                      | ** ** | **2009**                                                              | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|
| ** **                                                      | ** ** | **(Dollars in thousands except share data)** | ** ** |
| **Operating  Data:**                                            |       |                                                                  |       |      |       |      |       |     |       |     |       |
| Total interest  income                                          |       | $                                                                     | 81,108     |      | $          | 75,978    |       | $        | 62,206     |     | $          | 41,245 |   | $ | 23,633 |   |
| Total interest  expense                                         |       | 36,192                                                                |       | 41,027    |       | 34,934    |       | 21,868   |       | 10,006   |       |
| Net interest  income                                            |       | 44,916                                                                |       | 34,951    |       | 27,272    |       | 19,377   |       | 13,627   |       |
| Provision for  loan losses                                      |       | (31,039                                                               | )          | (9,111    | )          | (6,350    | )          | (4,350   | )          | (3,700   | )          |
| Net interest  income after provision for loan losses            |       | 13,877                                                                |       | 25,840    |       | 20,922    |       | 15,027   |       | 9,927    |       |
| Non-interest  income:                                           |       |                                                                  |       |      |       |      |       |     |       |     |       |
| Investment  securities gains                                    |       | 1,118                                                                 |       | 447       |       | 26        |       | —   |       | 4        |       |
| (Loss) gain on  sale of loans                                   |       | (1,928                                                                | )          | 3,750     |       | 2,687     |       | 2,025    |       | 1,106    |       |
| Other (loss)  income                                            |       | (747                                                                  | )          | 97        |       | 167       |       | (262     | )          | 201      |       |
| Non-interest  expense                                           |       | (21,305                                                               | )          | (17,608   | )          | (13,263   | )          | (9,056   | )          | (6,246   | )          |
| (Loss) income  before income taxes                              |       | (8,985                                                                | )          | 12,526    |       | 10,539    |       | 7,734    |       | 4,992    |       |
| Income tax  benefit (expense)                                   |       | 3,407                                                                 |       | (4,772    | )          | (3,643    | )          | (2,985   | )          | (1,925   | )          |
|                                                            |       |                                                                  |       |      |       |      |       |     |       |     |       |
| Net (loss)  income                                              |       | (5,578                                                                | )          | 7,754     |       | 6,896     |       | 4,749    |       | 3,067    |       |
| CPP preferred  dividends                                        |       | (1,546                                                                | )          | —    |       | —    |       | —   |       | —   |       |
|                                                            |       |                                                                  |       |      |       |      |       |     |       |     |       |
| Net (loss)  income available to common shareholders             |       | $                                                                     | (7,124     | )         | $          | 7,754     |       | $        | 6,896      |     | $          | 4,749 |   | $ | 3,067 |   |
|                                                            |       |                                                                  |       |      |       |      |       |     |       |     |       |
| **Per  Share Data :**                                           |       |                                                                  |       |      |       |      |       |     |       |     |       |
| Net income,  basic                                              |       | $                                                                     | (1.50      | )         | $          | 1.64      |       | $        | 1.49       |     | $          | 1.24 |   | $ | 0.95 |   |
| Net income,  diluted                                            |       | $                                                                     | (1.50      | )         | $          | 1.60      |       | $        | 1.41       |     | $          | 1.14 |   | $ | 0.87 |   |
| Book value                                                      |       | $                                                                     | 20.32      |      | $          | 21.50     |       | $        | 13.36      |     | $          | 11.51 |   | $ | 8.16 |   |
|                                                            |       |                                                                  |       |      |       |      |       |     |       |     |       |
| **Financial  Condition Data:**                                  |       |                                                                  |       |      |       |      |       |     |       |     |       |
| Assets                                                          |       | $                                                                     | 1,383,432  |      | $          | 1,218,084 |       | $        | 900,153    |     | $          | 623,518 |   | $ | 404,040 |   |
| Loans, net                                                      |       | 1,151,388                                                             |       | 1,023,271 |       | 784,001   |       | 538,550  |       | 344,187  |       |
| Investments                                                     |       | 93,668                                                                |       | 101,290   |       | 73,753    |       | 56,943   |       | 31,992   |       |
| Cash and due  from financial institutions                       |       | 22,864                                                                |       | 5,260     |       | 5,236     |       | 177      |       | 6,877    |       |
| Federal funds  sold                                             |       | 15,010                                                                |       | 35,538    |       | 9,573     |       | 13,820   |       | 12,535   |       |
| Premises and  equipment, net                                    |       | 1,967                                                                 |       | 2,330     |       | 1,413     |       | 1,633    |       | 769      |       |
| Deposits                                                        |       | 1,242,542                                                             |       | 1,069,143 |       | 815,053   |       | 560,567  |       | 367,705  |       |
| Federal funds  purchased                                        |       | —                                                                |       | —    |       | 2,000     |       | —   |       | —   |       |
| Long-term debt                                                  |       | 23,198                                                                |       | 23,198    |       | 8,248     |       | 8,248    |       | 8,248    |       |
| Other  liabilities                                              |       | 21,400                                                                |       | 15,100    |       | 11,592    |       | 3,479    |       | 1,657    |       |
| Shareholders’  equity                                      |       | 96,292                                                                |       | 101,747   |       | 63,121    |       | 51,224   |       | 26,430   |       |
|                                                            |       |                                                                  |       |      |       |      |       |     |       |     |       |
| **Selected  Ratios:**                                           |       |                                                                  |       |      |       |      |       |     |       |     |       |
| Overhead ratio  (1)                                             |       | 1.63                                                                  | %          | 1.52      | %          | 1.76      | %          | 1.80     | %          | 1.98     | %          |
| Efficiency ratio  (2)                                           |       | 49.14                                                                 | %          | 44.87     | %          | 43.99     | %          | 42.84    | %          | 41.81    | %          |
| Net yield on  earning assets                                    |       | 6.62                                                                  | %          | 7.45      | %          | 8.50      | %          | 8.46     | %          | 7.70     | %          |
| Cost of funds                                                   |       | 3.00                                                                  | %          | 4.16      | %          | 5.18      | %          | 4.94     | %          | 3.66     | %          |
| Net Interest  margin                                            |       | 3.66                                                                  | %          | 3.43      | %          | 3.72      | %          | 3.98     | %          | 4.44     | %          |
| Operating  expenses to average earning assets                   |       | 1.74                                                                  | %          | 1.73      | %          | 1.81      | %          | 1.86     | %          | 2.03     | %          |
| Return on  average assets                                       |       | (0.54                                                                 | )%         | 0.73      | %          | 0.91      | %          | 0.95     | %          | 0.97     | %          |
| Return on  average common equity                                |       | (10.86                                                                | )%         | 11.34     | %          | 12.13     | %          | 12.68    | %          | 12.29    | %          |
| Average common equity  to average assets                        |       | 5.02                                                                  | %          | 6.48      | %          | 7.53      | %          | 7.46     | %          | 7.90     | %          |
| Ratio of  nonperforming assets to average assets                |       | 1.63                                                                  | %          | 3.42      | %          | 1.14      | %          | 0.94     | %          | 1.40     | %          |
| Ratio of  allowance for loan losses to average assets           |       | 1.52                                                                  | %          | 1.27      | %          | 1.37      | %          | 1.39     | %          | 1.39     | %          |
| Ratio of  allowance for loan losses to nonperforming assets (3) |       | 93.52                                                                 | %          | 37.21     | %          | 119.94    | %          | 146.91   | %          | 99.43    | %          |

 

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(1) Operating expenses divided by average assets.

(2) Operating expenses divided by net interest income andnoninterest income.

(3) Nonperforming assets are made up of non-accruing loans,accruing loans 90 days past due and other real estate owned.

 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATION** |
|-------------|------------------------------------------------------------------------------------------------|

 

**Forward-Looking Statements**

 

Certain statementscontained in this report may not be based on historical facts and are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements may be identified by reference toa future period or by the use of forward-looking terminology, such as “expect,”“anticipate,” “believe,” “estimate,” “foresee,” “may,” “might,” “will,” “intend,”“could,” “would,” “plan,” “target,” “predict,” “should,” or future orconditional verb tenses and variations or negatives of such terms. Theseforward-looking statements include, without limitation, those relating to ouroperating results and financial condition, recent developments in the financialservices industry, recently adopted accounting standards, fair valuemeasurements, allowance for loan losses, Business Bank strategy, restrictionswith respect to our Fixed Rate Cumulative Perpetual Preferred Stock Series A,our warrant issued to Treasury, dividends, management’s review of the loanportfolio, loan classifications, loan commitments, interest rate risk, economicvalue of equity model, loan sale transactions, tax rates, liquidity,legislation and regulations affecting banks or bank holding companies, FDICinsurance premiums, rate sensitivity gap analysis, maturities of debtsecurities, growth of our market area, the impact of the economic environment,competition for loans, non-interest income, net interest income, revenueprovided by our mortgage unit, hiring of employees, ratio of assets peremployee, ratio of earning assets to total assets, accessing the wholesaledeposit market by means of an electronic bulletin board, engagement of depositbrokers, cost of funds, loan loss reserve, capital adequacy, informalcorrective actions, net interest margin, cash flows, interest-only stripsreceivable, servicing assets and liabilities, available-for-sale securities,maturities of time deposits, our split dollar life insurance plan, commitmentsto extend credit, lease payments, tax benefits and credits, net operating losscarryforward, our 2007 Equity Plan, payments under executive employmentagreements, stock-based compensation expense, capital stock, use of proceedsfrom equity offerings, internal control over financial reporting and our futuregrowth and profitability. We caution you not to place undue reliance on theforward-looking statements contained in this report because actual resultscould differ materially from those indicated in such forward-looking statementsas a result of a variety of factors. These factors include, but are not limitedto, changes in economic conditions, competition for loans, mortgages and otherfinancial services and products, changes in interest rates, concentrationswithin our loan portfolio, our ability to maintain credit quality, theeffectiveness of our risk monitoring systems, changes in consumer preferences,the ability of our borrowers to repay loans, the availability of and costsassociated with maintaining and/or obtaining adequate and timely sources ofliquidity, changes in our operating strategy, our ability to meet regulatorycapital adequacy requirements, our ability to collect amounts due under loanagreements and to attract deposits, our ability to attract, train and retainqualified personnel, the geographic concentration of our assets, our ability tooperate and integrate new technology, our ability to provide market competitiveproducts and services, our ability to diversify revenue, our ability to fundgrowth with lower cost liabilities, laws and regulations affecting financialinstitutions in general and other factors detailed from time to time in ourpress releases and filings with the Securities and Exchange Commission. Weundertake no obligation to update these forward-looking statements to reflectthe occurrence of changes or unanticipated events, circumstances or results thatoccur after the date of this report.

 

**Overview**

 

**(Dollars in thousands except sharedata in this Item 7.)**

 

The results of operationsfor the year 2009 compared to 2008 reflected a 191.88% decrease in net incomeand a 193.75% decrease in diluted earnings per share.  The decrease inearnings resulted primarily from an increased provision for loan losses as wellas an additional accrual for an FDIC special assessment.   The net interest margin for 2009 was 3.66%compared to 3.43% for 2008. The year 2009 reflected the Bank’s managementof asset growth, increasing by $165,348 or 13.57% from $1,218,084 at December 31,2008 to $1,383,432 at December 31, 2009. Net loans increased by 12.52% or$128,117 from December 31, 2008 to December 31, 2009, while totaldeposits increased by 16.22% or $173,399 during that same period.

 

The Corporation’s growthin assets was a result of growth in the market area and effective marketing.The improvement in results including net income and earnings per share was aresult of the business focus of the Bank. From 2000 to 2009, the Bank’s marketarea experienced explosive growth. In Williamson County, demographicinformation shows a 41.57% growth in the number of households from 2000 to2009.  Estimates from SNL Financial LC show that by 2014 the number ofhouseholds in this county will have grown by another 18.39%. Although estimatesof growth are not guaranteed and actual growth may be affected by factorsbeyond the Corporation’s control, management believes that the projected growthof the Bank’s market area will positively impact the Bank’s future growth.

 

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The Bank has also grownby marketing to business owners that have been left without a long standingbanking relationship. The Middle Tennessee area has experienced several bankmergers or acquisitions in the last ten years resulting in the termination ofmany long standing relationships. These acquisitions also resulted in loanfunding decisions being made out-of-state, creating unpredictability for locallending personnel and uncertainty for local businesses. The Bank has takenadvantage of this uncertainty by offering loans at a fair rate and fundedlocally in a timely manner. Management believes the competitive advantagecreated by this environment will continue to positively impact results fromoperations.

 

The Business Bankoperating strategy has enabled management to focus on managing results. Ratherthan focusing on building a multi-branch infrastructure including hiring andconstruction of buildings, management focuses on managing net interest marginaggressively and controlling non-interest expense. This has resulted in a 0.90basis point or a 24.59% decrease in the net interest margin from 2004 to 2009.Non-interest expense is controlled by efficiently staffing the Bank’soperations. In 2009, that resulted in $15,200 in assets per employee at yearend. Management believes that the Business Bank operating strategy willcontinue to be an effective model in the future.

 

**Changes in Results of Operations**

 

**NetIncome**- Netloss for 2009 was $7,124, a decrease of $14,878, or 191.88%, compared to netincome of $7,754 for 2008. The decrease was primarily attributable to a 240.68%increase in the provision for loan losses from $9,111 in 2008 to $31,039 in2009. The increase of $21,928 in the provision for loan losses was the resultof higher charge-offs and repossessions. Non-interest income decreased by$5,851, from $4,294 to a loss of $1,557, or 136.26%, primarily a result oflosses in the sale of loans and repossessions. These negative effects werepartially offset by a 150.11% increase in the gain on the sale of securities,from $447 in 2008 to $1,118 in 2009, and an increase of $5,130 in interestincome, up 6.75% to $81,108 in 2009 compared to $75,978 in 2008. The increasein non-interest expense was a result of the increase in FDIC premiums and theFDIC special assessment. In 2009, the Bank paid FDIC deposit insuranceassessments totaling approximately $1,920, including a special assessment of$300 paid during the third quarter of 2009 and a prepaid assessment of $8,050paid in the fourth quarter of 2009, as compared to an aggregate payments ofapproximately $682 in 2008.

 

Net income for 2008 was$7,754, an increase of $858, or 12.44%, compared to $6,896 for 2007. Theincrease was primarily attributable to a 28.16% increase in net interest incomefrom $27,272 in 2007 to $34,951 in 2008. The increase of $7,679 in net interestincome was the result of higher average loan balances. Non-interest incomeincreased by $1,414, from $2,880 to $4,294, or 49.10%, primarily a result ofgains on loan sales. These positive effects were partially offset by a 43.48%increase in the provision for loan losses, from $6,350 in 2007 to $9,111 in2008, and an increase of $4,345 in non-interest expense, up 32.76% to $17,608in 2008 compared to $13,263 in 2007. The increase in the provision for loanlosses was the result of funding the loan loss reserve to match the growth inthe loan portfolio and loan charge-offs. The increase in non-interest expensewas a result of the increase in personnel and general operating expensesattributable to the Corporation’s growth.

 

**NetInterest Income**- The primary source of earnings for the Bank is net interest income, which isthe difference between the interest earned on interest earning assets and theinterest paid on interest bearing liabilities.  The major factors whichaffect net interest income are changes in volumes and yield on earning assetsas well as the volumes and the cost of interest bearing liabilities. Management’s ability to respond to changes in interest rates by effectiveasset-liability management techniques is critical to maintaining the stabilityof the net interest margin and the momentum of the Bank’s primary source ofearnings.

 

During 2009, the FederalReserve Open Market Committee (“FOMC”) did not change short-term interestrates. During 2009, $22,468 of the Corporation’s net loan growth occurred infloating rate construction loans and approximately 74.15% of the $30,302increase in commercial loans was related to floating rate transactions.Management expects to continue its practice of competing for loans based onproviding superior service rather than the lowest price.

 

Net interest income for2009 was $44,916 compared to $34,951 for 2008, a gain of $9,965 or 28.51%. Theincrease in net interest income was largely attributable to strong loan growth.Net loans increased from $1,023,271 at December 31, 2008 to $1,151,388 at December 31,2009, an increase of $128,117 or 12.52%.  Net interest income wasfavorably impacted by a 3.87% decrease in the Bank’s indirect funding programfor small transactions. These loans, which are purchased at a minimum rate of8%, decreased from $173,438 at year-end 2008 to $166,969 at the end of 2009.The loan growth was matched by an increase in deposits from $1,069,143 at December 31,2008 to $1,242,542 in 2009, an increase of $173,399 or 16.22%.

 

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Net interest income for2008 was $34,951 compared to $27,272 for 2007, a gain of $7,679 or 28.16%. Theincrease in net interest income was largely attributable to strong loan growth.Net loans increased from $784,001 at December 31, 2007 to $1,023,271 at December 31,2008, an increase of $239,270 or 30.52%.  Net interest income wasfavorably impacted by the increase in the Bank’s indirect funding program forsmall transactions. These loans, which are purchased at a minimum rate of 8%,increased from $153,140 at year-end 2007 to $173,438 at the end of 2008. Theloan growth was matched by an increase in deposits from $815,053 at December 31,2007 to $1,069,143 in 2008, an increase of $254,090 or 31.17%.

 

**Investments** - The Bank views the investmentportfolio as a source of income and liquidity. Management’s investment strategyis to accept a lower immediate yield in the investment portfolio by targetingshorter term investments.   The Bank’s investment policy requires aminimum portfolio level equal to 7% of total assets and a maximum portfoliolevel of 20% of total assets.  Management has maintained the portfolio atthe lower end of the policy guidelines with the portfolio at 6.77%, 8.32% and8.19% of total assets at year-end in 2009, 2008 and 2007, respectively.

 

The investment portfolioat December 31, 2009 was $93,668 compared to $101,290 at year-end 2008.The interest earned on investments rose from $4,717 in 2008 to $5,325 in 2009,as a result of higher average portfolio balances. The average yield on theinvestment portfolio investments fell from 5.59% in 2008 to 5.14% in 2009, or45 basis points.

 

The investment portfolioat December 31, 2008 was $101,290, compared to $73,753 at year-end2007. The average yield on the investment portfolio was 5.59% in 2008compared to 5.43% in 2007.

 

**NetInterest Margin Analysis** - The net interest margin is impacted by the averagevolumes of interest sensitive assets and interest sensitive liabilities and bythe difference between the yield on interest sensitive assets and the cost ofinterest sensitive liabilities (spread).  Loan fees collected atorigination represent an additional adjustment to the yield on loans. The Bank’sspread can be affected by economic conditions, the competitive environment,loan demand and deposit flows.  The net yield on earning assets is anindicator of the effectiveness of a bank’s ability to manage the net interestmargin by managing the overall yield on assets and the cost of funding thoseassets.

 

The two factors that makeup the spread are the interest rates received on loans and the interest ratespaid on deposits. The Bank has been disciplined in raising interest rates ondeposits only as the market demands and thereby managing the cost of funds.Also, the Bank has not competed for new loans on interest rate alone but hasrelied on effective marketing to business customers. Business customers are notinfluenced by interest rates alone but are influenced by other factors such astimely funding.

 

The net interest marginincreased from 3.43% in 2008 to 3.66% in 2009 because the yield on earningassets decreased less than the cost of funds. Interest income increased by$5,130, or 6.75%, from $75,978 in 2008 to $81,108 in 2009. The increase wasprimarily a result of increased loan volume. Average earning assets increasedfrom $1,019,887 in 2008 to $1,224,775 in 2009, an increase of $204,888 or20.09%. The increase in earning assets was a result of loan growth. Averageloans increased $187,485 or 20.19% from 2008 to 2009. The average yield onearning assets decreased from 7.45% in 2008 to 6.62% in 2009, or 83 basispoints. The decrease in the Bank’s federal funds sold unfavorably impacted theaverage yield on earning assets. The average yield on this type of asset in2009 was 0.22%. The federal funds sold decreased 19.24% from $7,374 at year-end2008 to $5,955 in 2009.   Interestexpense decreased from $41,027 in 2008 to $36,192 in 2009. The decrease of$4,835, or 11.78%, in interest expense was a result of a lower cost of funds.Average deposits increased from $949,005 in 2008 to $1,157,759 in 2009, anincrease of $208,754 or 22.00%. The cost of funds decreased from 4.17% in 2008to 3.00% in 2009, or 117 basis points.

 

The net interest margindeclined from 3.72% in 2007 to 3.43% in 2008 because the yield on earningassets decreased faster than the cost of funds, resulting in a compression onthe yield on earning assets during 2008. Interest income increased by $13,772,or 22.14%, from $62,206 in 2007 to $75,978 in 2008. The increase was primarilya result of increased loan volume. Average earning assets increased from$731,749 in 2007 to $1,019,887 in 2008, an increase of $288,138 or 39.38%. Theincrease in earning assets was a result of loan growth. Average loans increased$272,298 or 41.50% from 2007 to 2008. The average yield on earning assetsdecreased from 8.50% in 2007 to 7.45% in 2008, or 105 basis points. Thedecrease in the Bank’s federal funds sold unfavorably impacted the averageyield on earning assets. The average yield on this type of asset in 2008 was2.17%. These federal funds sold decreased 36.98% from $11,701 at year-end 2007to $7,374 at the end of 2008.   Interestexpense increased from $34,934 in 2007 to $41,027 in 2008. The $6,093, or17.44%, increase in expense was a result of increases in the volume ofdeposits. Average deposits increased from $685,063 in 2007 to $949,005 in 2008,an increase of $263,942 or 38.53%. The cost of funds decreased from 5.18% in2007 to 4.17% in 2008, or 101 basis points.

 

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**Provisionfor Loan Losses**- The allowance for loan losses represents the Corporation’s estimate of probablelosses inherent in the loan portfolio, the largest asset category on theconsolidated balance sheet. Determining the amount of the allowance for loanlosses is considered a critical accounting policy because it requiressignificant judgment and the evaluation of several factors: the ongoing reviewand grading of the loan portfolio; consideration of the Corporation’s andrelevant banking industry’s past loan loss experience; trends in past-due andnonperforming loans; risk characteristics of the various classifications ofloans; existing economic conditions; the fair value of underlying collateral;the size and diversity of individual large credits; and other qualitative andquantitative factors that could affect probable credit losses. Otherconsiderations include the use of estimates related to the amount and timing ofexpected future cash flows on impaired loans, estimated losses on pools ofhomogeneous loans based on the Corporation’s historical loss experience andadditional qualitative factors for various issues. Additionally, an allocationof reserves is established for special situations that are unique to themeasurement period with consideration of current economic trends andconditions. Because economic conditions can change and future events are inherentlydifficult to predict, the anticipated amount of estimated loan losses, andtherefore the adequacy of the allowance, could change significantly.

 

The Corporation’sallowance for loan loss methodology is based on GAAP. Portions of the allowancemay be allocated for specific credits; however, the entire allowance isavailable for any credit that, in management’s judgment, should be charged off.While management utilizes its best judgment and information available, theultimate adequacy of the allowance is dependent upon a variety of factorsbeyond the Corporation’s control, including the performance of the Corporation’sloan portfolio, the economy, changes in interest rates and the view of theregulatory authorities toward loan classifications.

 

The Corporation’sallowance for loan losses consists of three elements: (i) specificallocated allowances based on probable losses on specific commercial orcommercial real estate loans or restructured residential mortgage or consumerloans; (ii) risk allocated allowance, which is comprised of several loanpool valuation allowances, based on the Corporation’s historical quantitativeloan loss experience for similar loans with similar risk characteristics,including additional qualitative risks; and (iii) general valuationallowances based on existing regional and local economic factors, includingdeterioration in commercial and residential real estate values, a macroeconomicadjustment factor used to calibrate for the current economic cycle theCorporation is experiencing, and other subjective factors supported byqualitative documentation.

 

Specific allocatedallowances are established in cases where management has identified significantconditions or circumstances related to a credit that management believes indicatesthat it is probable that the Corporation will be unable to collect all amountsdue according to the contractual terms of the loan. The specific creditallocations are based on a regular analysis of all commercial and commercialreal estate loans over a fixed dollar amount where the internal credit ratingis at or below a predetermined classification and on all restructuredresidential mortgage and consumer loans over a fixed dollar amount.

 

The Corporation’s riskallocated allowance, which is comprised of several loan pool valuationallowances is calculated based on historical data with additional qualitativerisk determined by the judgment of management. Qualitative factors, bothinternal and external to the Corporation, considered by management include: (i) theexperience, ability and effectiveness of the Corporation’s lending managementand staff; (ii) the effectiveness of the Corporation’s loan policies,procedures and internal controls; (iii) changes in asset quality; (iv) changesin loan portfolio volume; (v) the composition and concentrations ofcredit; (vi) the impact of competition on loan structuring and pricing; (vii) theeffectiveness of the internal loan review function; (viii) the impact ofenvironmental risks on the portfolio (ix) the impact of rising interestrates on the portfolio and (x) the impact of loan modification programs.The Corporation evaluates the degree of risk that these components have on thequality of the loan portfolio on a quarterly basis. Based upon the Corporation’sanalysis, appropriate estimates for qualitative risks are established. Includedin the qualitative valuations are allocations for groups of similar loans withrisk characteristics that exceed certain concentration limits. Concentrationrisk guidelines have been established, among other things, for certain industryconcentrations, large balance and highly leveraged credit relationships, andloans originated with policy exceptions. Qualitative allowances may alsoinclude estimates of inherent but undetected losses within the portfoliobecause of uncertainties in economic conditions, delays in obtaininginformation, including unfavorable information about a borrower’s financialcondition, the difficulty in identifying triggering events that correlateperfectly to subsequent loss rates, and risk factors that have not yetmanifested themselves in loss allocation factors. The historical losses usedmay not be representative of actual losses inherent in the portfolio that havenot yet been realized.

 

The general valuationallowance is based on management’s estimate of the effect of current generaleconomic conditions on current loan pools and the inherent imprecision in loanloss projection models. The uncertainty surrounding the strength and timing ofeconomic cycles, including concerns over the effects of the prolonged economicdownturn for the Corporation’s market area in the current cycle, also affectsthe estimates of loss.

 

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Continuous creditmonitoring processes and the analysis of loss components are the principalmethods relied upon by management to ensure that changes in estimated creditloss levels are reflected in the Corporation’s allowance for loan losses on atimely basis. The Corporation utilizes regulatory guidance and its ownexperience in this analysis. In addition, various regulatory agencies, as anintegral part of their examination process, periodically review the allowancefor loan losses. Such agencies may require additions to the allowance based ontheir judgment on information available to them at the time of theirexamination.

 

Actual loss ratiosexperienced in the future may vary from those projected. In the event thatmanagement overestimates future cash flows or underestimates losses on loanpools, the Corporation may be required to increase the allowance for loanlosses through the provision for loan losses, which would have a negativeimpact on the results of operations in the period in which the increaseoccurred. Note 1 to the Consolidated Financial Statements included in Item 8 ofthis Annual Report on Form 10-K describes the methodology used todetermine the allowance for loan losses.

 

The provision for loanlosses in 2009 was $31,039, an increase of $21,928, or 240.68%, above theprovision of $9,111 expensed in 2008. Of this provision, $6,459, or 20.81%, wasattributable to loan growth recorded during 2009. The remainder of the loanloss provision in 2009 funded net charge-offs of $24,580.

 

The provision for loanlosses in 2008 was $9,111, an increase of $2,761, or 43.48%, above theprovision of $6,350 expensed in 2007. Of this provision, $3,133, or 34.39%, wasattributable to loan growth recorded during 2008. The remainder of the loanloss provision in 2008 funded net charge-offs of $5,978.

 

The Bank targets smalland medium sized businesses as loan customers. Because of their size, theseborrowers may be less able to withstand competitive or economic pressures thanlarger borrowers in periods of economic weakness. If loan losses occur to alevel where the loan loss reserve is not sufficient to cover actual loanlosses, the Bank’s earnings will decrease. The Bank uses an independentaccounting firm to review its loans semi-annually for quality in addition tothe reviews that may be conducted by bank regulatory agencies as part of theirusual examination process.

 

The following tablepresents information regarding non-accrual, past due and restructured loans at December 31,2009, 2008, 2007, 2006 and 2005:

 
| ** **                                                                                              | ** ** | **December 31,**                | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                              | ** ** | **(Dollars in thousands)** | ** ** |
| Non-accrual  loans                                                                                      |       |                                 |       |   |   |   |   |   |   |   |   |
| Number                                                                                                  |       | 225                                  |       | 188 |   | 130 |   | 60 |   | 46 |   |
| Amount                                                                                                  |       | $                                    | 19,151     |   | $ | 11,603 |   | $ | 6,465 |   | $ | 2,689 |   | $ | 2,928 |   |
|                                                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Accruing loans  which are contractually past due 90 days or more as to principal and interest  payments |       |                                 |       |   |   |   |   |   |   |   |   |
| Number                                                                                                  |       | 30                                   |       | 51 |   | 44 |   | 18 |   | 9 |   |
| Amount                                                                                                  |       | $                                    | 1,328      |   | $ | 18,788 |   | $ | 1,992 |   | $ | 940 |   | $ | 352 |   |
|                                                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Loans defined as  “troubled debt restructurings” (1)                                          |       |                                 |       |   |   |   |   |   |   |   |   |
|                                                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Number                                                                                                  |       | 1                                    |       | 1 |   | 1 |   | 3 |   | 3 |   |
| Amount                                                                                                  |       | $                                    | 111        |   | $ | 130 |   | $ | 148 |   | $ | 1,144 |   | $ | 1,144 |   |
|                                                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Gross interest  income lost on the non-accrual loans                                                    |       | $                                    | 2,708      |   | $ | 870 |   | $ | 436 |   | $ | 174 |   | $ | 133 |   |
|                                                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Interest income  included in net income on the accruing loans                                           |       | $                                    | 112        |   | $ | 1,674 |   | $ | 605 |   | $ | 73 |   | $ | 31 |   |

 

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(1)                     Four loanspreviously reported as “troubled debt restructurings” for 2008 were found to beclassified incorrectly. The number and amount for 2008 is correctly reported inthe table above.

 

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As of December 31, 2009,there were no loans which represent trends or uncertainties that management reasonablyexpects will materially impact future operating results, liquidity, or capitalresources that have not been disclosed in the above table and classified forregulatory purposes as doubtful or substandard.

 

The Bank had notax-exempt loans during the years ended December 31, 2009 and December 31,2008. The Bank had no loans outstanding to foreign borrowers at December 31,2009 and December 31, 2008.

 

An analysis of the Bank’sloss experience is furnished in the following table for December 31, 2009,2008, 2007, 2006 and 2005, and the years then ended:

 
| ** **                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                        | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Allowance for  loan losses at beginning of period                                           |       | $                     | 13,454     |   | $ | 10,321 |   | $ | 6,968 |   | $ | 4,399 |   | $ | 2,841 |   |
| Charge-offs:                                                                                |       |                  |       |   |   |   |   |   |   |   |   |
| Real estate:                                                                                |       |                  |       |   |   |   |   |   |   |   |   |
| Construction                                                                                |       | 2,918                 |       | 288 |   | 32 |   | — |   | — |   |
| 1 to 4 family  residential                                                                  |       | 346                   |       | 9 |   | — |   | — |   | — |   |
| Other                                                                                       |       | 346                   |       | 102 |   | — |   | — |   | — |   |
| Commercial,  financial and agricultural                                                     |       | 22,462                |       | 5,620 |   | 3,262 |   | 2,026 |   | 2,379 |   |
| Consumer                                                                                    |       | 13                    |       | 80 |   | 16 |   | 11 |   | 32 |   |
| Other                                                                                       |       | —                |       | — |   | — |   | — |   | — |   |
| Total  Charge-offs                                                                          |       | 26,085                |       | 6,099 |   | 3,310 |   | 2,037 |   | 2,411 |   |
|                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| Recoveries:                                                                                 |       |                  |       |   |   |   |   |   |   |   |   |
| Real estate:                                                                                |       |                  |       |   |   |   |   |   |   |   |   |
| Construction                                                                                |       | —                |       | — |   | — |   | — |   | — |   |
| 1 to 4 family  residential                                                                  |       | —                |       | — |   | — |   | — |   | 1 |   |
| Other                                                                                       |       | —                |       | — |   | — |   | — |   | — |   |
| Commercial,  financial and agricultural                                                     |       | 1,504                 |       | 118 |   | 313 |   | 234 |   | 245 |   |
| Consumer                                                                                    |       | 1                     |       | 3 |   | — |   | 22 |   | 23 |   |
| Other                                                                                       |       | —                |       | — |   | — |   | — |   | — |   |
| Total Recoveries                                                                            |       | 1,505                 |       | 121 |   | 313 |   | 256 |   | 269 |   |
|                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| Net Charge-offs                                                                             |       | 24,580                |       | 5,978 |   | 2,997 |   | 1,781 |   | 2,142 |   |
|                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| Provision for  loan losses charged to expense                                               |       | 31,039                |       | 9,111 |   | 6,350 |   | 4,350 |   | 3,700 |   |
|                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses at end of period                                                 |       | $                     | 19,913     |   | $ | 13,454 |   | $ | 10,321 |   | $ | 6,968 |   | $ | 4,399 |   |
|                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| Net charge-offs  as a percentage of average total loans outstanding during the year         |       | 2.17                  | %          | 0.64 | % | 0.45 | % | 0.41 | % | 0.76 | % |
| Ending allowance  for loan losses as a percentage of total loans outstanding at end of year |       | 1.70                  | %          | 1.30 | % | 1.30 | % | 1.28 | % | 1.26 | % |

 

The allowance for loanlosses is established by charges to operations based on management’s evaluationof the loan portfolio, past due loan experience, collateral values, currenteconomic conditions and other factors considered necessary to maintain theallowance at an adequate level. Management believes that the allowance wasadequate at December 31, 2009.

 

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At December 31,2009, 2008, 2007, 2006 and 2005, the allowance for loan losses was allocated asfollows:

 
| ** **                              | ** ** | **2009**   | ** ** | **2008**                                                                             | ** ** | **2007**   | ** ** | **2006**                                                                             | ** ** | **2005**   | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------|------------|------------|------------|
| **(Dollars in thousands)**              | ** ** | **Amount** | ** ** | **Percentage********of loans in********each********category  to********total loans** | ** ** | **Amount** | ** ** | **Percentage********of loans in********each********category  to********total loans** | ** ** | **Amount** | ** ** | **Percentage********of loans in********each********category  to********total loans** | ** ** | **Amount** | ** ** | **Percentage********of loans in********each********category  to********total loans** | ** ** | **Amount** | ** ** | **Percentage********of loans in********each********category  to********total loans** | ** ** |
| Real estate:                            |       |       |       |                                                                                 |       |       |       |                                                                                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Construction                            |       | $          | 1,419      |                                                                                 | 12.13      | %          | $          | 1,816                                                                                |       | 17.52      | %          | $ | 1,132 |   | 14.15 | % | $ | 745 |   | 13.65 | % | $ | 383 |   | 10.98 | % |
| 1 to 4 family  residential              |       | 288        |       | 3.62                                                                                 | %          | 384        |       | 3.65                                                                                 | %          | 335        |       | 4.22 | % | 229 |   | 4.19 | % | 225 |   | 5.27 | % |
| Other                                   |       | 3,501      |       | 22.13                                                                                | %          | 1,919      |       | 16.51                                                                                | %          | 1,440      |       | 18.13 | % | 840 |   | 15.40 | % | 504 |   | 14.45 | % |
| Commercial,  financial and agricultural |       | 14,021     |       | 55.45                                                                                | %          | 8,766      |       | 56.86                                                                                | %          | 7,130      |       | 60.14 | % | 5,048 |   | 64.89 | % | 3,197 |   | 67.11 | % |
| Consumer                                |       | 20         |       | 0.30                                                                                 | %          | 39         |       | 0.35                                                                                 | %          | 56         |       | 0.50 | % | 37 |   | 0.60 | % | 45 |   | 0.90 | % |
| Other                                   |       | 664        |       | 6.37                                                                                 | %          | 530        |       | 5.11                                                                                 | %          | 228        |       | 2.86 | % | 69 |   | 1.27 | % | 45 |   | 1.29 | % |
|                                    |       |       |       |                                                                                 |       |       |       |                                                                                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Total                                   |       | $          | 19,913     |                                                                                 | 100.00     | %          | $          | 13,454                                                                               |       | 100.00     | %          | $ | 10,321 |   | 100.00 | % | $ | 6,968 |   | 100.00 | % | $ | 4,399 |   | 100.00 | % |

 

**Non-interestIncome** -Non-interest income is income that is not related to interest-earning assets.  In a typical retail bank, non-interest incomeconsists primarily of service charges and fees on deposit accounts and mortgageorigination fees.  Because of thebusiness focus of the Bank and its lack of a large retail customer base,revenues from these traditional sources will remain modest.

 

The Bank earned $31 inmortgage origination fees in 2009 and in 2008. Management believes that in 2010the mortgage unit will provide a value-added service with modest revenueresults.

 

The Bank lost $1,928 in2009 on a series of loan sale transactions compared to a gain of $3,750 in2008. In addition to lending in the local marketplace, the Bank providescollateral-based loans to business borrowers in other states through two typesof indirect funding programs. Management has identified a network of communitybanks eager to purchase quality assets. Management has installed appropriatesystems and a process to sell assets to other banks located in slower growing marketsand believes that loan sales will be a recurring source of revenue. Gains onsales of securities increased by $671, or 150.11% from $447 in 2008 to $1,118in 2009.

 

In 2008, the Bank earned$3,750 on a series of loan sale transactions. The Bank earned $31 in mortgage origination fees in 2008 compared to $76earned in 2007, a decline of $45 or 59.21%. The decline in mortgage origination income was attributed to thedisruption in the mortgage market in 2007. Income earned in the form of service charges on deposits totaled $122, a7.58% reduction from the $132 earned in 2007. Gain on sales of securities increased by $421 or 1,619% from $26 in 2007to $447 in 2008.

 

**Non-interestExpense** -Non-interest expense includes salaries and benefits expense, occupancy costsand other operating expenses including data processing, professional fees,supplies, postage, telephone and other items. Management views the control ofoperating expense as a critical element in the success of the Business Bankstrategy.  The Bank operates moreefficiently than most peer banks because it conducts business from a singlelocation and does not provide banking services for many retail customers withhigh transaction volume.

 

Management targets$10,000 in assets per full-time employee as a measure of staffing efficiency.Management believes that the growth of the Bank will offer additionalopportunities to leverage personnel resources. The Bank does not expect to hire employees in 2010, so salaries andbenefits expense may increase slightly, but the target for assets per employeewill remain at $10,000.

 

Non-interest expense for2009 was $21,305, an increase of $3,697 or 21.00%, over the $17,608 expensed in2008. Approximately 33.54% of the increase was attributable to the increased FDICpremiums, approximately 20.26% of the increase was attributable to the additionof new employees during the year and approximately 13.34% of the increase wasattributable to increased collection efforts. The Bank ended 2009 with 91full-time employees. Assets per employee were $15,203 at year-end 2009 comparedto $14,676 at year-end 2008.

 

Non-interest expense for2008 was $17,608, an increase of $4,345 or 32.76%, over the $13,263 expensed in2007. Approximately 28.38% of the increase was attributable to the increase inprofessional fees (audit, legal, and accounting), and approximately 25.85% ofthe increase was attributable to the addition of new employees during the year.The Bank ended 2008 with 83 full-time employees. Assets per employee were $14,676at year-end 2008 compared to $14,060 at year-end 2007.

 

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**IncomeTaxes** — TheCorporation’s effective tax rate in 2009 was 37.92% compared to 38.10% in 2008and 34.57% in 2007. Management anticipates that tax rates in future years willapproximate the rates paid in 2009.

 

**Changes in Financial Condition**

 

**Assets****-** Total assets at December 31, 2009were $1,383,432, an increase of $165,348 or 13.57%, over total assets of$1,218,084 at December 31, 2008. Average assets for 2009 were $1,307,205,an increase of $251,346, or 23.80% over average assets in 2008. Loan growth wasthe primary reason for these increases. Net loans were $1,151,388 at year-end2009, up $128,117, or 12.52% over the year-end 2008 total net loans of$1,023,271.

 

Total assets at December 31,2008 were $1,218,084, an increase of $317,931 or 35.32%, over total assets of$900,153 at December 31, 2007. Average assets for 2008 were $1,055,859, anincrease of $300,605, or 39.80% over average assets in 2007. Loan growth wasthe primary reason for the increases. Net loans were $1,023,271 at year-end2008, up $239,270, or 30.52% over the year-end 2007 total net loans of$784,001.

 

The Bank’s Business Bankmodel of operation results in a higher level of earning assets than most peerbanks.  Earning assets are defined asassets that earn interest income.  Earningassets include short-term investments, the investment portfolio and net loans.  The Bank maintains a relatively high level ofearning assets because few assets are allocated to facilities, cash anddue-from bank accounts used for transaction processing. Earning assets at December 31,2009 were $1,260,066, or 91.08% of total assets of $1,383,432. Earning assetsat December 31, 2008 were $1,160,099, or 95.24% of total assets of$1,218,084.  Management targets anearning asset to total asset ratio of 97% or higher. This ratio is expected togenerally continue at these levels, although it may be affected by economicfactors beyond the Bank’s control.

 

**Liabilities****-** The Bank relies on increasing itsdeposit base to fund loan and other asset growth.  The Williamson County marketplace is highlycompetitive with 30 financial institutions and 94 banking facilities (as of June 30,2009). The Bank competes for local deposits by offering attractive productswith premium rates.  The Bank expects tohave a higher average cost of funds for local deposits than most competitorbanks because of its single location and lack of a branch network.  Management’s strategy is to offset the highercost of funding with a lower level of operating expense and firm pricingdiscipline for loan products.  The Bankhas promoted electronic banking services by providing them without charge andby offering in-bank customer training.

 

The Bank also obtainsfunding in the wholesale deposit market which is accessed by means of anelectronic bulletin board.  Thiselectronic market links banks and sellers of deposits to deposit purchaserssuch as credit unions, school districts, labor unions, and other organizationswith excess liquidity.  Deposits may beraised in $99 or $100 increments in maturities from two weeks to five years.  Management believes the utilization of theelectronic bulletin board is highly efficient and the average rate has beengenerally less than rates paid in the local market. Participants in theelectronic market pay a modest annual licensing fee and there are notransaction charges.  Management hasestablished policies and procedures to govern the acquisition of fundingthrough the wholesale market.  Wholesaledeposits are categorized as “Purchased Time Deposits” on the detail of depositsshown in this Item 7. Management may also, from time to time, engage theservices of a deposit broker to raise a block of funding at a specifiedmaturity date.

 

Total average deposits in2009 were $1,157,759, an increase of $208,754, or 22.00% over the total averagedeposits of $949,005 in 2008. Average non-interest bearing deposits increasedby $1,028, or 4.40%, from $23,344 in 2008 to $24,372 in 2009. Average savingsdeposits increased by $85,979 from $6,531 in 2008 to $92,510 in 2009. Averagepurchased deposits increased by $79,888, or 17.56%, from $455,054 in 2008 to$534,942 in 2009. The average rate paid on purchased deposits in 2009 was 3.29%compared to 4.50% in 2008. Purchased time deposit funding represented 42.36% oftotal funding in 2009 compared to 47.95% in 2008.

 

Total average deposits in2008 were $949,005, an increase of $263,942, or 38.53% over the total averagedeposits of $685,063 in 2007. Average non-interest bearing deposits increasedby $2,097, or 9.87%, from $21,247 in 2007 to $23,344 in 2008. Average savingsdeposits decreased by $724 from $7,255 in 2007 to $6,531 in 2008. Averagepurchased deposits increased by $200,443, or 78.73%, from $254,611 in 2007 to$455,054 in 2008. The average rate paid on purchased deposits in 2008 was 4.50%compared to 5.28% in 2007. Purchased time deposit funding represented 47.95% oftotal funding in 2008 compared to 37.27% in 2007.

 

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**Informationregarding the Corporation’s return on assets, return on equity and equity toasset ratio is located in Item 6 of this Annual Report on Form 10-K.**

 

**LoanPolicy** -Lending activity is conducted under guidelines defined in the Bank’s LoanPolicy.  The Loan Policy establishesguidelines for analyzing financial transactions including an evaluation of aborrower’s credit history, repayment capacity, collateral value, and cash flow.  Loans may be at a fixed or variable rate,with the maximum maturity of fixed rate loans set at five years.

 

All lendingactivities of the Bank are under the direct supervision and control of theDirect Loan Committee, the Indirect Loan Committee, the President’s Committeeand, in some cases, the full Board of Directors of the Bank. The Direct andIndirect Loan Committees are chaired by senior lenders John Burton and DougRogers, respectively. The Chief Credit Officer and the Chief Operating Officerserve as permanent members of both committees. These two committees approve anynew loans in an amount up to 15% of Tier I Capital. Any new loan in an amountabove 15% of Tier I Capital is sent for approval to the President’s LoanCommittee, which is chaired by Chairman/CEO/President Mike Sapp andconsists of the members of the Direct or Indirect Loan Committees, the ChiefAdministrative Officer and the Senior Vice President of Risk Management. The Bank Board of Directors must ratifyall proposed extensions of credit made by management that are in excess of$5,000. In addition, the full Board must approve all extensions of credit tothe Bank’s directors, executive officers and their related parties.

 

Management of the Bankperiodically reviews the loan portfolio, particularly non-accrual andrenegotiated loans.  The review mayresult in a determination that a loan should be placed on a non-accrual statusfor income recognition.  In addition, tothe extent that management identifies potential losses in the loan portfolio,it reduces the book value of such loans, through charge-offs, to theirestimated collectible value.  The Bank’spolicy is that accrual of interest is discontinued on a loan when management ofthe Bank determines that collection of interest is doubtful based onconsideration of economic and business factors affecting collection efforts.

 

When a loan is classifiedas non-accrual, any unpaid interest is reversed against current income.  Interest is included in income thereafteronly to the extent received in cash.  Theloan remains in a non-accrual classification until such time as the loan isbrought current, when it may be returned to accrual classification.  When principal or interest on a non-accrualloan is brought current, if in management’s opinion future payments arequestionable, the loan would remain classified as non-accrual.  After a non-accrual or renegotiated loan ischarged off, any subsequent payments of either interest or principal areapplied first to any remaining balance outstanding, then to recoveries andlastly to income.

 

The Bank’s underwritingguidelines are applied to three major categories of loans, commercial andindustrial, consumer, and real estate which includes residential, constructionand development and certain other real estate loans.  The Bank requires its loan officers and loancommittee to consider the borrower’s character, the borrower’s financialcondition, the economic environment in which the loan will be repaid, as wellas, for commercial loans, the borrower’s management capability and the borrower’sindustry. Before approving a loan, the loan officer or committee must determinethat the borrower is creditworthy, is a capable manager, understands thespecific purpose of the loan, understands the source and plan of repayment, anddetermine that the purpose, plan and source of repayment as well as collateralare acceptable, reasonable and practical given the normal framework withinwhich the borrower operates.

 

The maintenance of anadequate loan loss reserve is one of the fundamental concepts of riskmanagement for every financial institution. Management is responsible for ensuring that controls are in place tomonitor the adequacy of the loan loss reserve in accordance with generallyaccepted accounting principles (“GAAP”), the Bank’s stated policies andprocedures, and regulatory guidance.  Quantificationof the level of reserve which is prudently conservative, but not excessive,involves a high degree of judgment.

 

Management’s assessmentof the adequacy of the loan loss reserve considers a wide range of factorsincluding portfolio growth, mix, collateral and geographic diversity, and termsand structure.  Portfolio performancetrends, including past dues and charge-offs, are monitored closely.  Management’s assessment includes a continuingevaluation of current and expected market conditions and the potential impactof economic events on borrowers.  Management’sassessment program is monitored by an ongoing loan review program conducted byan independent accounting firm and periodic examinations by bank regulators.

 

Management uses a varietyof financial methods to quantify the level of the loan loss reserve.  At inception, each loan transaction isassigned a risk rating that ranges from “RR1—Excellent” to “RR4—Average.”  The risk rating is determined by an analysisof the borrower’s credit history and capacity, collateral, and cash flow.  The weighted average risk rating of theportfolio provides an indication of overall risk and identifies trends.  The portfolio is additionally segmented byloan type, collateral, and purpose.  Loantransactions that have exhibited signs of increased risk are downgraded to a “Watch,”“Critical,” or “Substandard” classification, i.e., RR5, RR6 and RR7,respectively.  These loans are closelymonitored for rehabilitation or potential loss and the loan loss reserve isadjusted accordingly.

 

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It is management’s intentto maintain a loan loss reserve that is adequate to absorb current andestimated losses which are inherent in a loan portfolio.  The historical loss ratio (net charge-offs asa percentage of average loans) was 2.17%, 0.64% and 0.45% for the years ended December 31,2009, 2008 and 2007, respectively.  Theyear-end loan loss reserve as a percentage of the end of period loans was1.70%, 1.30% and 1.30%, respectively, for the same years.  Because of the commercial emphasis of theBank’s operation, management has kept a reserve level in excess of historicalresults.

 

The provision for loanlosses for 2009 was $31,039, an increase of $21,928 over the $9,111 provisionfor 2008.  In 2009, expenses reflectedthe impact of $24,580 in net charge-offs during the year and the incrementalprovision required as a result of the $128,117 increase in loan volume.

 

Credit Risk Management and Reserve for Loan Losses

 

Credit risk and exposureto loss are inherent parts of the banking business.  Management seeks to manage and minimize theserisks through its loan and investment policies and loan review procedures.  Management establishes and continuallyreviews lending and investment criteria and approval procedures that itbelieves reflect the risk sensitive nature of the Bank.  The loan review procedures are set to monitoradherence to the established criteria and to ensure that on a continuing basissuch standards are enforced and maintained. Management’s objective in establishing lending and investment standardsis to manage the risk of loss and provide for income generation through pricingpolicies.

 

The Bank targets small-and medium-sized businesses as loan customers. Because of their size, theseborrowers may be less able to withstand competitive or economic pressures thanlarger borrowers in periods of economic weakness. If loan losses occur to alevel where the loan loss reserve is not sufficient to cover actual loanlosses, the Bank’s earnings will decrease. The Bank uses an independentaccounting firm to review its loans for quality in addition to the reviews thatmay be conducted by bank regulatory agencies as part of their usual examinationprocess.

 

Management regularlyreviews the loan portfolio and determines the amount of loans to becharged-off.  In addition, managementconsiders such factors as the Bank’s previous loan loss experience, prevailingand anticipated economic conditions, industry concentrations and the overallquality of the loan portfolio. While management uses available information torecognize losses on loans and real estate owned, future additions to theallowance may be necessary based on changes in economic conditions.  In addition, various regulatory agencies, asan integral part of their examination process, periodically review theallowances for losses on loans and real estate owned.  Such agencies may require the Bank torecognize additions to the allowances based on their judgments aboutinformation available at the time of their examinations.  In addition, any loan or portion thereofwhich is classified as a “loss” by regulatory examiners is charged-off.

 

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**FinancialTables**

 

The financial informationbelow regarding the Corporation and the Bank should be read in conjunction withthe Corporation’s financial statements included in Item 8 of this Annual Reporton Form 10-K.

 

Average Balance Sheets, Net Interest Income andChanges in Interest Income and Interest Expense

 

The following tablespresent the average yearly balances of each principal category of assets,liabilities and stockholders’ equity of the Corporation and the Bank. Thetables are presented on a taxable equivalent basis, as applicable.

 
| ** **                                       | ** ** | **12 Months Ended December 31, 2009** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                                    | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Balance**                                                    | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |                                                           |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Interest earning  assets                         |       |                                                           |       |   |   |   |   |
| Securities                                       |       |                                                           |       |   |   |   |   |
| Taxable (1)                                      |       | $                                                              | 102,827    |   | $ | 5,325 |   | 5.14 | % |
| Tax-exempt                                       |       | —                                                         |       | — |   | — |   |
| Total securities                                 |       | 102,827                                                        |       | 5,325 |   | 5.14 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Loans  (2) (3)                              |       | 1,115,993                                                      |       | 75,770 |   | 6.79 | % |
| Federal funds  sold                              |       | 5,955                                                          |       | 13 |   | 0.22 | % |
| Total interest  earning assets                   |       | 1,224,775                                                      |       | 81,108 |   | 6.62 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Non-interest  earning assets                     |       |                                                           |       |   |   |   |   |
| Cash and due  from banks                         |       | 8,452                                                          |       |   |   |   |   |
| Net fixed assets  and equipment                  |       | 2,160                                                          |       |   |   |   |   |
| Accrued interest  and other assets               |       | 71,818                                                         |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Total assets                                     |       | $                                                              | 1,307,205  |   |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                                                           |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                           |       |   |   |   |   |
| Deposits (other  than demand)                    |       | $                                                              | 1,133,387  |   | 34,213 |   | 3.02 | % |
| Federal funds  purchased                         |       | 14,467                                                         |       | 89 |   | 0.62 | % |
| Subordinated  debt                               |       | 33,198                                                         |       | 1,890 |   | 5.69 | % |
| Total interest  bearing liabilities              |       | 1,181,052                                                      |       | 36,192 |   | 3.06 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                           |       |   |   |   |   |
| Non-interest  bearing demand deposits            |       | 24,372                                                         |       |   |   |   |   |
| Other  liabilities                               |       | 6,626                                                          |       |   |   |   |   |
| Shareholders’  equity                       |       | 95,155                                                         |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                              | 1,307,205  |   |   |   |   |   |
|                                                  |            |                                                                |            |  |  |  |  |  |  |

 
| Net interest  spread |   | 3.56   | %      |
|----------------------|--------|--------|--------|
|                 |   |   |   |
| Net interest  margin |   | 3.66   | %      |

 

----

(1)                     Unrealized loss of $806 is excluded from yieldcalculation.

(2)                     Non-accrual loans are included in average loanbalances and loan fees of $5,347 are included in interest income.

(3)                     Loans are presented net of allowance for loan loss.

 

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| ** **                                       | ** ** | **12 Months Ended December 31, 2008** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                                    | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Balance**                                                    | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |                                                           |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Interest earning  assets                         |       |                                                           |       |   |   |   |   |
| Securities                                       |       |                                                           |       |   |   |   |   |
| Taxable (1)                                      |       | $                                                              | 84,005     |   | $ | 4,717 |   | 5.59 | % |
| Tax-exempt                                       |       | —                                                         |       | — |   | — |   |
| Total securities                                 |       | 84,005                                                         |       | 4,717 |   | 5.59 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Loans  (2) (3)                              |       | 928,508                                                        |       | 71,101 |   | 7.66 | % |
| Federal funds  sold                              |       | 7,374                                                          |       | 160 |   | 2.17 | % |
| Total interest  earning assets                   |       | 1,019,887                                                      |       | 75,978 |   | 7.45 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Non-interest  earning assets                     |       |                                                           |       |   |   |   |   |
| Cash and due  from banks                         |       | 3,732                                                          |       |   |   |   |   |
| Net fixed assets  and equipment                  |       | 1,918                                                          |       |   |   |   |   |
| Accrued interest  and other assets               |       | 30,322                                                         |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Total assets                                     |       | $                                                              | 1,055,859  |   |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                                                           |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                           |       |   |   |   |   |
| Deposits (other  than demand)                    |       | $                                                              | 925,661    |   | 39,271 |   | 4.24 | % |
| Federal funds  purchased                         |       | 10,380                                                         |       | 269 |   | 2.59 | % |
| Subordinated  debt                               |       | 25,268                                                         |       | 1,487 |   | 5.88 | % |
| Total interest  bearing liabilities              |       | 961,309                                                        |       | 41,027 |   | 4.27 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                           |       |   |   |   |   |
| Non-interest  bearing demand deposits            |       | 23,344                                                         |       |   |   |   |   |
| Other  liabilities                               |       | 2,825                                                          |       |   |   |   |   |
| Shareholders’  equity                       |       | 68,381                                                         |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                              | 1,055,859  |   |   |   |   |   |
|                                                  |            |                                                                |            |  |  |  |  |  |  |

 
| Net interest  spread |   | 3.18   | %      |
|----------------------|--------|--------|--------|
|                 |   |   |   |
| Net interest  margin |   | 3.43   | %      |

 

----

(1)                     Unrealized loss of $318 is excluded from yieldcalculation.

(2)                     Non-accrual loans are included in average loanbalances and loan fees of $5,730 are included in interest income.

(3)                     Loans are presented net of allowance for loan loss.

 

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| ** **                                       | ** ** | **12 Months Ended December 31, 2007** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                                    | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Balance**                                                    | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |                                                           |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Interest  earning assets                         |       |                                                           |       |   |   |   |   |
| Securities                                       |       |                                                           |       |   |   |   |   |
| Taxable  (1)                                     |       | $                                                              | 63,838     |   | $ | 3,492 |   | 5.43 | % |
| Tax-exempt                                       |       | —                                                         |       | — |   | — |   |
| Total  securities                                |       | 63,838                                                         |       | 3,492 |   | 5.43 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Loans  (2) (3)                              |       | 656,210                                                        |       | 58,114 |   | 8.86 | % |
| Federal  funds sold                              |       | 11,701                                                         |       | 600 |   | 5.13 | % |
| Total  interest earning assets                   |       | 731,749                                                        |       | 62,206 |   | 8.50 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Non-interest  earning assets                     |       |                                                           |       |   |   |   |   |
| Cash  and due from banks                         |       | 5,057                                                          |       |   |   |   |   |
| Net  fixed assets and equipment                  |       | 1,539                                                          |       |   |   |   |   |
| Accrued  interest and other assets               |       | 16,909                                                         |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Total  assets                                    |       | $                                                              | 755,254    |   |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**    |       |                                                           |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Interest  bearing liabilities                    |       |                                                           |       |   |   |   |   |
| Deposits  (other than demand)                    |       | $                                                              | 663,816    |   | 34,245 |   | 5.16 | % |
| Federal  funds purchased                         |       | 889                                                            |       | 57 |   | 6.41 | % |
| Subordinated  debt                               |       | 9,355                                                          |       | 632 |   | 6.76 | % |
| Total  interest bearing liabilities              |       | 674,060                                                        |       | 34,934 |   | 5.18 | % |
|                                             |       |                                                           |       |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                           |       |   |   |   |   |
| Non-interest  bearing demand deposits            |       | 21,247                                                         |       |   |   |   |   |
| Other  liabilities                               |       | 3,090                                                          |       |   |   |   |   |
| Shareholders’  equity                       |       | 56,857                                                         |       |   |   |   |   |
|                                             |       |                                                           |       |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                              | 755,254    |   |   |   |   |   |
|                                                  |            |                                                                |            |  |  |  |  |  |  |

 
| Net  interest spread | 3.32   | %      |
|----------------------|--------|--------|
|                 |   |   |
| Net  interest margin | 3.72   | %      |

 

----

(1)  Unrealized loss of $463 is excluded from yield calculation.

(2)  Non-accrual loans are included in average loan balances and loan fees of $3,890are included in interest income.

(3)  Loans are presented net of allowance for loan loss.

 

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| ** **                           | ** ** | **December 31, 2009 change from**                       | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **December 31, 2008 as**** ****a result of:** | ** ** |
| **(Dollars in thousands)** | ** ** | **Volume**                                                                  | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Interest  income                     |       |                                                                        |       |   |   |   |   |
| Loans                                |       | $                                                                           | 13,314     |   | $ | (8,645 | ) | $ | 4,669 |   |
| Securities  — taxable           |       | 990                                                                         |       | (382 | ) | 608 |   |
| Federal  funds sold                  |       | (26                                                                         | )          | (121 | ) | (147 | ) |
| Total  interest income               |       | 14,278                                                                      |       | (9,148 | ) | 5,130 |   |
|                                 |       |                                                                        |       |   |   |   |   |
| Interest  expense                    |       |                                                                        |       |   |   |   |   |
| Deposits  (other than demand)        |       | 7,700                                                                       |       | (12,758 | ) | (5,058 | ) |
| Federal  funds purchased             |       | 78                                                                          |       | (258 | ) | (180 | ) |
| Subordinated  debt                   |       | 453                                                                         |       | (50 | ) | 403 |   |
| Total  interest expense              |       | 8,231                                                                       |       | (13,066 | ) | (4,835 | ) |
|                                 |       |                                                                        |       |   |   |   |   |
| Net  interest income                 |       | $                                                                           | 6,047      |   | $ | 3,918 |   | $ | 9,965 |   |
| ** **                           | ** ** | ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **December 31, 2008 change from**                       | ** ** |
| ** **                           | ** ** | **December 31, 2007 as a result of:**         | ** ** |
| **(Dollars in thousands)** | ** ** | **Volume**                                                                  | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Interest  income                     |       |                                                                        |       |   |   |   |   |
| Loans                                |       | $                                                                           | 21,654     |   | $ | (8,667 | ) | $ | 12,987 |   |
| Securities  — taxable           |       | 1,125                                                                       |       | 100 |   | 1,225 |   |
| Federal  funds sold                  |       | (172                                                                        | )          | (268 | ) | (440 | ) |
| Total  interest income               |       | 22,607                                                                      |       | (8,835 | ) | 13,772 |   |
|                                 |       |                                                                        |       |   |   |   |   |
| Interest  expense                    |       |                                                                        |       |   |   |   |   |
| Deposits  (other than demand)        |       | 11,854                                                                      |       | (6,828 | ) | 5,026 |   |
| Federal  funds purchased             |       | 265                                                                         |       | (53 | ) | 212 |   |
| Subordinated  debt                   |       | 946                                                                         |       | (91 | ) | 855 |   |
|                                 |       |                                                                        |       |   |   |   |   |
| Total  interest expense              |       | 13,065                                                                      |       | (6,972 | ) | 6,093 |   |
|                                 |       |                                                                        |       |   |   |   |   |
| Net  interest income                 |       | $                                                                           | 9,542      |   | $ | (1,863 | ) | $ | 7,679 |   |

 

Liability and AssetManagement

 

Thematching of assets and liabilities may be analyzed by examining the extent towhich such assets and liabilities are “interest rate sensitive” and bymonitoring an institution’s interest rate sensitivity “gap.”  An asset orliability is said to be interest rate sensitive within a specific time periodif it will mature or reprice within that time period.  The interest ratesensitivity gap is defined as the difference between the dollar amount of ratesensitive assets re-pricing during a period and the volume of rate sensitiveliabilities re-pricing during the same period. A gap is considered positivewhen the amount of interest rate sensitive assets exceeds the amount ofinterest rate sensitive liabilities.  A gap is considered negative whenthe amount of interest rate sensitive liabilities exceeds the amount ofinterest rate sensitive assets.  During a period of rising interest rates,a negative gap would tend to adversely affect net interest income while apositive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to resultin an increase in net interest income while a positive gap would tend toadversely affect net interest income.

 

TheBank’s Asset Liability and Investment Committee, which consists of theCorporation’s non-independent board members and executive officers and certainother bank officers, Arthur F. Helf, Michael R. Sapp, H. Lamar Cox,  Frank Perez and Martin M. Zorn, is chargedwith monitoring the liquidity and funds position of the Bank.  Thecommittee regularly reviews (a) the rate sensitivity position on a three-month,six-month and one-year time horizon; (b) loans to deposit ratios; and (c) averagematurity for certain categories of liabilities.  The Bank operates anasset/liability management model.  At December 31, 2009, the Bank hada positive cumulative re-pricing gap between four and twelve months ofapproximately $155,229 or 11.22% of total year-end earning assets. See Item 7Aof this Annual Report on Form 10-K for additional information.

 

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Deposits

 

TheBank’s primary source of funds is interest-bearing deposits. The followingtables present the average amount of and average rate paid on each of thefollowing deposit categories for 2009, 2008 and 2007:

 
| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                            | ** ** | ** **                                 | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                            | ** ** | **Average**                                | ** ** | **Rate** | ** ** | **Average** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Rate** | ** ** |
| **(Dollars in thousands)**  | ** ** | **Balance**                                | ** ** | **Paid** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Balance** | ** ** | **Paid** | ** ** |
| Types  of Deposits                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                          | 24,372     |   | — |   | $ | 23,344 |   | — |   | $ | 21,247 |   | — |   |
| Interest-bearing  demand deposits     |       | 6,693                                      |       | 0.13 | % | 6,517 |   | 0.74 | % | 6,659 |   | 3.36 | % |
| Money  market accounts                |       | 42,030                                     |       | 0.90 | % | 65,269 |   | 2.04 | % | 111,747 |   | 4.84 | % |
| Savings  accounts                     |       | 92,510                                     |       | 2.22 | % | 6,531 |   | 2.71 | % | 7,255 |   | 2.66 | % |
| IRA  accounts                         |       | 37,711                                     |       | 3.62 | % | 25,363 |   | 4.66 | % | 17,522 |   | 5.88 | % |
| Purchased  time deposits              |       | 534,942                                    |       | 3.29 | % | 455,054 |   | 4.50 | % | 254,611 |   | 5.28 | % |
| Time  deposits                        |       | 419,501                                    |       | 3.05 | % | 366,926 |   | 4.37 | % | 266,022 |   | 5.29 | % |
| Total  deposits                       |       | $                                          | 1,157,759  |   |   |   | $ | 949,004 |   |   |   | $ | 685,063 |   |   |   |

 

Thefollowing table indicates amount outstanding of time certificates of deposit of$100,000 or more and respective maturities as of December 31, 2009 (inthousands):

 
| ** **                            | ** ** | **2009**   | ** ** |
|---------------------------------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** |
| Three  months or less                 |       | $          | 127,392    |   |
|                                  |       |       |       |
| Over  three months through six months |       | 76,191     |       |
|                                  |       |       |       |
| Over  six months through 12 months    |       | 91,176     |       |
|                                  |       |       |       |
| More  than 12 months                  |       | 191,562    |       |
| Total                                 |       | $          | 486,321    |   |

 

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Investment Portfolio

 

TheBank’s investment portfolio at December 31, 2009, 2008 and 2007 consistedof the following (dollars in thousands):

 
| ** **                     | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                     | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Market**    | ** ** |
| ** **                     | ** ** | **Cost**      | ** ** | **Gain**       | ** ** | **Loss**       | ** ** | **Value**     | ** ** |
| As  of December 31, 2009  |       |          |       |           |       |           |       |          |       |
| Securities  available for sale |       |          |       |           |       |           |       |          |       |
| U.S.  Government agencies      |       | $             | 84,924     |           | $          | 57             |       | $             | (2,138     | ) | $ | 82,843 |   |
| Mortgage-backed  securities    |       | —        |       | —         |       | —         |       | —        |       |
| Corporate  debt securities     |       | 182           |       | 6              |       | —         |       | 188           |       |
| Other                          |       | 10,637        |       | —         |       | —         |       | 10,637        |       |
| Total                          |       | $             | 95,743     |           | $          | 63             |       | $             | (2,138     | ) | $ | 93,668 |   |
|                           |       |          |       |           |       |           |       |          |       |
| As  of December 31, 2008  |       |          |       |           |       |           |       |          |       |
| Securities  available for sale |       |          |       |           |       |           |       |          |       |
| U.S.  Government agencies      |       | $             | 94,049     |           | $          | 1,197          |       | $             | (51        | ) | $ | 95,195 |   |
| Mortgage-backed  securities    |       | —        |       | —         |       | —         |       | —        |       |
| Corporate  debt securities     |       | 730           |       | 2              |       | (82            | )          | 650           |       |
| Other                          |       | 5,217         |       | 228            |       | —         |       | 5,445         |       |
| Total                          |       | $             | 99,996     |           | $          | 1,427          |       | $             | (133       | ) | $ | 101,290 |   |
|                           |       |          |       |           |       |           |       |          |       |
| As  of December 31, 2007  |       |          |       |           |       |           |       |          |       |
| Securities  available for sale |       |          |       |           |       |           |       |          |       |
| U.S.  Government agencies      |       | $             | 63,622     |           | $          | 504            |       | $             | (36        | ) | $ | 64,090 |   |
| Mortgage-backed  securities    |       | 5,410         |       | —         |       | (104           | )          | 5,306         |       |
| Corporate  debt securities     |       | 3,841         |       | 1              |       | (66            | )          | 3,776         |       |
| Other                          |       | 380           |       | 201            |       | —         |       | 581           |       |
| Total                          |       | $             | 73,253     |           | $          | 706            |       | $             | (206       | ) | $ | 73,753 |   |

 

Thefollowing table presents the estimated maturities and weighted average yieldsof investment securities of the Bank at December 31, 2009:

 
| ** **                                     | ** ** | ** **    | ** ** | **Estimated** | ** ** | **Weighted** | ** ** |
|------------------------------------------------|------------|---------------|------------|---------------|------------|--------------|------------|
| ** **                                     | ** ** | **Amortized** | ** ** | **Market**    | ** ** | **Average**  | ** ** |
| ** **                                     | ** ** | **Cost**      | ** ** | **Value**     | ** ** | **Yield**    | ** ** |
| Obligations  of U.S. Government agencies       |       |          |       |          |       |         |       |
| Due  in one year or less                       |       | $             | —     |          | $          | —       |       | — | % |
| Due  after one through five years              |       | —        |       | —        |       | —       | %          |
| Due  after five through ten years              |       | 22,018        |       | 21,706        |       | 4.22         | %          |
| Due  after ten years                           |       | 62,906        |       | 61,137        |       | 4.46         | %          |
| Total  obligations of U.S. Government agencies |       | 84,924        |       | 82,843        |       |         |       |
|                                           |       |          |       |          |       |         |       |
| Mortgage-backed  securities                    |       | —        |       | —        |       | —       | %          |
|                                           |       |          |       |          |       |         |       |
| Corporate  debt securities                     |       |          |       |          |       |         |       |
| Due  in one year or less                       |       | —        |       | —        |       | —       |       |
| Due  after one through five years              |       | 182           |       | 188           |       | 4.01         | %          |
| Due  after five through ten years              |       | —        |       | —        |       | —       | %          |
| Due  after ten years                           |       | —        |       | —        |       | —       |       |
| Total  corporate debt securities               |       | 182           |       | 188           |       |         |       |
|                                           |       |          |       |          |       |         |       |
| Other  securities                              |       | 10,637        |       | 10,637        |       | 8.08         | %          |
| Total  securities available for sale           |       | $             | 95,743     |          | $          | 93,668       |       |   |   |

 

The Bank owned notax-exempt securities during the period ended December 31, 2009.

 

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Investment Policy

 

Theobjective of the Bank’s investment policy is to invest funds not otherwiseneeded to meet the loan demand of its market area to earn the maximum returnfor the Bank, yet still maintain sufficient liquidity to meet fluctuations inthe Bank’s loan demand and deposit structure.  In doing so, the Bankbalances the market and credit risks against the potential investment return,makes investments compatible with the pledge requirements of the Bank’sdeposits of public funds, maintains compliance with regulatory investmentrequirements and assists the various public entities with their financingneeds.  The asset liability and investment committee has full authorityover the investment portfolio and makes decisions on purchases and sales ofsecurities.  The entire portfolio, along with all investment transactionsoccurring since the previous Board of Director’s meeting, is reviewed by theBoard at each monthly meeting.  The investment policy allows portfolioholdings to include short-term securities purchased to provide the Bank’sneeded liquidity and longer term securities purchased to generate level incomefor the Bank over periods of interest rate fluctuations.

 

Loan Portfolio

 

TheBank had net loans of $1,151,388 at December 31, 2009.  As the loanportfolio is concentrated in Davidson County and Williamson County, there is arisk that the borrowers’ ability to repay the loans could be affected bychanges in local economic conditions. The following schedule details the loansof the Bank at December 31, 2009, 2008, 2007, 2006 and 2005:

 
| **(Dollars  in thousands)**             | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|
| Real  estate                            |       |      |       |      |       |      |       |     |       |     |       |
| Construction                            |       | $         | 142,109    |      | $          | 181,638   |       | $        | 112,405    |     | $          | 74,482 |   | $ | 38,279 |   |
| 1 to  4 family residential              |       | 42,425    |       | 37,822    |       | 33,560    |       | 22,873   |       | 18,358   |       |
| Other                                   |       | 259,220   |       | 171,150   |       | 143,973   |       | 83,985   |       | 50,371   |       |
| Commercial,  financial and agricultural |       | 649,475   |       | 589,518   |       | 477,666   |       | 353,996  |       | 233,948  |       |
| Consumer                                |       | 3,476     |       | 3,572     |       | 3,966     |       | 3,246    |       | 3,149    |       |
| Other                                   |       | 74,596    |       | 53,025    |       | 22,752    |       | 6,936    |       | 4,481    |       |
|                                    |       |      |       |      |       |      |       |     |       |     |       |
| Total  loans                            |       | 1,171,301 |       | 1,036,725 |       | 794,322   |       | 545,518  |       | 348,586  |       |
| Less:  allowance for loan losses        |       | (19,913   | )          | (13,454   | )          | (10,321   | )          | (6,968   | )          | (4,399   | )          |
|                                    |       |      |       |      |       |      |       |     |       |     |       |
| Net  loans                              |       | $         | 1,151,388  |      | $          | 1,023,271 |       | $        | 784,001    |     | $          | 538,550 |   | $ | 344,187 |   |

 

The following tablereflects the composition of loan portfolio by type:

 
| ** **                              | ** ** | **As  of December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **(Dollars  in thousands)**             | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Real  estate:                           |       |                         |       |   |   |   |   |   |   |   |   |
| Construction                            |       | 12.13                        | %          | 17.52 | % | 14.15 | % | 13.65 | % | 10.98 | % |
| 1 to  4 family residential              |       | 3.62                         | %          | 3.65 | % | 4.22 | % | 4.19 | % | 5.27 | % |
| Other                                   |       | 22.13                        | %          | 16.51 | % | 18.13 | % | 15.40 | % | 14.45 | % |
| Commercial,  financial and agricultural |       | 55.45                        | %          | 56.86 | % | 60.14 | % | 64.89 | % | 67.11 | % |
| Consumer                                |       | 0.30                         | %          | 0.34 | % | 0.50 | % | 0.60 | % | 0.90 | % |
| Other                                   |       | 6.37                         | %          | 5.12 | % | 2.86 | % | 1.27 | % | 1.29 | % |
| Total                                   |       | 100                          | %          | 100 | % | 100 | % | 100 | % | 100 | % |

 

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The following tablereflects the composition of commercial loan portfolio by sourcing program type:

 
| ** **                               | ** ** | **As  of December 31,** | ** ** |
|------------------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(Dollars  in thousands)**              | ** ** | **Amount**                   | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial,  financial and agricultural: |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Direct                                   |       | $                            | 351,933    |   | 54.19 | % | $ | 267,542 |   | 45.38 | % | $ | 193,943 |   | 40.60 | % |
| Indirect                                 |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Large                                    |       | 130,573                      |       | 20.10 | % | 148,538 |   | 25.20 | % | 130,583 |   | 27.34 | % |
| Small                                    |       | 166,969                      |       | 25.71 | % | 173,438 |   | 29.42 | % | 153,140 |   | 32.06 | % |
| Total                                    |       | $                            | 649,475    |   | 100.00 | % | $ | 589,518 |   | 100.00 | % | $ | 477,666 |   | 100.00 | % |

 

The following tabledetails maturities and sensitivity to interest rates changes for loans of theBank at December 31, 2009:

 
| ** **                              | ** ** | **Due  in 1**               | ** ** | **Due  in 1**   | ** ** | **Due  after** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| **Type of  Loan (1)**                   | ** ** | **year  or less**           | ** ** | **to  5 years** | ** ** | **5  Years**   | ** ** | **Total**  | ** ** |
| ** **                              | ** ** | **(Dollars  in thousands)** | ** ** |
| Real  estate:                           |       |                        |       |            |       |           |       |       |       |
| Construction                            |       | $                           | 75,490     |            | $          | 59,308         |       | $          | 7,311      |   | $ | 142,109 |   |
| 1 to  4 family residential              |       | 18,835                      |       | 19,776          |       | 3,814          |       | 42,425     |       |
| Other                                   |       | 64,731                      |       | 172,883         |       | 21,606         |       | 259,220    |       |
| Commercial,  financial and agricultural |       | 150,692                     |       | 458,325         |       | 40,458         |       | 649,475    |       |
| Consumer                                |       | 1,410                       |       | 2,066           |       | —         |       | 3,476      |       |
| Other                                   |       | —                      |       | —          |       | 74,596         |       | 74,596     |       |
| Total                                   |       | $                           | 311,158    |            | $          | 712,358        |       | $          | 147,785    |   | $ | 1,171,301 |   |
|                                    |       |                        |       |            |       |           |       |       |       |
| Less:  allowance for loan loss          |       |                        |       |            |       |           |       | (19,913    | )          |
|                                    |       |                        |       |            |       |           |       |       |       |
| Net  loans                              |       |                        |       |            |       |           |       | $          | 1,151,388  |   |
|                                    |       |                        |       |            |       |           |       |       |       |
| Interest  rate sensitivity:             |       |                        |       |            |       |           |       |       |       |
| Fixed  interest rates                   |       | 128,673                     |       | 628,193         |       | 36,498         |       | 793,364    |       |
| Floating  or adjustable rates           |       | 182,485                     |       | 84,165          |       | 111,287        |       | 377,937    |       |
|                                    |       |                        |       |            |       |           |       |       |       |
| Total                                   |       | $                           | 311,158    |            | $          | 712,358        |       | $          | 147,785    |   | $ | 1,171,301 |   |

 

----

(1) Includesnon-accrual loans.

 

**CapitalResources / Liquidity**

 

**Liquidity**

 

Ofprimary importance to depositors, creditors and regulators is the ability tohave readily available funds sufficient to repay fully maturing liabilities. The Bank’s liquidity, represented by cash and cash due from banks, is aresult of its operating, investing and financing activities.  In order toensure funds are available at all times, the Bank devotes resources to projectingon a monthly basis the amount of funds that will be required and maintainsrelationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short-term borrowings orthe disposition of short-term assets which are generally matched to correspondto the maturity of liabilities.

 

Althoughthe Bank has no formal liquidity policy, in the opinion of management, itsliquidity levels are considered adequate.  The Bank is subject to generalFDIC guidelines which do not require a minimum level of liquidity. Management believes its liquidity ratios meet or exceed these guidelines. Management does not know of any trends or demands that are reasonablylikely to result in liquidity increasing or decreasing in any material manner.

 

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**Impactof Inflation and Changing Prices**

 

Thefinancial statements and related financial data presented herein have beenprepared in accordance with GAAP which require the measurement of financialposition and operating results in terms of historical dollars withoutconsidering the changes in the relative purchasing power of money over time anda result of inflation.  The impact of inflation on operations of the Bankis reflected in increased operating costs.  Unlike most industrialcompanies, virtually all of the assets and liabilities of the Bank are monetaryin nature.  As a result, interest rates have a more significant impact onthe Bank’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in thesame magnitude as the price of goods and services.

 

**CapitalAdequacy**

 

Capitaladequacy refers to the level of capital required to sustain asset growth overtime and to absorb losses.  To continue to grow, the Bank must increasecapital by generating earnings, issuing equity securities, borrowing funds or acombination of those activities. If growth exceeds expectations, the Bank mayneed to raise capital in the capital markets. The Bank’s ability to raisecapital will depend in part on conditions in the capital markets which areoutside the Bank’s control. If the Bank cannot raise capital on termsacceptable to it, the Bank’s ability to continue growing would be materiallyimpaired.

 

Theobjective of the Bank’s management is to maintain a level of capitalizationthat is sufficient to take advantage of profitable growth opportunities whilemeeting regulatory requirements including remaining well capitalized. This isachieved by improving profitability through effectively allocating resources tomore profitable businesses, improving asset quality, strengthening servicequality and streamlining costs.  The primary measures used by managementto monitor the results of these efforts are the ratios of average equity toaverage assets, average tangible equity to average tangible assets and averageequity to net loans.

 

TheFederal Reserve Board has adopted capital guidelines governing the activitiesof bank holding companies.  These guidelines require the maintenance of anamount of capital based on risk-adjusted assets so that categories of assetswith potentially higher credit risk will require more capital backing thanassets with lower risk.  In addition, banks and bank holding companies arerequired to maintain capital to support, on a risk-adjusted basis, certainoff-balance sheet activities such as loan commitments.

 

TheCorporation and the Bank are required to maintain certain capital ratios. Theseinclude Tier I, Total Capital and Leverage Ratios. Certain ratios for theCorporation and the Bank for 2009 and 2008 are set forth below:

 
| ** **              | ** ** | **Capital  Level Meeting**        | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------|------------|-----------------------------------|------------|-----------------|------------|------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | **Regulatory  Definition of**     | ** ** | **Corporation** | ** ** | **Bank**   | ** ** |
| ** **              | ** ** | **“Well  Capitalized”** | ** ** | **2009**        | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2008**   | ** ** |
| ** **              | ** ** | **(%)**                           | ** ** | **(%)**         | ** ** | **(%)**    | ** ** | **(%)**    | ** ** | **(%)**    | ** ** |
| Tier  I Capital Ratio   |       | 6.00                              |       | 9.57            |       | 11.20      |       | 9.37       |       | 9.79       |       |
|                    |       |                              |       |            |       |       |       |       |       |       |       |
| Total  Risk-Based Ratio |       | 10.00                             |       | 10.83           |       | 12.42      |       | 10.63      |       | 11.01      |       |
|                    |       |                              |       |            |       |       |       |       |       |       |       |
| Leverage  Ratio         |       | 5.00                              |       | 8.93            |       | 10.62      |       | 8.74       |       | 9.26       |       |

 

Basedsolely on analysis of federal banking regulatory categories, on December 31,2009 the Corporation and the Bank both fell within the “well capitalized”categories under the regulations.

 

As aresult of a recently completed routine bank examination, the Bank’s managementexpects the examiners to recommend an informal corrective action for the Bank.On the basis of earlier discussions with these examiners, the board of the Bankvoluntarily determined in October 2009 to adopt certain measuresproactively to reduce risk and strengthen the capital position of the Bank.These measures addressed capital adequacy and preservation, asset growth andfunding sources. Based on these discussions and the current economic environment,it is management’s intent to take steps to increase the Bank’s capital ratiosand reduce credit and funding risk. Management is in the process of finalizingthe appropriate levels for these and other measures with the FDIC and theTennessee Department of Financial Institutions. The board of directors andmanagement of the Company and the Bank are committed to addressing andresolving any issues that might be raised in an informal corrective action, ifand when issued.

 

**Off-BalanceSheet Arrangements**

 

The Bank is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financialinstruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk inexcess of the amount recognized in the balance sheet.  The contract ornotional amounts of those instruments reflect the extent of involvement theBank has in those particular financial instruments.

 

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TheBank’s exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument is represented by the contractual or notionalamount of those instruments.  The Bank uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance sheetinstruments.

 

Financialinstruments for which contract amounts represented credit risk as of December 31:

 
| ** **                                          | ** ** | **2009**                    | ** ** | **2008**                       | ** ** | **2007**                    | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| **(Dollars  in thousands)**                         | ** ** | **Fixed******** Rate** | ** ** | **Variable******** Rate** | ** ** | **Fixed******** Rate** | ** ** | **Variable******** Rate** | ** ** | **Fixed******** Rate** | ** ** | **Variable******** Rate** | ** ** |
|                                                |       |                        |       |                           |       |                        |       |   |   |   |   |   |   |
| Commitments  to extend credit                       |       | $                           | 23,457     |                           | $          | 71,800                      |       | $ | 39,529 |   | $ | 137,950 |   | $ | 18,380 |   | $ | 107,663 |   |
| Standby  letters of credit and financial guarantees |       | —                      |       | 9,106                          |       |                        |       | 16,239 |   | — |   | 11,063 |   |
|                                                     |            |                             |            |                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Commitmentsto make loans are generally made for periods of one year or less.  Thefixed rate loan commitments have interest rates ranging from 3.25% to 11% andmaturities ranging from two months to five years.

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generallyhave fixed expiration dates or other termination clauses and may requirepayment of a fee.  Since many of the commitments are expected to expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements.  The Bank evaluates each customer’screditworthiness on a case-by-case basis.  The amount of collateralobtained if deemed necessary by the Bank upon extension of credit is based onmanagement’s credit evaluation. Collateral held varies but may include accountsreceivable, inventory, property, plant and equipment, and income-producingcommercial properties.

 

Standbyletters of credit are conditional commitments issued by the Bank to guaranteethe performance of a customer to a third party.  Those guarantees areprimarily issued to support public and private borrowing arrangements,including commercial paper, bond financing and similar transactions.  Allletters of credit are due within one year or less of the original commitmentdate.  The credit risk involved in issuing letters of credit isessentially the same as that involved in extending loan facilities tocustomers.

 

**ContractualObligations**

 

At December 31,2009, the Bank had certain contractual obligations as shown below.

 
| ** **                          | ** ** | **Payments  due by Period** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| **Contractual  Obligations (1)**    | ** ** | **Total**                   | ** ** | **Less  Than******** 1 Year** | ** ** | **1-3******** Years** | ** ** | **3-5******** Years** | ** ** | **More  than 5******** Years** | ** ** |
| ** **                          | ** ** | **(Dollars  in thousands)** | ** ** |
| Deposits  without a stated maturity |       | $                           | 314,953    |   | $ | 314,953 |   | $ | — |   | $ | — |   | $ | — |   |
| Certificates  of deposit            |       | 927,586                     |       | 521,506 |   | 369,492 |   | 36,588 |   | — |   |
| Subordinated  long term debt        |       | 23,198                      |       | — |   | — |   | — |   | 23,198 |   |
| Short-term  debt                    |       | 14,000                      |       | 14,000 |   | — |   | — |   | — |   |
| Operating  lease obligations        |       | 15,502                      |       | 1,351 |   | 5,812 |   | 6,193 |   | 2,146 |   |
| Purchase  obligations               |       | —                      |       | — |   | — |   | — |   | — |   |
| Other  long term liabilities        |       | —                      |       | — |   | — |   | — |   | — |   |
| Total                               |       | $                           | 1,295,239  |   | $ | 851,810 |   | $ | 375,304 |   | $ | 42,781 |   | $ | 25,344 |   |

 

----

(1) Excludes interest.

 

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**RecentAccounting Pronouncements**

 

AccountingStandards Codification: Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) 105 (“FASB ASC 105”), “The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted Accounting Principles,a Replacement of FASB Statement No. 162,” replaces SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” and establishes theFASB Accounting Standards Codification (the “Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynon-governmental entities in the preparation of financial statements inconformity with generally accepted accounting principles. Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative guidance for SEC registrants. All guidancecontained in the Codification carries an equal level of authority. Allnon-grandfathered, non-SEC accounting literature not included in theCodification is superseded and deemed non-authoritative. FASB ASC 105 iseffective for the Corporation’s financial statements for periods ending after September 15,2009 and did not have a significant impact on the Corporation’s financialstatements.

 

Additionalaccounting pronouncements are located starting on page F-12, within Note 1to the Corporation’s Consolidated Financial Statements included in Item 8 ofthis Annual Report on Form 10-K.

 

**ITEM 7A.               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Quantitativeand Qualitative Analysis of Market Risk**

 

Likeall financial institutions, the Corporation is subject to market risk fromchanges in interest rates.  Interest rate risk is inherent in the balancesheet because of the mismatch between the maturities of rate sensitive assetsand rate sensitive liabilities.  If rates are rising, and the level ofrate sensitive liabilities exceed the level of rate sensitive assets, the netinterest margin will be negatively impacted.  Conversely, if rates arefalling, and the level of rate sensitive liabilities is greater than the levelof rate sensitive assets, the impact on the net interest margin will befavorable.  Managing interest rate risk is further complicated by the factthat all rates do not change at the same pace; in other words, short-term ratesmay be rising while longer term rates remain stable.  In addition,different types of rate sensitive assets and rate sensitive liabilities reactdifferently to changes in rates.

 

Tomanage interest rate risk, the Corporation must take a position on the expectedfuture trend of interest rates.  Rates may rise, fall or remain thesame.  The Asset-Liability Committee of the Bank develops its view offuture rate trends by monitoring economic indicators, examining the views ofeconomists and other experts, and understanding the current status of theCorporation’s balance sheet.   The Corporation’s annual budgetreflects the anticipated rate environment for the next 12 months.  TheAsset-Liability Committee conducts a quarterly analysis of the rate sensitivityposition.  The results of the analysis are reported to the Bank’s Board.

 

TheAsset-Liability Committee uses a computer model to analyze the maturities ofrate sensitive assets and liabilities.  The model measures the “gap,”which is the difference between the dollar amount of rate sensitive assetsre-pricing during a period and the volume of rate sensitive liabilitiesre-pricing during the same period. Gap is also expressed as the ratio of ratesensitive assets divided by rate sensitive liabilities.  If the ratio isgreater than one, the dollar value of assets exceeds the dollar value ofliabilities and the balance sheet is “asset sensitive.” Conversely, if thevalue of liabilities exceeds the value of assets, the ratio is less than oneand the balance sheet is “liability sensitive.”  Policy requiresmanagement to maintain the gap within a range of 0.75 to 1.25.

 

Themodel measures scheduled maturities in periods of three months, four to 12months, one to five years and over five years. The chart below illustrates theCorporation’s rate sensitive position at December 31, 2009. Managementuses the one year gap as the appropriate time period for setting strategy.

 

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**RateSensitivity Gap Analysis**

 

Maturities:

 
| **(Dollars in thousands)**                           | ** ** | **Floating** | ** ** | **1-3******** Months** | ** ** | **4-12******** Months** | ** ** | **1-5******** Years** | ** ** | **Over******** 5 years** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|--------------|------------|-----------------------------|------------|------------------------------|------------|----------------------------|------------|------------------------------------|------------|-----------|------------|
| Interest  Earnings Assets                                      |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Federal  funds sold                                            |       | $            | 15,010     |                        | $          | —                       |       | $                          | —     |                               | $          | —    |       | $ | — |   | $ | 15,010 |   |
| Interest  bearing deposits in banks                            |       | —       |       | —                      |       | —                       |       | —                     |       | —                             |       | —    |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Securities                                                     |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| U.S.  government agencies                                      |       | —       |       | 41,422                      |       | —                       |       | —                     |       | 52,058                             |       | 93,480    |       |
| Mortgage-backed  and corporate debt securities                 |       | —       |       | 25                          |       | 75                           |       | 88                         |       | —                             |       | 188       |       |
| Total  securities                                              |       | —       |       | 41,447                      |       | 75                           |       | 88                         |       | 52,058                             |       | 93,668    |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Total  loans                                                   |       | 220,440      |       | 214,152                     |       | 410,851                      |       | 279,228                    |       | 46,630                             |       | 1,171,301 |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Total  interest earning assets                                 |       | 235,450      |       | 255,599                     |       | 410,926                      |       | 279,316                    |       | 98,688                             |       | 1,279,979 |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Other  assets                                                  |       | —       |       | —                      |       | —                       |       | —                     |       | 103,453                            |       | 103,453   |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Total  assets                                                  |       | 235,450      |       | 255,599                     |       | 410,926                      |       | 279,316                    |       | 202,141                            |       | 1,383,432 |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Interest  Bearing Liabilities                                  |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Deposits                                                       |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Interest  checking                                             |       | 2,313        |       | —                      |       | —                       |       | 3,619                      |       | —                             |       | 5,932     |       |
| Money  market and savings                                      |       | 209,961      |       | —                      |       | —                       |       | 69,987                     |       | —                             |       | 279,948   |       |
| Time  deposits                                                 |       | —       |       | 183,695                     |       | 336,777                      |       | 406,079                    |       | —                             |       | 926,551   |       |
| Total  deposits                                                |       | 212,274      |       | 183,695                     |       | 336,777                      |       | 479,685                    |       | —                             |       | 1,212,431 |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Federal  funds purchased                                       |       | —       |       | —                      |       | —                       |       | —                     |       | —                             |       | —    |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Short  term borrowings                                         |       | —       |       | 4,000                       |       | 10,000                       |       | —                     |       | —                             |       | 14,000    |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Subordinated  long term debt                                   |       | —       |       | —                      |       | —                       |       | —                     |       | 23,198                             |       | 23,198    |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Total  interest bearing liabilities                            |       | 212,274      |       | 187,695                     |       | 346,777                      |       | 479,685                    |       | 23,198                             |       | 1,249,629 |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Other  liabilities                                             |       | —       |       | —                      |       | —                       |       | —                     |       | 37,511                             |       | 37,511    |       |
| Shareholders’  equity                                     |       | —       |       | —                      |       | —                       |       | —                     |       | 96,292                             |       | 96,292    |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Total  liabilities and shareholders’ equity               |       | 212,274      |       | 187,695                     |       | 346,777                      |       | 479,685                    |       | 157,001                            |       | 1,383,432 |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Rate  sensitive gap by period                                  |       | 23,176       |       | 67,904                      |       | 64,149                       |       | (200,369                   | )          | 75,490                             |       |      |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Cumulative  gap                                                |       | $            | —     |                        | $          | 91,080                       |       | $                          | 155,229    |                               | $          | (45,140   | )          | $ | 30,350 |   |   |   |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Cumulative  gap as a percent of total                          |       | —       |       | 6.58                        | %          | 11.22                        | %          | (3.26                      | )%         | 2.19                               | %          |      |       |
|                                                           |       |         |       |                        |       |                         |       |                       |       |                               |       |      |       |
| Rate  sensitive assets/rate sensitive liabilities (cumulative) |       | 1.11         |       | 1.23                        |       | 1.21                         |       | 0.96                       |       | 1.02                               |       |      |       |
|                                                                |            |              |            |                             |            |                              |            |                            |            |                                    |            |           |            |  |  |  |  |  |  |

 

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In 2009,the FOMC did not change short-term interest rates.  As of December 31,2009, the Corporation was positioned for an increasing rate environment withassets repricing more rapidly than liabilities.  At year-end 2009, theCorporation’s one-year ratio was 1.21.

 

Theinterest rate risk model that defines the gap position also performs a “rateshock” test of the balance sheet.  The rate shock procedure measures theimpact on the economic value of equity (“EVE”) which is a measure of long-terminterest rate risk. EVE is the difference between the market value of theassets and the liabilities and is the liquidation value of the bank. In thisanalysis, the model calculates the discounted cash flow or market value of eachcategory on the balance sheet. The percent change in EVE is a measure of thevolatility of risk. Regulatory guidelines specify a maximum change of 30% for a200 basis points rate change. At December 31, 2009, the percent change inEVE for a plus or minus 200 basis points was well within that range at (20.9) %and 12.8%, respectively.

 

Theone year gap of 1.21 indicates that the Bank would show an increase in netinterest income in a falling rate environment, and the EVE rate shock showsthat the EVE would rise in a falling rate environment. The EVE simulation modelis a static model that provides information only at a certain point in time.For example, in a rising rate environment, the model does not take into accountactions that management might take to change the impact of rising rates on the Bank.Given that limitation, it is still useful is assessing the impact of anunanticipated movement in interest rates.

 

Theabove analysis may not on its own be an entirely accurate indicator of how netinterest income or EVE will be affected by changes in interest rates. Incomeassociated with interest earning assets and costs associated with interestbearing liabilities may not be affected uniformly by changes in interest rates.In addition, the magnitude and duration of changes in interest rates may have asignificant impact on net interest income. Interest rates on certain types ofassets and liabilities fluctuate in advance of changes in general market rates,while interest rates on other types may lag behind changes in general marketrates. The Asset-Liability Committee develops its view of future rate trends bymonitoring economic indicators, examining the views of economists and otherexperts, and understanding the current status of the Corporation’s balancesheet, and conducts a quarterly analysis of the rate sensitivityposition.  The results of the analysis are reported to the Bank’s Board.

 

**ITEM 8.****                                                 ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

Thereport of independent accountants, consolidated financial statements andsupplementary data required by Item 8 are set forth on pages F-1 throughF-32 of this Annual Report on Form 10-K and are incorporated herein byreference.

 

**ITEM9.****                                                 ****CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A(T).        CONTROLSAND PROCEDURES**

 

a)**                               **Evaluation of Disclosure Controls andProcedures. TheCorporation maintains disclosure controls and procedures, as defined in Rule 13a-15(a) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”),that are designed to ensure that information required to be disclosed by it inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time period specified in the SEC’srules and forms and that such information is accumulated and communicatedto the Corporation’s management, including its Chief Executive Officer andChief Financial Officer. The Corporation carried out an evaluation, under thesupervision and with the participation of its management, including its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures as of the end ofthe period covered by this report.  Based on the evaluation of thesedisclosure controls and procedures, the Chief Executive Officer and ChiefFinancial Officer concluded that the Corporation’s disclosure control andprocedures were effective.

 

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Pursuantto Section 404 of the Sarbanes-Oxley Act of 2002, the Corporation hasincluded a report of management’s assessment of the design and operatingeffectiveness of its internal control over financial reporting as part of thisAnnual Report on Form 10-K. Management’s report is included with the 2009consolidated financial statements in Item 8 of this Annual Report on Form 10-Kunder the caption entitled “Management’s Report on Internal Control OverFinancial Reporting.”

 

Thisannual report does not include an attestation report of the Corporation’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by theCorporation’s registered public accounting firm pursuant to temporary rules ofthe SEC that permit the Corporation to provide only management’s report in thisannual report.

 

b)**              **Changes in Internal Controls andProcedures. Therewere no changes in the Corporation’s internal control over financial reportingduring the Corporation’s fiscal quarter ended December 31, 2009 that havematerially affected, or are reasonably likely to materially affect, itsinternal control over financial reporting.

 

**ITEM 9B.             OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10.              DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

 

**Directors**

 

Informationrelating to our directors is incorporated by reference to the informationcontained under the caption “Proposal 1: Election of Directors” included in ourproxy statement relating to our 2010 annual meeting of shareholders.

 

**ExecutiveOfficers**

 

Informationrelating to our executive officers incorporated by reference to the informationcontained under the caption “Executive Officers” included in our proxystatement relating to our 2010 annual meeting of shareholders.

 

**Compliancewith Section 16(a) of the Exchange Act**

 

Informationwith respect to compliance with Section 16(a) of the SecuritiesExchange Act of 1934, as amended, is incorporated by reference to theinformation contained under the caption “General Information — Section 16(a) BeneficialOwnership Reporting Compliance” included in our proxy statement relating to our2010 annual meeting of shareholders.

 

**Codeof Ethics**

 

Informationwith respect to our Code of Ethics is incorporated by reference to theinformation contained under the caption “Corporate Governance — Code of Ethics”included in our proxy statement relating to our 2010 annual meeting of shareholders.

 

**ShareholderNominees**

 

Informationwith respect to procedures by which shareholders may recommend nominees to theBoard of Directors is incorporated by reference to the information containedunder the caption “Corporate Governance — Shareholders Nomination of Directors”included in our proxy statement relating to our 2010 annual meeting ofshareholders.

 

**Auditand Compliance Committee**

 

Informationrelating to the Audit and Compliance Committee is incorporated by reference tothe information contained under the caption “Audit Committee Report” includedin our proxy statement relating to our 2010 annual meeting of shareholders.

 

**ITEM 11.              EXECUTIVE COMPENSATION**

 

Informationregarding the Executive Compensation is incorporated by reference to theinformation contained under the captions “Compensation Discussion and Analysis,”“Executive Compensation,” “Director Compensation,” “Compensation CommitteeReport” and “Compensation Committee Interlocks and Insider Participation”included in our proxy statement relating to our 2010 annual meeting ofshareholders.

 

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**ITEM 12.****                              ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

**SecurityOwnership of Certain Beneficial Owners and Management**

 

Thisinformation is incorporated by reference to the information contained under thecaption “Security Ownership of Certain Beneficial Owners and Management”included in our proxy statement relating to our 2010 annual meeting ofshareholders.

 

**EquityCompensation Plan Information**

 

Thefollowing table provides information as of December 31, 2009, with respectto compensation plans under which shares of Corporation common stock areauthorized for issuance:

 
| **Plan Category**                                                                                                                | ** ** | **Number of Securities to be  Issued Upon Exercise of  Outstanding Options,******** Warrants and Rights********(a)** | ** ** | **Weighted-average Exercise  Price of Outstanding Options,  Warrants, and Rights******** (b)** | ** ** | **Number of Securities******** Remaining Available for******** Future Issuance Under Equity******** Compensation Plans******** (Excluding Securities******** Reflected in Column (a))******** (c)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                  |       |                                                                                                                                                                        |       |                                                                                                                              |       |                                                                                                                                                                                                                                                                                          |       |
| Equity  Compensation Plans Approved by Shareholders (1)                                                                               |       | 242,000                                                                                                                                                                     |       | $                                                                                                                                 | 23.92      |                                                                                                                                                                                                                                                                                          | 758,000    |   |
| Equity  Compensation Plans Not Approved by Shareholders (incentive options for  executive officers, directors, and incorporators) (2) |       | 623,820                                                                                                                                                                     |       | $                                                                                                                                 | 9.68       |                                                                                                                                                                                                                                                                                          | —     |   |
| Total                                                                                                                                 |       | 865,820                                                                                                                                                                     |       | $                                                                                                                                 | 13.66      |                                                                                                                                                                                                                                                                                          | 758,000    |   |

 

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|   | (1)    | Includes the  Tennessee Commerce Bancorp, Inc. 2007 Equity Plan.                                                                                                                                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
|   | (2)    | Includes various  stock option agreements entered into with employees of the Bank between  January 14, 2000 and November 1, 2005. For additional information  regarding the terms of these stock options, see note 13 to the Corporation’s  Consolidated Financial Statements included in Item 8 of this Annual Report on  Form 10-K. |

 

**ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE**

 

Thisinformation is incorporated by reference to the information contained under thecaption “Certain Relationships and Related Transactions” and “CorporateGovernance-Director Independence” included in our proxy statement relating toour 2010 annual meeting of shareholders.

 

**ITEM 14.          PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

Thisinformation is incorporated by reference to the information contained under thecaption “Proposal 2: Ratification of the Appointment of Independent RegisteredAccounting Firm” included in our proxy statement relating to our 2010 annualmeeting of shareholders.

 

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**PART IV**

 

**ITEM 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 

(a)(1)     FinancialStatements: See Part II, Item 8 “Financial Statements and SupplementaryData” of this Annual Report on Form 10-K.

 

(2)          Schedulesrequired by Article 12 of Regulation S-X are either omitted because theyare not applicable or because the required information is shown in thefinancial statements or the notes thereto.

 

(3)          Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                 |
| 3.1                  |       | Charter of  Tennessee Commerce Bancorp, Inc., as amended(1)                                                                                                                                                                                                                     |
| 3.2                  |       | Bylaws of  Tennessee Commerce Bancorp, Inc.(2)                                                                                                                                                                                                                                  |
| 3.3                  |       | Amendment to  Bylaws of Tennessee Commerce Bancorp, Inc.(3)                                                                                                                                                                                                                     |
| 4.1                  |       | Shareholders’ Agreement(2)                                                                                                                                                                                                                                                      |
| 4.2                  |       | Form of  Stock Certificate(4)                                                                                                                                                                                                                                                   |
| 4.3                  |       | Indenture, dated  as of June 20, 2008, between Tennessee Commerce Bancorp, Inc. and  Wilmington Trust Company, as trustee(5)                                                                                                                                               |
| 4.4                  |       | Amended and  Restated Declaration of Trust, dated as of June 20, 2008, among  Tennessee Commerce Bancorp, Inc. , as sponsor, Wilmington Trust Company,  as institutional and Delaware trustee, and Arthur F. Helf, H. Lamar Cox and  Michael R. Sapp, as administrators(5) |
| 4.5                  |       | Guarantee  Agreement, dated as of June 20, 2008, between Tennessee Commerce  Bancorp, Inc. and Wilmington Trust Company(5)                                                                                                                                                 |
| 4.6                  |       | Form of  Certificate of Series A Preferred Stock(6)                                                                                                                                                                                                                        |
| 4.7                  |       | Warrant for  Purchase of Shares of Common Stock, dated December 19, 2008(6)                                                                                                                                                                                                     |
| 10.1                 |       | Tennessee  Commerce Bancorp, Inc. Stock Option Plan - Employees(2)                                                                                                                                                                                                              |
| 10.2                 |       | Form of  Tennessee Commerce Bancorp, Inc. 1999 Stock Option — Directors(2)                                                                                                                                                                                            |
| 10.3                 |       | Form of  Tennessee Commerce Bancorp, Inc. 1999 Stock Option - Incorporators(2)                                                                                                                                                                                             |
| 10.4                 |       | Form of  Tennessee Commerce Bancorp, Inc. 2003 Stock Option - Directors(2)                                                                                                                                                                                                 |
| 10.5                 |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with Arthur F.  Helf(2)                                                                                                                                                                                           |
| 10.6                 |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with Michael R.  Sapp(2)                                                                                                                                                                                          |
| 10.7                 |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with H. Lamar Cox(2)                                                                                                                                                                                              |
| 10.8                 |       | Amended and  Restated Employment Agreement, dated as of May 19, 2009, between  Tennessee Commerce Bank and Michael R. Sapp(7)                                                                                                                                                   |
| 10.9                 |       | Amended and  Restated Employment Agreement, dated as of May 19, 2009, between  Tennessee Commerce Bank and H. Lamar Cox(7)                                                                                                                                                      |
| 10.10                |       | Offer of  Employment, dated as of August 5, 2008, between Tennessee Commerce  Bancorp, Inc. and Frank Perez(8)                                                                                                                                                             |
| 10.11                |       | Tennessee  Commerce Bancorp, Inc. 2007 Equity Plan(9)                                                                                                                                                                                                                           |
| 10.12                |       | Letter  Agreement, dated as of December 19, 2008, between the United States  Department of the Treasury and Tennessee Commerce Bancorp, Inc.(6)                                                                                                                            |
| 10.13                |       | Tennessee  Commerce Bancorp, Inc. Form of Split Dollar Agreement(7)                                                                                                                                                                                                        |
| 10.14                |       | Tennessee  Commerce Bancorp, Inc. Form of Salary Continuation Plan(7)                                                                                                                                                                                                      |
| 10.15                |       | Tennessee  Commerce Bancorp, Inc. Form of Consulting and Non-Competition  Agreement(7)                                                                                                                                                                                     |
| 21.1                 |       | Subsidiaries*                                                                                                                                                                                                                                                                        |
| 23.1                 |       | Consent of  Independent Registered Public Accounting Firm*                                                                                                                                                                                                                           |
| 31.1                 |       | Certification of  Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 31.2                 |       | Certification of  Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 32.1                 |       | Certification of  Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 32.2                 |       | Certification of  Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 99.1                 |       | Certification  pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act  of 2008 as amended by the American Recovery and Reinvestment Act of 2009*                                                                                                                |
| 99.2                 |       | Certification  pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act  of 2008 as amended by the American Recovery and Reinvestment Act of 2009*                                                                                                                |

 

----

| (1)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Quarterly Report on  Form 10-Q, as filed with the Securities and Exchange Commission on  November 6, 2009 and incorporated herein by reference.                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| (2)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Registration  Statement on Form 10, as filed with the Securities and Exchange  Commission on April 29, 2005 and incorporated herein by reference.                                          |
|   |   |                                                                                                                                                                                                                                                                                 |
| (3)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on  Form 8-K, as filed with the Securities and Exchange Commission on  February 5, 2008 and incorporated herein by reference.                                               |
|   |   |                                                                                                                                                                                                                                                                                 |
| (4)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Registration  Statement on Form S-8, as filed with the Securities and Exchange  Commission on December 31, 2007 (Registration No. 333-148415), and  incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                 |
| (5)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on  Form 8-K, as filed with the Securities and Exchange Commission on  June 23, 2008 and incorporated herein by reference.                                                  |
|   |   |                                                                                                                                                                                                                                                                                 |
| (6)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on  Form 8-K, as filed with the Securities and Exchange Commission on  December 23, 2008 and incorporated herein by reference.                                              |
|   |   |                                                                                                                                                                                                                                                                                 |
| (7)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on  Form 8-K, as filed with the Securities and Exchange Commission on  May 26, 2009, and incorporated herein by reference.                                                  |
|   |   |                                                                                                                                                                                                                                                                                 |
| (8)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on  Form 8-K, as filed with the Securities and Exchange Commission on August 5,  2008 and incorporated herein by reference.                                                 |
|   |   |                                                                                                                                                                                                                                                                                 |
| (9)    |   | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Quarterly Report on  Form 10-Q, as filed with the Securities and Exchange Commission on  August 14, 2007 and incorporated herein by reference.                                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| *      |   | Filed herewith.                                                                                                                                                                                                                                                                      |

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | TENNESSEE COMMERCE  BANCORP, INC.                                                      |                |
|--------|----------------------------------------------------------------------------------------|---------------------|
|   |                                                                                   |
|   | By:                                                                                    | /s/ Michael R. Sapp |   |
|   | Michael R. Sapp,  Chairman and Chief Executive Officer   (Principal Executive Officer) |
|   | Date:   March 9,  2010                                             |                |
|        |                                                                                        |                     |  |  |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities indicated.

 
| By:    | /s/ H. Lamar Cox                                    |   | By:    | /s/ Paul W. Dierksen                                             |
|--------|-----------------------------------------------------|--------|--------|------------------------------------------------------------------|
|   | H.  Lamar Cox, Chief Operating Officer and Director |   |   | Paul W. Dierksen,  Director                                      |
| Date:  | March  9, 2010                                      |   | Date:  | March 9, 2010                                                    |
|   |                                                |   |   |                                                             |
|   |                                                |   |   |                                                             |
| By:    | /s/ Dennis L. Grimaud                               |   | By:    | /s/ Arthur F. Helf                                               |
|   | Dennis  L. Grimaud, Director                        |   |   | Arthur F. Helf,  Director                                        |
| Date:  | March  9, 2010                                      |   | Date:  | March 9, 2010                                                    |
|   |                                                |   |   |                                                             |
|   |                                                |   |   |                                                             |
| By:    | /s/ William W. McInnes                              |   | By:    | /s/ Thomas R. Miller                                             |
|   | William  W. McInnes, Director                       |   |   | Thomas R. Miller,  Director                                      |
| Date:  | March  9, 2010                                      |   | Date:  | March 9, 2010                                                    |
|   |                                                |   |   |                                                             |
|   |                                                |   |   |                                                             |
| By:    |                                                |   | By:    | /s/ Michael R. Sapp                                              |
|   | Darrel  Reifschneider, Director                     |   |   | Michael R. Sapp,  Chairman, Chief Executive Officer and Director |
|   |                                                |   | Date:  | March 9, 2010                                                    |
|   |                                                |   |   |                                                             |
|   |                                                |   |   |                                                             |
| By:    | /s/ Dr. Paul A. Thomas                              |   | By:    | /s/ Frank Perez                                                  |
|   | Dr.  Paul A. Thomas, Director                       |   |   | Frank Perez, Chief  Financial Officer (Principal                 |
|   |                                                |   |   | Financial and  Accounting Officer)                               |
| Date:  | March  9, 2010                                      |   | Date:  | March 9, 2010                                                    |
|        |                                                     |        |        |                                                                  |  |  |

 

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**TENNESSEECOMMERCE BANCORP, INC.**

 

**CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Asof December 31, 2009 and 2008**

**andfor the three-year period ended December 31, 2009**

 

CONTENTS

 
| MANAGEMENT’S  REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING |   | F-2    |
|------------------------------------------------------------------------|--------|--------|
|                                                                   |   |   |
| REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM               |   | F-3    |
|                                                                   |   |   |
| FINANCIAL STATEMENTS                                                   |   |   |
|                                                                   |   |   |
| CONSOLIDATED  BALANCE SHEETS                                           |   | F-4    |
|                                                                   |   |   |
| CONSOLIDATED  STATEMENTS OF INCOME                                     |   | F-5    |
|                                                                   |   |   |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’  EQUITY       |   | F-6    |
|                                                                   |   |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                  |   | F-7    |
|                                                                   |   |   |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                             |   | F-8    |

 

F-1

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Table of Contents

 

**Management’s Report on InternalControl Over Financial Reporting**

 

Management of theCorporation is responsible for establishing and maintaining adequate internalcontrol over financial reporting, (as defined in Rules 13a-15(f) and15d-15(f) of the Securities Exchange Act of 1934, as amended) that isdesigned to produce reliable financial statements in conformity with accountingprinciples generally accepted in the United States.  The Corporation’sinternal control over financial reporting includes those policies andprocedures that: (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Corporation; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples and that receipts and expenditures of the Corporation are being madeonly in accordance with authorizations of management and directors of theCorporation; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of theCorporation’s assets that could have a material effect on the financialstatements.

 

The system of internalcontrol over financial reporting as it relates to the financial statements isevaluated for effectiveness by management and tested for reliability through aprogram of internal audits. Actions are taken to correct potential deficienciesas they are identified. Any system of internal control, no matter how welldesigned, has inherent limitations, including the possibility that a controlcan be circumvented or overridden, and misstatements resulting from error orfraud may occur and not be detected. Also, because of changes in conditions,internal control effectiveness may vary over time. Accordingly, even aneffective system of internal control will provide only reasonable assurancewith respect to financial statement preparation.

 

Management, with theparticipation of the Corporation’s Chief Executive Officer and Chief FinancialOfficer, conducted an assessment of the effectiveness of the Corporation’ssystem of internal control over financial reporting as of December 31,2009, based on criteria for effective internal control over financial reportingdescribed in “Internal Control - Integrated Framework,” issued by the Committeeof Sponsoring Organizations of the Treadway Commission.  Based on thisassessment, management believes that the Corporation maintained effectiveinternal control over financial reporting as of December 31, 2009.

 

This annual report doesnot include an attestation report of the company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this annual report.

 

F-2

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Table of Contents

 

**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directorsand Shareholders

Tennessee CommerceBancorp, Inc.

 

We have audited theaccompanying consolidated balance sheets of Tennessee Commerce Bancorp, Inc.and subsidiaries (collectively, the “Company”) as of December 31, 2009 and2008, and the related consolidated statements of income, changes inshareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2009.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Tennessee Commerce Bancorp, Inc.and subsidiaries as of December 31, 2009 and 2008, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2009, in conformity with U.S. generallyaccepted accounting principles.

 

We were not engaged toexamine management’s assessment of the effectiveness of Tennessee CommerceBancorp, Inc.’s internal control over financial reporting as of December 31,2009, in accordance with the standards of the Public Company AccountingOversight Board, included in the accompanying Management’s Report on InternalControl Over Financial Reporting and, accordingly, we do not express an opinionthereon.

 

/s/KraftCPAs PLLC

Nashville, Tennessee

March 9, 2010

 

F-3

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Tableof Contents

 

**TENNESSEECOMMERCE BANCORP, INC.**

**CONSOLIDATED BALANCE SHEETS**

**December 31,2009 and 2008**

 
| **(Dollars in thousands except share data)**                                                                                                                                                                                                          | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                     |       |      |       |      |       |
| Cash  and due from financial institutions                                                                                                                                                                                                                                      |       | $         | 22,864     |      | $          | 5,260 |   |
| Federal  funds sold                                                                                                                                                                                                                                                            |       | 15,010    |       | 35,538    |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                     |       | 37,874    |       | 40,798    |       |
|                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Securities  available for sale                                                                                                                                                                                                                                                 |       | 93,668    |       | 101,290   |       |
|                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Loans                                                                                                                                                                                                                                                                          |       | 1,171,301 |       | 1,036,725 |       |
| Allowance  for loan losses                                                                                                                                                                                                                                                     |       | (19,913   | )          | (13,454   | )          |
| Net  loans                                                                                                                                                                                                                                                                     |       | 1,151,388 |       | 1,023,271 |       |
|                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                   |       | 1,967     |       | 2,330     |       |
| Accrued  interest receivable                                                                                                                                                                                                                                                   |       | 9,711     |       | 8,115     |       |
| Restricted  equity securities                                                                                                                                                                                                                                                  |       | 2,169     |       | 1,685     |       |
| Income  tax receivable                                                                                                                                                                                                                                                         |       | 68        |       | 4,430     |       |
| Bank-owned  life insurance                                                                                                                                                                                                                                                     |       | 25,673    |       | —    |       |
| Other  assets                                                                                                                                                                                                                                                                  |       | 60,914    |       | 36,165    |       |
|                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Total  assets                                                                                                                                                                                                                                                                  |       | $         | 1,383,432  |      | $          | 1,218,084 |   |
|                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                  |       |      |       |      |       |
| Liabilities                                                                                                                                                                                                                                                                    |       |      |       |      |       |
| Deposits                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| Noninterest-bearing                                                                                                                                                                                                                                                            |       | $         | 30,111     |      | $          | 24,217 |   |
| Interest-bearing                                                                                                                                                                                                                                                               |       | 1,212,431 |       | 1,044,926 |       |
| Total  deposits                                                                                                                                                                                                                                                                |       | 1,242,542 |       | 1,069,143 |       |
|                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Accrued  interest payable                                                                                                                                                                                                                                                      |       | 1,430     |       | 3,315     |       |
| Accrued  dividend payable                                                                                                                                                                                                                                                      |       | 187       |       | —    |       |
| Short-term  borrowings                                                                                                                                                                                                                                                         |       | 14,000    |       | 10,000    |       |
| Accrued  bonuses                                                                                                                                                                                                                                                               |       | —    |       | 917       |       |
| Other  liabilities                                                                                                                                                                                                                                                             |       | 5,783     |       | 9,764     |       |
| Long-term  subordinated debt                                                                                                                                                                                                                                                   |       | 23,198    |       | 23,198    |       |
| Total  liabilities                                                                                                                                                                                                                                                             |       | 1,287,140 |       | 1,116,337 |       |
| Shareholders’  equity                                                                                                                                                                                                                                                     |       |      |       |      |       |
| Preferred  stock, 1,000,000 shares authorized; 30,000 shares of $0.50 par value Fixed  Rate Cumulative Perpetual, Series A issued and outstanding at  December 31, 2009 and December 31, 2008                                                                   |       | 15,000    |       | 15,000    |       |
| Common  stock, $0.50 par value; 20,000,000 shares authorized at December 31,  2009 and 10,000,000 shares authorized at December 31, 2008; 5,646,368  and 4,731,696 shares issued and outstanding at December 31, 2009 and  December 31, 2008, respectively |       | 2,823     |       | 2,366     |       |
| Common  stock warrants                                                                                                                                                                                                                                                         |       | 453       |       | 453       |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                    |       | 63,247    |       | 59,946    |       |
| Retained  earnings                                                                                                                                                                                                                                                             |       | 16,056    |       | 23,180    |       |
| Accumulated  other comprehensive (loss) income                                                                                                                                                                                                                                 |       | (1,287    | )          | 802       |       |
| Total  shareholders’ equity                                                                                                                                                                                                                                               |       | 96,292    |       | 101,747   |       |
|                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                                                                               |       | $         | 1,383,432  |      | $          | 1,218,084 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**TENNESSEECOMMERCE BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

**YearsEnded December 31, 2009, 2008 and 2007**

 
| **(Dollars in thousands except share data)** | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-----------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Interest  income                                                      |       |      |       |      |       |      |       |
| Loans,  including fees                                                |       | $         | 75,770     |      | $          | 71,101    |       | $ | 58,114 |   |
| Securities                                                            |       | 5,325     |       | 4,717     |       | 3,492     |       |
| Federal  funds sold                                                   |       | 13        |       | 160       |       | 600       |       |
| Total  interest income                                                |       | 81,108    |       | 75,978    |       | 62,206    |       |
|                                                                  |       |      |       |      |       |      |       |
| Interest  expense                                                     |       |      |       |      |       |      |       |
| Deposits                                                              |       | 34,213    |       | 39,271    |       | 34,245    |       |
| Other                                                                 |       | 1,979     |       | 1,756     |       | 689       |       |
| Total  interest expense                                               |       | 36,192    |       | 41,027    |       | 34,934    |       |
|                                                                  |       |      |       |      |       |      |       |
| Net  interest income                                                  |       | 44,916    |       | 34,951    |       | 27,272    |       |
|                                                                  |       |      |       |      |       |      |       |
| Provision  for loan losses                                            |       | 31,039    |       | 9,111     |       | 6,350     |       |
|                                                                  |       |      |       |      |       |      |       |
| Net  interest income after provision for loan losses                  |       | 13,877    |       | 25,840    |       | 20,922    |       |
|                                                                  |       |      |       |      |       |      |       |
| Non-interest  income                                                  |       |      |       |      |       |      |       |
| Service  charges on deposit accounts                                  |       | 157       |       | 122       |       | 132       |       |
| Securities  gains                                                     |       | 1,118     |       | 447       |       | 26        |       |
| (Loss)  gain on sale of loans                                         |       | (1,928    | )          | 3,750     |       | 2,687     |       |
| Loss  on repossession                                                 |       | (1,826    | )          | (230      | )          | (167      | )          |
| Other                                                                 |       | 922       |       | 205       |       | 202       |       |
| Total  non-interest (loss) income                                     |       | (1,557    | )          | 4,294     |       | 2,880     |       |
|                                                                  |       |      |       |      |       |      |       |
| Non-interest  expense                                                 |       |      |       |      |       |      |       |
| Salaries  and employee benefits                                       |       | 9,849     |       | 9,100     |       | 7,977     |       |
| Occupancy  and equipment                                              |       | 1,625     |       | 1,422     |       | 1,109     |       |
| Data  processing fees                                                 |       | 1,549     |       | 1,210     |       | 983       |       |
| FDIC  expense                                                         |       | 1,922     |       | 682       |       | 286       |       |
| Professional  fees                                                    |       | 1,851     |       | 2,012     |       | 779       |       |
| Other                                                                 |       | 4,509     |       | 3,182     |       | 2,129     |       |
| Total  non-interest expense                                           |       | 21,305    |       | 17,608    |       | 13,263    |       |
|                                                                  |       |      |       |      |       |      |       |
| (Loss)  income before income taxes                                    |       | (8,985    | )          | 12,526    |       | 10,539    |       |
|                                                                  |       |      |       |      |       |      |       |
| Income  tax (benefit) expense                                         |       | (3,407    | )          | 4,772     |       | 3,643     |       |
| Net  (loss) income                                                    |       | (5,578    | )          | 7,754     |       | 6,896     |       |
| Preferred  dividends                                                  |       | (1,546    | )          | —    |       | —    |       |
|                                                                  |       |      |       |      |       |      |       |
| Net  (loss) income available to common shareholders                   |       | $         | (7,124     | )         | $          | 7,754     |       | $ | 6,896 |   |
|                                                                  |       |      |       |      |       |      |       |
| Earnings  (loss) per share (EPS):                                     |       |      |       |      |       |      |       |
| Basic  EPS                                                            |       | $         | (1.50      | )         | $          | 1.64      |       | $ | 1.49 |   |
| Diluted  EPS                                                          |       | (1.50     | )          | 1.60      |       | 1.41      |       |
|                                                                  |       |      |       |      |       |      |       |
| Weighted  average shares outstanding:                                 |       |      |       |      |       |      |       |
| Basic                                                                 |       | 4,738,638 |       | 4,731,204 |       | 4,613,342 |       |
| Diluted                                                               |       | 4,738,638 |       | 4,852,065 |       | 4,892,167 |       |

 

See accompanyingnotes to consolidated financial statements.

 

F-5

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**TENNESSEECOMMERCE BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**

**YearsEnded December 31, 2009, 2008 and 2007**

 
| ** **                                                                                                | ** ** | ** **    | ** ** | ** ** | ** ** | **Warrants to** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------|------------|----------------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                | ** ** | ** **    | ** ** | ** ** | ** ** | **Purchase**         | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**              | ** ** | **Total**              | ** ** |
| ** **                                                                                                | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common**           | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | **Comprehensive**      | ** ** | **Shareholders’** | ** ** |
| **(Dollars in thousands except share data)**                                     | ** ** | **Stock**     | ** ** | **Stock**  | ** ** | **Stock**            | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Balance  at December 31, 2006                                                                        |       | —        |       | 2,226      |       | —               |       | 40,755         |       | 8,530        |       | (287                   | )          | 51,224                 |       |
| Comprehensive  income                                                                                     |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Net  income                                                                                               |       | —        |       | —     |       | —               |       | —         |       | 6,896        |       | —                 |       | 6,896                  |       |
| Other  comprehensive income, net of income taxes                                                          |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Unrealized  gains on securities available for sale during the period, net of $366 in tax                  |       | —        |       | —     |       | —               |       | —         |       | —       |       | 596                    |       | 596                    |       |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Total  comprehensive income                                                                               |       | —        |       | —     |       | —               |       | —         |       | —       |       | —                 |       | 7,492                  |       |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Exercise  of stock options to purchase 272,522 common shares and related tax benefit                      |       | —        |       | 136        |       | —               |       | 3,995          |       | —       |       | —                 |       | 4,131                  |       |
| Stock-based  compensation expense                                                                         |       | —        |       | —     |       | —               |       | 259            |       | —       |       | —                 |       | 259                    |       |
| Section 16  profit reimbursement                                                                     |       | —        |       | —     |       | —               |       | 15             |       | —       |       | —                 |       | 15                     |       |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Balance  at December 31, 2007                                                                        |       | —        |       | 2,362      |       | —               |       | 45,024         |       | 15,426       |       | 309                    |       | 63,121                 |       |
| Comprehensive  income                                                                                     |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Net  income                                                                                               |       | —        |       | —     |       | —               |       | —         |       | 7,754        |       | —                 |       | 7,754                  |       |
| Other  comprehensive income, net of income taxes                                                          |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Unrealized  gains on securities available for sale during the period, net of $477 in tax                  |       | —        |       | —     |       | —               |       | —         |       | —       |       | 770                    |       | 770                    |       |
| Reclassification  adjustment for gains included in net income, net of $170 in tax                         |       | —        |       | —     |       | —               |       | —         |       | —       |       | (277                   | )          | (277                   | )          |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Total  comprehensive income                                                                               |       | —        |       | —     |       | —               |       | —         |       | —       |       | —                 |       | 8,247                  |       |
| Issuance  of preferred stock                                                                              |       | 15,000        |       | —     |       | —               |       | 14,547         |       | —       |       | —                 |       | 29,547                 |       |
| Issuance  of common stock warrant                                                                         |       | —        |       | —     |       | 453                  |       | —         |       | —       |       | —                 |       | 453                    |       |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Exercise  of stock options to purchase 7,500 common shares and related tax benefit                        |       | —        |       | 4          |       | —               |       | 86             |       | —       |       | —                 |       | 90                     |       |
| Stock-based  compensation expense                                                                         |       | —        |       | —     |       | —               |       | 289            |       | —       |       | —                 |       | 289                    |       |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Balance  at December 31, 2008                                                                        |       | 15,000        |       | 2,366      |       | 453                  |       | 59,946         |       | 23,180       |       | 802                    |       | 101,747                |       |
| Comprehensive  income                                                                                     |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Net  loss                                                                                                 |       | —        |       | —     |       | —               |       | —         |       | (5,578       | )          | —                 |       | (5,578                 | )          |
| Other  comprehensive income, net of income taxes                                                          |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Unrealized  losses on securities available for sale during the period, net of income tax  benefit of $825 |       | —        |       | —     |       | —               |       | —         |       | —       |       | (1,351                 | )          | (1,351                 | )          |
| Reclassification  adjustment for gains included in net income, net of $380 in tax                         |       | —        |       | —     |       | —               |       | —         |       | —       |       | (738                   | )          | (738                   | )          |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Total  comprehensive loss                                                                                 |       | —        |       | —     |       | —               |       | —         |       | —       |       | —                 |       | (7,667                 | )          |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Common  stock warrant accretion                                                                           |       | —        |       | —     |       | —               |       | 85             |       | —       |       | —                 |       | 85                     |       |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Preferred  stock dividend                                                                                 |       | —        |       | —     |       | —               |       | —         |       | (1,546       | )          | —                 |       | (1,546                 | )          |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Issuance  of 903,424 shares of common stock                                                               |       | —        |       | 452        |       | —               |       | 2,830          |       | —       |       | —                 |       | 3,282                  |       |
| Issuance  of 11,248 shares of restricted stock and related tax benefit                                    |       | —        |       | 5          |       | —               |       | 51             |       | —       |       | —                 |       | 56                     |       |
| Stock-based  compensation expense                                                                         |       | —        |       | —     |       | —               |       | 335            |       | —       |       | —                 |       | 335                    |       |
|                                                                                                      |       |          |       |       |       |                 |       |           |       |         |       |                   |       |                   |       |
| Balance  at December 31, 2009                                                                        |       | $             | 15,000     |       | $          | 2,823                |       | $              | 453        |         | $          | 63,247                 |       | $                      | 16,056     |   | $ | (1,287 | ) | $ | 96,292 |   |
|                                                                                                           |            |               |            |            |            |                      |            |                |            |              |            |                        |            |                        |            |  |  |  |  |  |  |  |

 

See accompanyingnotes to consolidated financial statements.

 

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**TENNESSEECOMMERCE BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YearsEnded December 31, 2009, 2008 and 2007**

 
| **(Dollars in thousands except share data)**                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                     |       |     |       |     |       |     |       |
| **Cash flows from operating activities**                                                 |       |     |       |     |       |     |       |
| Net  (loss) income                                                                       |       | $        | (5,578     | )        | $          | 7,754    |       | $ | 6,896 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by operating activities |       |     |       |     |       |     |       |
| Depreciation                                                                             |       | 498      |       | 423      |       | 333      |       |
| Deferred  loan fees                                                                      |       | 320      |       | (210     | )          | 919      |       |
| Provision  for loan losses                                                               |       | 31,039   |       | 9,111    |       | 6,350    |       |
| Stock-based  compensation expense                                                        |       | 335      |       | 289      |       | 259      |       |
| Deferred  income tax                                                                     |       | (3,053   | )          | 8,255    |       | 408      |       |
| Net  amortization of investment securities                                               |       | 182      |       | (52      | )          | 11       |       |
| Gain  on sales of securities                                                             |       | (1,118   | )          | (447     | )          | (26      | )          |
| Change  in:                                                                              |       |     |       |     |       |     |       |
| Accrued  interest receivable                                                             |       | (1,596   | )          | (2,214   | )          | (1,785   | )          |
| Accrued  interest payable                                                                |       | (1,885   | )          | 1,023    |       | 564      |       |
| Income  tax receivable                                                                   |       | 4,362    |       | (2,544   | )          | (1,886   | )          |
| Other  assets                                                                            |       | 34,928   |       | (18,263  | )          | (10,442  | )          |
| Other  liabilities                                                                       |       | (1,354   | )          | (314     | )          | 549      |       |
| Net  cash provided by operating activities                                               |       | 57,080   |       | 2,811    |       | 2,150    |       |
|                                                                                     |       |     |       |     |       |     |       |
| **Cash flows from investing activities**                                                 |       |     |       |     |       |     |       |
| Purchases  of securities available for sale                                              |       | (162,533 | )          | (101,560 | )          | (43,898  | )          |
| Proceeds  from sales of securities available for sale                                    |       | 97,466   |       | 46,603   |       | 25,850   |       |
| Proceeds  from maturities, prepayments and calls of securities available for sale        |       | 70,255   |       | 28,713   |       | 2,216    |       |
| Net  change in loans                                                                     |       | (218,363 | )          | (248,171 | )          | (252,720 | )          |
| Purchase  of bank owned life insurance investment                                        |       | (25,673  | )          | —   |       | —   |       |
| Purchases  of FHLB stock                                                                 |       | (484     | )          | (747     | )          | (305     | )          |
| Net  purchases of premises and equipment                                                 |       | (135     | )          | (1,340   | )          | (113     | )          |
| Net  cash used by investing activities                                                   |       | (239,467 | )          | (276,502 | )          | (268,970 | )          |
|                                                                                     |       |     |       |     |       |     |       |
| **Cash flows from financing activities**                                                 |       |     |       |     |       |     |       |
| Net  change in deposits                                                                  |       | 173,399  |       | 254,090  |       | 254,486  |       |
| Net  change in federal funds purchased and repurchase agreements                         |       | —   |       | (2,000   | )          | 2,000    |       |
| Payments  on short-term debt                                                             |       | —   |       | (7,000   | )          | —   |       |
| Proceeds  from long-term subordinated debt                                               |       | —   |       | 14,950   |       | —   |       |
| Purchase  of capital securities of unconsolidated subsidiary                             |       | —   |       | (450     | )          | —   |       |
| Proceeds  from issuance of preferred stock and common stock warrant                      |       | —   |       | 30,000   |       | —   |       |
| Preferred  stock dividends                                                               |       | (1,359   | )          | —   |       | —   |       |
| Warrant  accretion expense                                                               |       | 85       |       | —   |       | —   |       |
| Issuance  of common stock                                                                |       | 3,338    |       | —   |       | —   |       |
| Proceeds  from exercise of common stock options                                          |       | —   |       | 38       |       | 2,152    |       |
| Proceeds  from issuance of short-term debt                                               |       | 4,000    |       | 10,000   |       | 7,000    |       |
| Excess  tax benefit from option exercises                                                |       | —   |       | 52       |       | 1,979    |       |
| Section 16  profit reimbursement                                                    |       | —   |       | —   |       | 15       |       |
| Net  cash provided by financing activities                                               |       | 179,463  |       | 299,680  |       | 267,632  |       |
|                                                                                     |       |     |       |     |       |     |       |
| **Net change in cash and cash equivalents**                                              |       | (2,924   | )          | 25,989   |       | 812      |       |
|                                                                                     |       |     |       |     |       |     |       |
| Cash  and cash equivalents at beginning of period                                        |       | 40,798   |       | 14,809   |       | 13,997   |       |
|                                                                                     |       |     |       |     |       |     |       |
| **Cash and cash equivalents at end of period**                                           |       | $        | 37,874     |     | $          | 40,798   |       | $ | 14,809 |   |
|                                                                                     |       |     |       |     |       |     |       |
| **Supplemental cash flow information:**                                                  |       |     |       |     |       |     |       |
| Cash  paid during period for interest                                                    |       | $        | 38,077     |     | $          | 40,004   |       | $ | 34,370 |   |
| Cash  paid during period for income taxes                                                |       | 77       |       | 1,125    |       | 4,745    |       |
|                                                                                     |       |     |       |     |       |     |       |
| Loans  foreclosed upon with repossessions                                                |       | 58,887   |       | 35,641   |       | 12,772   |       |

 

See accompanyingnotes to consolidated financial statements.

 

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**TENNESSEECOMMERCE BANCORP, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The accounting principlesfollowed and the methods of applying those principles conform with accountingprinciples generally accepted in the United States of America and to generalpractices in the banking industry. The significant policies are summarized asfollows:

 

Principles ofConsolidation:  The accompanying consolidated financialstatements include the accounts of Tennessee Commerce Bancorp, Inc. (the “Corporation”)and its wholly-owned subsidiaries, Tennessee Commerce Bank (the “Bank”) and TCBCommercial Asset Services, Inc. (“TCB”). Tennessee Commerce Statutory Trust Iand Tennessee Commerce Statutory Trust II are not consolidated and areaccounted for under the equity method. Material intercompany accounts andtransactions have been eliminated.

 

Nature ofOperations:  The Corporation was formed in July 2000. TheBank received its charter as a state bank and opened for business in January 2000.Substantially all of the assets, liabilities and operations presented in theconsolidated financial statements are attributable to the Bank. The Bankprovides a variety of banking services to individuals and businesses in MiddleTennessee. Its primary deposit products are demand and savings deposits andcertificates of deposit, and its primary lending products are commercial, leasefinancing, real estate mortgage and installment loans. In July 2008, theCorporation formed a wholly owned subsidiary, TCB. This subsidiary purchases,at fair market value, and then sells assets for the Bank.

 

The Bank’s loans aregenerally secured by specific items of collateral including real property,consumer assets and business assets. Although the Bank has a diversified loanportfolio, a substantial portion of its debtors’ ability to honor theircontracts is dependent on local economic conditions.

 

AccountingStandards Codification: Financial Accounting Standards Board (“FASB”) Accounting StandardsCodification (“ASC”) 105 (“FASB ASC 105”), “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles, aReplacement of FASB Statement No. 162,” replaces SFAS No. 162, “The Hierarchyof Generally Accepted Accounting Principles” and establishes the FASB ASC (the “Codification”)as the source of authoritative accounting principles recognized by the FASB tobe applied by non-governmental entities in the preparation of financialstatements in conformity with generally accepted accounting principles. Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative guidance for SEC registrants. All guidancecontained in the Codification carries an equal level of authority. Allnon-grandfathered, non-SEC accounting literature not included in theCodification is superseded and deemed non-authoritative. FASB ASC 105 iseffective for the Corporation’s financial statements for periods ending after September15, 2009 and did not have a significant impact on the Corporation’s financialstatements.

 

Use of Estimates:  To prepare financial statements in conformitywith accounting principles generally accepted in the United States of America,management makes estimates and assumptions based on available information.These estimates and assumptions affect the amounts reported in the financialstatements and the disclosures provided, and future results could differ. Theallowance for loan losses and fair value of financial instruments areparticularly subject to change.

 

Statement of CashFlows:  For purposes of presentation in the statementsof cash flows, cash and cash equivalents include amounts due from financialinstitutions and federal funds sold. Net cash flows are reported for loan anddeposit transactions.

 

Concentrations and Restrictions on Cash and Cash Equivalents: The Corporation maintains deposits withother financial institutions in amounts that exceed federal deposit insurancecoverage. Furthermore, federal funds sold are essentially uncollateralizedloans to other financial institutions. Management regularly evaluates thecredit risk associated with the counterparties to these transactions andbelieves that the Corporation is not exposed to any significant credit risks oncash and cash equivalents.

 

Cash on hand or ondeposit with other banks of approximately $468,000 and $294,000 was required tomeet regulatory reserve and clearing requirements at year-end 2009 and 2008,respectively. These balances do not earn interest.

 

Securities:  Certain debt securities that management hasthe positive intent and ability to hold to maturity are classified as “held tomaturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair valueincluded in earnings.  Securities notclassified as held to maturity or trading, including equity securities withreadily determinable fair values, are classified as “available for sale” andrecorded at fair value, with unrealized gains and losses excluded from earningsand reported in other comprehensive income. At December 31, 2009 and 2008, allsecurities were classified as available for sale. The Bank had no tradingsecurities or held to maturity securities as of December 31, 2009 and 2008.

 

Purchase premiums anddiscounts are recognized in interest income using the interest method over theterms of the securities.  Declines in thefair value of held-to-maturity and available-for-sale securities below theircost that are deemed to be other than temporary are reflected in earnings asrealized losses.  In determining whetherother-than-temporary impairment exists, management considers many factors,including (i) the length of time and the extent to which the fair value hasbeen less than cost, (ii) the financial condition and near-term prospects ofthe issuer, and (iii) the intent and ability of the Corporation to retain itsinvestment in the issuer for a period of time sufficient to allow for anyanticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the tradedate and are determined using the specific identification method.

 

MortgageBanking Activities: The Bank originates mortgage loans forsale and these loans are carried at the lower of cost or fair value, determinedon an aggregate basis. Generally, a commitment is obtained from investors atorigination in order to minimize market risk directly related to interest ratemovements. Origination fees are recorded as income when the loans are sold tothird party investors. At the end of the year for each period presented therewere no loans held for sale.

 

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Loans:  Loans that the Bank has the positive intentand ability to hold to maturity are stated at the principal amount outstanding.Interest on loans is computed daily based on the principal amount outstanding.Loan origination fees are deferred, to the extent they exceed directorigination costs, and recognized over the life of the related loans as yieldadjustments.

 

The accrual of intereston mortgage and commercial loans is discontinued at the time the loan is 90days past due unless the credit is well-secured and in process ofcollection.  Credit card loans and otherpersonal loans are typically charged off no later than 180 days past due.  Past due status is based on the contractualterms of the loan.  In all cases, loansare placed on nonaccrual or charged-off at an earlier date if collection ofprincipal or interest is considered doubtful. All interest accrued but notcollected for loans that are placed on nonaccrual or charged off is reversedagainst interest income.  The interest onthese loans is accounted for on the cash-basis or cost-recovery method, untilqualifying for return to accrual.  Loansare returned to accrual status when all the principal and interest amounts contractuallydue are brought current and future payments are reasonably assured.

 

Management periodicallyreviews the loan portfolio. A loan is placed on non-accrual status when it is90 days or more past due and immediate collection is doubtful. The non-accrualloans are reviewed periodically for impairment. A loan is impaired when fullpayment under the loan terms is not expected. Commercial and commercial realestate loans are individually evaluated for impairment. If a loan is impaired,a portion of the allowance is allocated so that the loan is reported, net, atthe present value of estimated future cash flows using the loan’s existing rateor at the fair value of collateral if repayment is expected solely from thecollateral. Large groups of smaller balance homogeneous loans, such as consumerand residential real estate loans are collectively evaluated for impairment,and accordingly, they are not separately identified for impairment disclosures.Loans are charged-off at a time when the collection efforts are reasonablydeemed uncollectable.

 

Tax Leases: Tax leases comprised approximately$74,596,000 and $53,025,000 of loans on the consolidated balance sheets at December31, 2009 and 2008, respectively. In accordance with FASB ASC 860, “AccountingFor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” (“FASB ASC 860”), at the time of investment, the tax lease assetis recorded along with unearned interest income followed by periodic journalentries to record the interest income and maintain an accurate representationof the investment balance. The current balance is part of “Loans” on theconsolidated balance sheets and as “Tax leases” on the Summary of Loans in Note3.

 

Allowancefor Loan Losses:  The allowance for loan losses is maintained ata level that, in management’s judgment, is adequate to absorb credit lossesinherent in the loan portfolio. The amount of the allowance is based onmanagement’s evaluation of the collectability of the loan portfolio, includingthe nature of the portfolio, credit concentrations, trends in historical lossexperience, impaired loans and economic conditions. Allowances for impairedloans are generally determined based on collateral values or the present valueof estimated cash flows. Because of uncertainties associated with the regionaleconomic conditions, collateral values and future cash flows on impaired loans,it is reasonably possible that management’s estimate of credit losses inherentin the loan portfolio and the related allowance may change materially in thenear term. The allowance is increased by the provision for loan losses andreduced by charge-offs, net of recoveries.

 

The allowance consists ofspecific and general components. The specific component relates to loans thatare individually classified as impaired. The general component coversnon-classified loans and is based on historical loss experience and adjustedfor current factors including the economic environment. The allowance alsoincludes an unallocated component. Management believes that the unallocatedamount is warranted for inherent factors that cannot be practically assigned toindividual loan categories. An example is the imprecision in the overallmeasurement process, in particular the volatility of the national and globaleconomy.

 

Premises andEquipment:  Premises and equipment are stated at cost,less accumulated depreciation and amortization. The provision for depreciationis computed principally on the straight-line method over the estimated usefullives of the assets. Leasehold improvements are amortized over the shorter ofthe lease term or useful life of the asset. Costs of major additions andimprovements are capitalized. Expenditures for maintenance and repairs arecharged to operations as incurred.

 

Other Real Estateand Repossessed Assets:  Real estate acquired byforeclosure is carried at the lower of the recorded investment in the propertyor its fair value, less costs to sell, at the date of foreclosure, determinedby appraisal. Declines in value indicated by reappraisals as well as lossesresulting from disposition are charged to operations. Subsequent costs areexpensed as they occur after any re-acquisitions. Other real estate owned isincluded in other assets on the balance sheet, with a carrying value ofapproximately $814,000 and $5,764,000 in 2009 and 2008, respectively.Repossessed assets acquired by foreclosure are carried at the lower of therecorded investment in the asset or its estimated fair value. Declines in valueindicated by reappraisals as well as losses resulting from disposition arecharged to operations. These repossessed assets are either disposed of by theBank or sold to TCB. Subsequent costs are expensed as they occur after anyre-acquisitions. Repossessions are included in other assets on the balancesheet, with a carrying value of approximately $27,169,000 and $10,694,000 in2009 and 2008, respectively. If a repossession of the Bank is not resold withinthe six month holding period allowed by Tennessee law, it is purchased by TCBat fair market value.  The sole purposeof TCB is the resale of assets repossessed by the Bank. At December 31, 2009and 2008, TCB carried approximately $9,782,000 and $4,701,000, respectively,and nothing in prior years on its balance sheet. TCB carries these purchases asinventory.

 

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Gain on Sale ofLoans: Transfersof financial assets are accounted for as sales when control over the assets hasbeen surrendered. Control over transferred assets is deemed to be surrenderedwhen (1) the assets have been isolated from the Corporation, (2) the transfereeobtains the right (free of conditions that constrain it from taking advantageof the right) to pledge or exchange the transferred assets, and (3) theCorporation does not maintain effective control over the transferred assetsthrough an agreement to repurchase them before maturity. The Bank records thetransfer by allocating the carrying amount of the financial asset between theassets sold, and the retained interests, if any, based on their relative fairvalues at the date of transfer. Estimates of expected future cash flows areused to determine fair value on the date of transfer. The gain on sale ispresented as a component of non-interest income.

 

Interest-OnlyStrips Receivable: Interest-only strips receivable arerelated to loans originated and sold to others, and represent the differencebetween the loan’s coupon rate and the rate “passed through” to investors. Theinitial amount recorded as interest-only strips receivable (“I/O”) is computedby applying present value factors to the investors’ expected cash flowscompared to expected cash flows from the borrowers. I/Os are carried at fairvalue and unrealized losses or gains are recognized into income. I/Os areincluded in other assets on the balance sheet.

 

When the Bank sells loansto others, it may hold interest-only strips, which is an interest thatcontinues to be held by the transferor in the securitized receivable.  It may also obtain servicing assets or assumeservicing liabilities that are initially measured at fair value.  Gain or loss on sale of the receivablesdepends in part on both (a) the previous carrying amount of the financialassets involved in the transfer, allocated between the assets sold and theinterests that continue to be held by the transferor based on their relativefair value at the date of transfer, and (b) the proceeds received.  To obtain fair values, quoted market pricesare used if available. If quotes are not available for interests that continueto be held by the transferor, the Bank estimates fair value based on the futureexpected cash flows estimated using management’s best estimates of the keyassumptions — credit losses and discount rates commensurate with the risksinvolved.

 

Servicing Assets: Servicing assets are recognized asseparate assets when rights are acquired through purchase or through sale offinancial assets. When the Bank sells loans to others that it continues toservice, a servicing asset is recorded at fair value. The Corporation valuesits servicing assets by allocating the carrying value of the financial assetbetween the assets sold and the retained interests, if any, based on theirrelative fair values at the date of transfer. Capitalized servicing rights arereported in other assets and are amortized over the life of the loan beingserviced. Servicing assets totaled approximately $80,000 and $216,000 as of December31, 2009 and 2008, respectively. Servicing assets are included on the balancesheet with other assets.

 

The Corporation initiallymeasures all separately recognized servicing assets and servicing liabilitiesat fair value. The Corporation subsequently measures such assets andliabilities using either the amortization method, where it amortizes servicingassets or servicing liabilities in proportion to and over the period ofestimated net servicing income or net servicing loss, or the fair value method,where it measures servicing assets or servicing liabilities at fair value ateach reporting date. The Corporation reports fair value changes in its earningsduring the period in which they occur. Because of the nature of our servicingassets, quoted market prices may not be available, prohibiting the Corporationfrom using the fair value method. Therefore, if no quoted market prices areavailable, the Corporation uses the amortization method. The Corporationassesses servicing assets or servicing liabilities for impairment or increasedobligation based on the fair value at each reporting date. After consideringcosts to service, the Corporation generally values the servicing assets atapproximately 0.20% of the assets’ fair value. The adoption of FASB ASC 860, “Accountingfor Servicing of Financial Assets” (“FASB ASC 860”), did not have a materialeffect on the valuation of the Corporation’s servicing assets or servicingliabilities for the year ended December 31, 2009.

 

Income Per CommonShare: Basic incomeper share available to common stockholders (“EPS”) is computed by dividing netincome available to common stockholders by the weighted average common sharesoutstanding for the period. Diluted EPS reflects the dilution that could occurif securities or other contracts to issue common stock were exercised orconverted. The difference between basic and diluted weighted average sharesoutstanding was attributable to common stock options, common stock appreciationrights, warrants and restricted shares. The dilutive effect of outstandingoptions, common stock appreciation rights, warrants and restricted shares isreflected in diluted EPS by application of the treasury stock method.

 

Stock-Based Compensation: Compensation expense for stock options and non-vestedstock awards is based on the fair value of the award on the measurement date,which, for the Corporation, is the date of the grant and is recognized ratablyover the service period of the award. The fair value of stock options isestimated using the Black-Scholes option-pricing model. The fair value ofnon-vested stock awards and deferred stock units is generally the market priceof the Corporation’s stock on the date of grant. Some amounts have beenreclassified to be comparable to current year presentation.

 

In June of 2007, theTennessee Commerce Bancorp 2007 Equity Plan was adopted and the Corporationreserved authorized shares to be issued, and not repurchased, in accordancewith the provisions of the plan.

 

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Income Taxes:  Income tax expense is the total of the currentyear income tax due or refundable and the change in deferred tax assets andliabilities. Deferred tax assets and liabilities are the expected future taxamounts for the temporary differences between carrying amounts and tax bases ofassets and liabilities, computed using enacted tax rates. A valuationallowance, if needed, reduces deferred tax assets to the amount expected to berealized. Realization of deferred tax assets is dependent upon the generationof a sufficient level of future taxable income and recoverable taxes paid inprior years.

 

The Corporationrecognizes interest and/or penalties related to income tax matters in incometax expense.

 

Advertising Costs:  Advertising costs are generally charged tooperations in the year incurred and totaled approximately $100,000, $107,000and $73,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

 

Off-Balance SheetFinancial Instruments:  Financial instruments includeoff-balance sheet credit instruments, such as commitments to make loans,financial guarantees and standby letters of credit, issued to meet customerfinancing needs. The face amount for these items represents the exposure toloss, before considering customer collateral or ability to repay. Suchfinancial instruments are recorded when they are funded.

 

DividendRestrictions:  Banking regulations require maintainingcertain capital levels and may limit the dividends paid by the Bank to theCorporation, which would limit dividends payable by the Corporation to itsshareholders. In addition, the Fixed Rate Cumulative Perpetual Preferred Stock,Series A, of the Corporation (“Series A Preferred Stock”) includes certainrestrictions regarding the payment of dividends on the Corporation’s commonstock. For more information regarding these restrictions, see Note 16.

 

ComprehensiveIncome:  Comprehensive income consists of net incomeand other comprehensive income. Other comprehensive income includes unrealizedgains and losses on securities available for sale which are also recognized asseparate components of equity.

 

Fair Value ofFinancial Instruments:  Fair values of financialinstruments are estimated using relevant market information and otherassumptions, as more fully disclosed in Note 14. Fair value estimates involveuncertainties and matters of significant judgment regarding interest rates,credit risk, prepayments and other factors, especially in the absence of broadmarkets for particular items. Changes in assumptions or in market conditionscould significantly affect the estimates.

 

Operating Segments:  While the chief decision-makers monitor therevenue streams of the various products and services, the Corporation does nothave any identifiable segments.

 

Reclassifications:  Some items in the prior year financialstatements were reclassified to conform to the current presentation.

 

Recently IssuedAccounting Standards:FASB ASC 810, “Noncontrolling Interest in Consolidated Financial Statements (“FASBASC 810”) amends prior guidance to establish accounting and reporting standardsfor the non-controlling interest in a subsidiary and for the deconsolidation ofa subsidiary. FASB ASC 810 clarifies that a non-controlling interest in asubsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as acomponent of equity in the consolidated financial statements. Among otherthings, FASB ASC 810 requires consolidated net income to be reported at amountsthat include the amounts attributable to both the parent and thenon-controlling interest. It also requires disclosure, on the face of the consolidatedincome statement, of the amounts of consolidated net income attributable to theparent and to the non-controlling interest. The new authoritative guidancebecame effective for the Corporation on January 1, 2009 and did not have asignificant impact on the Corporation’s financial statements.

 

Further new authoritativeaccounting guidance under FASB ASC 810 amends prior guidance to change how acompany determines when an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated. Thedetermination of whether a company is required to consolidate an entity isbased on, among other things, an entity’s purpose and design and a company’sability to direct the activities of the entity that most significantly impactthe entity’s economic performance. The new authoritative accounting guidancerequires additional disclosures about the reporting entity’s involvement withvariable-interest entities and any significant changes in risk exposure due tothat involvement as well as its effect on the entity’s financial statements.The new authoritative accounting guidance under FASB ASC 810 will be effective January1, 2010 and is not expected to have a significant impact on the Corporation’sfinancial statements

 

FASB ASC 260, “Earnings Per Share” (“FASB ASC 260”). On January 1, 2009, the Corporationadopted new authoritative accounting guidance under ASC 260, “Earnings PerShare,” which provides that unvested share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents (whether paid orunpaid) are participating securities and shall be included in the computationof earnings per share pursuant to the two-class method.

 

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FASBASC 855, “Subsequent Events” (“FASB ASC 855”), establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or available to be issued.  FASB ASC 855 defines (i) the period after thebalance sheet date during which a reporting entity’s management should evaluateevents or transactions that may occur for potential recognition or disclosurein the financial statements, (ii) the circumstances under which an entityshould recognize events or transactions occurring after the balance sheet datein its financial statements, and (iii) the disclosures an entity should makeabout events or transactions that occurred after the balance sheet date. FASBASC 855 became effective for the Corporation’s financial statements for periodsending after June 15, 2009 and did not have a significant impact on theCorporation’s financial statements. Management evaluated all events ortransactions that occurred after December 31, 2009 through March 9, 2010, thedate the Corporation issued the accompanying financial statements.  During this period, the Corporation did nothave any material recognizable subsequent events that required recognition inits disclosures with respect to the accompanying financial statements.

 

FASBASC 860 amends prior accounting guidance to enhance reporting about transfersof financial assets, including securitizations, and where companies havecontinuing exposure to the risks related to transferred financial assets. FASBASC 860 eliminates the concept of a “qualifying special-purpose entity” andchanges the requirements for derecognizing financial assets. FASB ASC 860 also requiresadditional disclosures about all continuing involvements with transferredfinancial assets including information about gains and losses resulting fromtransfers during the period. FASB ASC 860 will be effective January 1, 2010 andis not expected to have a significant impact on the Corporation’s financialstatements

 

FASBASC 820, “Fair Value Measurements and Disclosures (“FASB ASC 820”), defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. The provisions of FASBASC 820 became effective for the Corporation on January 1, 2008 for financialassets and financial liabilities and on January 1, 2009 for non-financialassets and non-financial liabilities. For more information about fair valuemeasurements, see Note 14.

 

Additional newauthoritative accounting guidance under FASB ASC 820 affirms that the objectiveof fair value when the market for an asset is not active is the price thatwould be received to sell the asset in an orderly transaction, and clarifiesand includes additional factors for determining whether there has been asignificant decrease in market activity for an asset when the market for thatasset is not active. FASB ASC 820 requires an entity to base its conclusionabout whether a transaction was not orderly on the weight of the evidence. Thenew accounting guidance amended prior guidance to expand certain disclosurerequirements. The Corporation adopted the new authoritative accounting guidanceunder FASB ASC 820 during the first quarter of 2009. Adoption of the newguidance did not significantly impact the Corporation’s financial statements.

 

Further new authoritativeaccounting guidance (Accounting Standards Update No. 2009-5) under FASB ASC 820provides guidance for measuring the fair value of a liability in circumstancesin which a quoted price in an active market for the identical liability is notavailable. In such instances, a reporting entity is required to measure fairvalue utilizing a valuation technique that uses (i) the quoted price of theidentical liability when traded as an asset, (ii) quoted prices for similarliabilities or similar liabilities when traded as assets, or (iii) anothervaluation technique that is consistent with the existing principles of FASB ASC820, such as an income approach or market approach. The new authoritativeaccounting guidance also clarifies that when estimating the fair value of aliability, a reporting entity is not required to include a separate input oradjustment to other inputs relating to the existence of a restriction thatprevents the transfer of the liability. The foregoing new authoritativeaccounting guidance under FASB ASC 820 became effective for the Corporation’sfinancial statements for periods ending after October 1, 2009 and did not havea significant impact on the Corporation’s financial statements.

 

Newauthoritative accounting guidance under FASB ASC 320, “Investments—Debt andEquity Securities” (“FASB ASC 320”), (i) changes existing guidance fordetermining whether an impairment is other than temporary to debt securitiesand (ii) replaces the existing requirement that the entity’s management assertit has both the intent and ability to hold an impaired security until recoverywith a requirement that management assert: (a) it does not have the intent tosell the security; and (b) it is more likely than not it will not have to sellthe security before recovery of its cost basis. Under FASB ASC 320, declines inthe fair value of held-to-maturity and available-for-sale securities belowtheir cost that are deemed to be other than temporary are reflected in earningsas realized losses to the extent the impairment is related to credit losses.The amount of the impairment related to other factors is recognized in othercomprehensive income. The Corporation adopted the provisions of the newauthoritative accounting guidance under FASB ASC 320 during the first quarterof 2009. Adoption of the new guidance did not significantly impact theCorporation’s financial statements.

 

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**NOTE2 - SECURITIES**

 

The fair value ofavailable for sale securities and the related gross unrealized gains and lossesrecognized in accumulated other comprehensive income (loss) were as follows at December31, 2009 and 2008:

 

 
| ** **                  | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **    | ** ** |
|-----------------------------|------------|------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                  | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized** | ** ** |
| **(Dollars  in thousands)** | ** ** | **Value**  | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Cost**      | ** ** |
|                        |       |       |       |           |       |           |       |          |       |
| 2009                        |       |       |       |           |       |           |       |          |       |
|                        |       |       |       |           |       |           |       |          |       |
| U.S.  Government agencies   |       | $          | 82,843     |           | $          | 57             |       | $             | (2,138     | ) | $ | 84,924 |   |
| Corporate  debt securities  |       | 188        |       | 6              |       | —         |       | 182           |       |
| Other                       |       | 10,637     |       | —         |       | —         |       | 10,637        |       |
|                        |       |       |       |           |       |           |       |          |       |
|                        |       | $          | 93,668     |           | $          | 63             |       | $             | (2,138     | ) | $ | 95,743 |   |
|                        |       |       |       |           |       |           |       |          |       |
| 2008                        |       |       |       |           |       |           |       |          |       |
|                        |       |       |       |           |       |           |       |          |       |
| U.S.  Government agencies   |       | $          | 95,195     |           | $          | 1,197          |       | $             | (51        | ) | $ | 94,049 |   |
| Corporate  debt securities  |       | 239        |       | 2              |       | —         |       | 237           |       |
| Corporate  bonds            |       | 411        |       | —         |       | (82            | )          | 493           |       |
| Other                       |       | 5,445      |       | 228            |       | —         |       | 5,217         |       |
|                        |       |       |       |           |       |           |       |          |       |
|                        |       | $          | 101,290    |           | $          | 1,427          |       | $             | (133       | ) | $ | 99,996 |   |

 

Contractual maturities ofdebt securities at December 31, 2009 are shown below. Expected maturities willdiffer from contractual maturities because borrowers may have the right to callor prepay obligations with or without prepayment penalties.

 
| **(Dollars  in thousands)**       | ** ** | **Fair  Value** | ** ** |
|-----------------------------------|------------|-----------------|------------|
|                              |       |            |       |
| Due  in less than one year        |       | $               | —     |   |
| Due  after one through five years |       | 188             |       |
| Due  after five through ten years |       | 21,706          |       |
| Due  after ten years              |       | 71,774          |       |
|                              |       |            |       |
|                              |       | $               | 93,668     |   |

 

Gross gains ofapproximately $1,231,000, $611,000 and $212,000 on sales of securities wererecognized in 2009, 2008 and 2007, respectively. Gross losses of approximately$113,000, $164,000 and $187,000 on sales of securities were recognized in 2009,2008 and 2007, respectively. Securities carried at approximately $70,878,000and $74,979,000 at December 31, 2009 and 2008, respectively, were pledged tosecure deposits and for other purposes as required or permitted by law.

 

Restricted equitysecurities consist of securities which are restricted as to transferability.These securities are recorded at cost.

 
| ** **                    | ** ** | **December  31,** | ** ** |
|-------------------------------|------------|-------------------|------------|
| **(Dollars  in thousands)**   | ** ** | **2009**          | ** ** | **2008** | ** ** |
|                          |       |              |       |   |   |
| Federal  Home Loan Bank stock |       | $                 | 2,169      |   | $ | 1,685 |   |
|                               |            |                   |            |  |  |  |  |

 

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Securities withunrealized losses at year-end 2009 and 2008, and the length of time they havebeen in continuous loss positions were as follows:

 
| ** **                  | ** ** | **Less  than 12 Months** | ** ** | **12  Months or More** | ** ** | **Total** | ** ** |
|-----------------------------|------------|--------------------------|------------|------------------------|------------|-----------|------------|
| ** **                  | ** ** | **Fair**                 | ** ** | **Unrealized**         | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(Dollars  in thousands)** | ** ** | **Value**                | ** ** | **Loss**               | ** ** | **Value** | ** ** | **Loss** | ** ** | **Value** | ** ** | **Loss** | ** ** |
|                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| 2009                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
|                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| U.S.  Government agencies   |       | $                        | 54,552     |                   | $          | 1,882     |       | $ | 14,737 |   | $ | 256 |   | $ | 69,289 |   | $ | 2,138 |   |
| Corporate  bonds            |       | —                   |       | —                 |       | —    |       | — |   | — |   | — |   |
|                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| Total                       |       | $                        | 54,552     |                   | $          | 1,882     |       | $ | 14,737 |   | $ | 256 |   | $ | 69,289 |   | $ | 2,138 |   |
|                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| 2008                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
|                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| U.S.  Government agencies   |       | $                        | —     |                   | $          | —    |       | $ | 8,048 |   | $ | 51 |   | $ | 8,048 |   | $ | 51 |   |
| Corporate  bonds            |       | —                   |       | —                 |       | 411       |       | 82 |   | 411 |   | 82 |   |
|                        |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| Total                       |       | $                        | —     |                   | $          | —    |       | $ | 8,459 |   | $ | 133 |   | $ | 8,459 |   | $ | 133 |   |

 

Unrealizedlosses on U.S. government agency securities have not been recognized in incomebecause the securities are backed by the U.S. government or its agencies,management has the intent and ability to hold for the foreseeable future andthe decline in fair value was largely a result of increases in market interestrates. Furthermore, as of December 31, 2009, management did not have the intentto sell any of the securities classified as available for sale in the tableabove and believe that it is more likely than not that the Corporation will nothave to sell any such securities before a recovery of cost. The fair value ofthe securities above is expected to recover as the securities approach theirmaturity dates and/or market rates decline.

 

There were six and fivesecurities with continued unrealized losses lasting 12 months or more at December31, 2009 and 2008, respectfully. There were 16 securities with continuedunrealized losses lasting less than 12 months at December 31, 2009 and none at December31, 2008.

 

**NOTE3 - LOANS**

 

The following is asummary of loans outstanding by category at December 31:

 
| **(Dollars  in thousands)**             | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-----------------------------------------|------------|-----------|------------|-----------|------------|
| Real  estate:                           |       |      |       |      |       |
|                                    |       |      |       |      |       |
| Construction                            |       | $         | 142,109    |      | $          | 181,638 |   |
| 1 to  4 family residential              |       | 42,425    |       | 37,822    |       |
| Other                                   |       | 259,220   |       | 171,150   |       |
| Commercial,  financial and agricultural |       | 649,475   |       | 589,518   |       |
| Consumer                                |       | 3,476     |       | 3,572     |       |
| Tax  leases                             |       | 74,596    |       | 53,025    |       |
|                                    |       | 1,171,301 |       | 1,036,725 |       |
| Less:  Allowance for loan losses        |       | (19,913   | )          | (13,454   | )          |
|                                    |       |      |       |      |       |
| Net  loans                              |       | $         | 1,151,388  |      | $          | 1,023,271 |   |

 

The Bank records atransfer of financial assets as a sale when it surrenders control over thosefinancial assets to the extent that consideration other than beneficialinterests in the assets is received in exchange. The maximum extent of theCorporation’s recourse obligations on loans transferred during the three-yearperiod ended December 31, 2009 was 10% of the amount transferred, adjusted forany early payoffs or terminations. The amount of the proceeds for loans thatwere transferred with recourse, that were recorded as a sale for each periodwas as follows.

 

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| **(Dollars  in thousands)**                    | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds  from loans transferred with recourse |       | $          | 19,160     |       | $          | 27,045     |       | $ | 40,590 |   |
|                                                |            |            |            |            |            |            |            |  |  |  |

 

The Bank services loansfor the benefit of others. The amount of loans being serviced for the benefitof others at year-end for each period follows:

 
| ** **                      | ** ** | **December******** 31,** | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| **(Dollars  in thousands)**     | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                            |       |                          |       |   |   |   |   |
| Amount  of loans being serviced |       | $                             | 81,704     |   | $ | 105,177 |   | $ | 86,489 |   |
|                                 |            |                               |            |  |  |  |  |  |  |  |

 

Certain parties(principally executive officers and directors of the Bank, including theirrelated interests) were customers of, and had loans with the Bank in theordinary course of business. These loan transactions were made on substantiallythe same terms as those prevailing at the time for comparable loans to otherpersons. They did not involve more than the normal risk of collectability orpresent other unfavorable features.

 

Loans to principalofficers, directors and their affiliates were as follows:

 
| ** **                  | ** ** | **December  31,** | ** ** |
|-----------------------------|------------|-------------------|------------|
| **(Dollars  in thousands)** | ** ** | **2009**          | ** ** | **2008** | ** ** |
|                        |       |              |       |   |   |
| Beginning  balance          |       | $                 | 16,425     |   | $ | 6,804 |   |
| New  loans                  |       | 6,400             |       | 11,888 |   |
| Repayments                  |       | (987              | )          | (2,267 | ) |
|                        |       |              |       |   |   |
| Ending  balance             |       | $                 | 21,838     |   | $ | 16,425 |   |

 

**NOTE4 — ALLOWANCE FOR LOAN LOSSES**

 

Changes in the allowancefor loan losses were as follows:

 
| ** **                               | ** ** | **December  31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|
| **(Dollars  in thousands)**              | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |              |       |   |   |   |   |
| Balance  at beginning of year            |       | $                 | 13,454     |   | $ | 10,321 |   | $ | 6,968 |   |
| Provision  charged to operating expenses |       | 31,039            |       | 9,111 |   | 6,350 |   |
| Loans  charged-off                       |       | (26,085           | )          | (6,099 | ) | (3,310 | ) |
| Recoveries                               |       | 1,505             |       | 121 |   | 313 |   |
|                                     |       |              |       |   |   |   |   |
| Balance  at end of year                  |       | $                 | 19,913     |   | $ | 13,454 |   | $ | 10,321 |   |

 

Impaired loans were asfollows:

 
| ** **                                             | ** ** | **December  31,** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|
| **(Dollars  in thousands)**                            | ** ** | **2009**          | ** ** | **2008** | ** ** |
|                                                   |       |              |       |   |   |
| Balance  of impaired loans with no allocated allowance |       | $                 | 14,993     |   | $ | — |   |
| Balance  of impaired loans with an allocated allowance |       | 26,100            |       | 11,603 |   |
|                                                   |       |              |       |   |   |
| Total  recorded impaired loans                         |       | 41,093            |       | 11,603 |   |
|                                                   |       |              |       |   |   |
| Amount  of the allowance allocated to impaired loans   |       | $                 | 5,580      |   | $ | 3,203 |   |

 

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| ** **                                 | ** ** | **December  31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                       |       |              |       |   |   |   |   |
| Average  of impaired loans during the year |       | $                 | 34,592     |   | $ | 7,875 |   | $ | 3,783 |   |
|                                            |            |                   |            |  |  |  |  |  |  |  |

 

The amount of interestincome recognized for the time that these loans were impaired during 2009, 2008and 2007 was not material to the financial statements.

 

Nonperforming loans wereas follows:

 
| ** **                                    | ** ** | **December  31,** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|
| **(Dollars  in thousands)**                   | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                          |       |              |       |   |   |   |   |
| Loans  past due over 90 days still on accrual |       | $                 | 1,328      |   | $ | 18,788 |   | $ | 1,992 |   |
| Nonaccrual  loans                             |       | 19,151            |       | 11,603 |   | 6,465 |   |
|                                               |            |                   |            |  |  |  |  |  |  |  |

 

Nonperforming loansinclude both smaller balance homogeneous loans that are collectively evaluatedfor impairment and individually classified impaired loans.

 

**NOTE5 — PREMISES AND EQUIPMENT**

 

Below is a summary ofpremises and equipment as of December 31, 2009 and 2008. Depreciation expensefor 2009, 2008 and 2007 was approximately $498,000, $423,000 and $333,000,respectively.

 
| **(Dollars  in thousands)**       | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Leasehold  improvements           |       | $        | 1,321      |     | $          | 1,319 |   |
| Furniture  and equipment          |       | 2,813    |       | 2,680    |       |
|                              |       | 4,134    |       | 3,999    |       |
| Less:  Allowance for depreciation |       | 2,167    |       | 1,669    |       |
|                              |       |     |       |     |       |
|                              |       | $        | 1,967      |     | $          | 2,330 |   |

 

The Bank leases officespace, furniture and equipment under operating leases. Rent expense recognizedin 2009, 2008 and 2007 amounted to approximately $744,000, $660,000 and$390,000, respectively. The remaining minimum lease payments related to theleases at December 31, 2009 were as follows, before considering renewal optionsthat generally are present:

 
| **(Dollars  in thousands)** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| 2010                        |       | $          | 1,351      |   |
| 2011                        |       | 1,896      |       |
| 2012                        |       | 1,939      |       |
| 2013                        |       | 1,977      |       |
| 2014                        |       | 2,021      |       |
| 2015-2017                   |       | 6,318      |       |
|                        |       |       |       |
|                        |       | $          | 15,502     |   |

 

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**NOTE6 - DEPOSITS**

 

Time deposits greaterthan $100,000 amounted to approximately $486,321,000 in 2009 and approximately$566,084,000 in 2008.

 

At December 31, 2009, scheduledmaturities of time deposits were as follows:

 
| **(Dollars  in thousands)** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
|                        |       |            |       |
| 2010                        |       | $          | 521,506    |   |
| 2011                        |       | 236,748    |       |
| 2012                        |       | 96,932     |       |
| 2013                        |       | 35,812     |       |
| 2014                        |       | 36,588     |       |
|                             |            |            |            |  |

 

Deposits held at the Bankby directors, executive officers and their related interests were approximately$1,608,000 and $14,706,000 at December 31, 2009 and 2008, respectively.

 

**NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER DEBT**

 

TheFederal Home Loan Bank (“FHLB”) of Cincinnati advances funds to the Bank withthe requirement that the advances are secured by securities and qualifyingloans, essentially home mortgages (1-4 family residential). At December 31,2009, the Bank had an available line of $55,494,000 with the FHLB. Toparticipate in this program, the Bank is required to be a member of the FHLBand own stock in the FHLB. The Bank had $2,168,900 of such stock at December 31,2009 to satisfy this requirement.

 

At December31, 2009, the Bank had received no advances from the FHLB and, therefore, hadpledged no securities or qualifying loans to the FHLB.

 

At December31, 2009, the Bank had approximately $38,700,000 in available federal fundslines (or the equivalent thereof) with correspondent banks.  At December 31, 2009, the Bank had no federalfunds purchased.

 

In December2009, TCB entered into a short-term revolving line of credit with a qualifiedinvestor, pursuant to which the qualified investor agreed to loan TCB up to$5,000,000 at an interest rate of prime plus 1% with a floor of 6.25%.  The qualified investor’s obligation to makeadvances to TCB under this line of credit terminates on March 31, 2010.  At December 31, 2009, TCB had outstandingborrowings of $4,000,000 under this line of credit.

 

The Corporation had a $15,000,000 line of credit with First TennesseeBank, National Association during 2009. The outstanding principal balance onthis line of credit at December 31, 2009 was $0, as this line of credit waspaid on the maturity date of April 30, 2009.

 

In May2009, the Corporation entered into a short-term revolving line of credit with aqualified investor, pursuant to which the qualified investor agreed to loan theCorporation up to $10,000,000 at an interest rate of 5.0%.  The qualified investor’s obligation to makeadvances to the Corporation under this line of credit has been extended throughFebruary 4, 2011 in the principal balance of $8,750,000.  The Corporation agreed with a qualifiedinvestor that, until the note, together with interest, and all otherindebtedness of the Corporation to the lender are paid in full, the Corporationwill (i) make all financial information available, (ii) pay all taxes andclaims prior to date of penalty, (iii) preserve its corporate status, (iv) givenotice of adverse events, (v) maintain capital ratios and (vi) give notice ofchanges in management.

 

Bothoutstanding lines of credit are secured by all inventories at TCB and 100% ofall outstanding bank stock.

 

**NOTE 8 -DEFERRED COMPENSATION PLANS**

 

During 2009, the Bank paid$25,000,000 to purchase single premium bank-owned life insurance policies (“BOLIs”)for three key executives of the Bank. The Bank is the owner and beneficiary ofthe BOLIs, which serve as investment vehicles that partially offsets costsassociated with the Bank’s other employee benefit plans.  The aggregate cash surrender values of theBOLIs increased by approximately $673,000 in 2009, which was recognized asnoninterest income. Income from the BOLIs is tax exempt.

 

The Bank’s deferredcompensation arrangements for its executive officer include split dollar lifeinsurance plans, non-competitions agreements and supplemental executiveretirements plans (“SERPs”). The estimated present value of future benefits tobe paid under the SERP and non-competition agreements is being accrued over theperiod from the effective date of the agreements through the expectedretirement dates of the participants. The expense incurred and amount accruedfor these plans for the year ended December 31, 2009 was approximately $84,000.

 

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| ** **                                        | ** ** | **Split Dollar  Life Insurance Plan**                                                                                                                                                                                                                                                                                                                                  | ** ** | **Non-Competition Agreement**                                                                                                                                                                                                                                                                       | ** ** | **SERP**                                                                                                                                                                                             |
|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                             | ** ** | ** **                                                                                                                                                                                                                                                                                          | ** ** | ** **                                                                                                                                                                                           |
| **Retired  Chairman and Chief Executive Officer** |       | Lesser  of Net Amount at Risk(1) and two times the sum of the annual salary for the  most recent full year of employment plus the greatest bonus amount paid in  any of the last three full years of employment. If death occurs prior to separation  from the Bank, any amounts owed under the SERP and the Non-Competition  Agreement are deducted from this amount. |       | Term  of two years following separation from service. Pays 120 monthly payments,  each in an amount equal to the greatest annual cash compensation (including  base salary and bonus) paid in any of the last three calendar years of  employment preceding separation from service, divided by 48. |       | N/A                                                                                                                                                                                                  |
| ** **                                        |       |                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                 |
| **Chief  Operating Officer**                      |       | Lesser  of Net Amount at Risk(1) and two times the sum of the annual salary for the  most recent full year of employment plus the greatest bonus amount paid in  any of the last three full years of employment. If death occurs prior to  separation from the Bank, any amounts owed under the SERP and the  Non-Competition Agreement are deducted from this amount. |       | Term  of two years following separation from service. Pays 120 monthly payments,  each in an amount equal to the greatest annual cash compensation (including  base salary and bonus) paid in any of the last three calendar years of  employment preceding separation from service, divided by 48. |       | 96  monthly payments equal to the greater of $4,166.67 or the executive’s average  annual base salary for the highest three-year period ending at his normal  retirement date divided by 48.(2) |
| ** **                                        |       |                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                 |
| **Chairman  and Chief Executive Officer**         |       | Lesser  of Net Amount at Risk(1) and two times the sum of the annual salary for the  most recent full year of employment plus the greatest bonus amount paid in  any of the last three full years of employment. If death occurs prior to  separation from the Bank, any amounts owed under the SERP and the  Non-Competition Agreement are deducted from this amount. |       | N/A                                                                                                                                                                                                                                                                                                 |       | 180  monthly payments equal to the executive’s average annual base salary for the  highest three-year period ending at his normal retirement date divided by  48.(3)                            |

 

----

(1)                      Net Amount atRisk is the difference between the cash surrender value of the insurance policyand the death benefit payable under the policy at the time of death.

 

(2)                      The amount shownassumes termination of employment on or after normal retirement date for areason other than death. This SERP arrangement also contains (i) an earlyretirement benefit that vests after ten years of service and pays an amountequal to the accrued benefit at the time of retirement divided by 96, (ii) adisability benefit which pays an amount equal to the accrued balance at thetime of disability divided by 96, and (iii) a change in control benefit whichpays the greater of the present value of the normal retirement benefit or theaccrued benefit preceding the change in control.  The early retirement and disability benefitsare payable over eight years. The change in control payment is to be made inone lump sum within 30 days of the later of termination of employment or changein control.

 

(3)                      The amount shownassumes termination of employment on or after normal retirement date for areason other than death. This SERP arrangement also contains (i) an earlyretirement benefit that vests after ten years of service and pays an amountequal to the accrued benefit at the time of retirement, (ii) a disabilitybenefit which pays an amount equal to the accrued balance at the time ofdisability, and (iii) a change in control benefit which pays the greater of thepresent value of the normal retirement benefit or the accrued benefit precedingthe change in control.  The earlyretirement and disability benefits are payable over 15 years.  The change in control payment is to be madein one lump sum within 30 days of the later of termination of employment orchange in control.

 

The Bank also providessplit dollar life insurance plans for its top 30 paid employees. These plansgenerally provide a death benefit of up to 1.5 times annual base salary.  The Bank owns the cash surrender value ofeach policy and, by way of a split dollar arrangement, has agreed to endorse aportion of the death benefit over to the name beneficiary. Since the Bank hasno direct benefit obligation to these officers, no such accruals have been madein the Corporation’s financial statements.

 

F-18

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Table of Contents

 

**NOTE9 — INCOME TAXES**

 

Income tax expense(benefit) recognized in the years ended December 31, 2009, 2008 and 2007 wasmade up of current and deferred federal and state tax amounts as shown below:

 
| **(Dollars  in thousands)**    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |     |       |
| Current  federal               |       | $        | (372       | )        | $          | (3,466   | )          | $ | 2,897 |   |
| Current  state                 |       | 18       |       | (14      | )          | 338      |       |
| Deferred  federal              |       | (2,354   | )          | 7,789    |       | 369      |       |
| Deferred  state                |       | (730     | )          | 463      |       | 39       |       |
| Change  in valuation allowance |       | 31       |       | —   |       | —   |       |
|                           |       |     |       |     |       |     |       |
|                           |       | $        | (3,407     | )        | $          | 4,772    |       | $ | 3,643 |   |

 

The tax effect of eachtype of temporary difference that results in net deferred tax assets and liabilitiesis as follows:

 
| **(Dollars  in thousands)**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Assets                                   |       |     |       |     |       |
| Allowance  for loan losses               |       | $        | 7,624      |     | $          | 4,852 |   |
| Nonaccrual  loan interest                |       | 1,013    |       | 337      |       |
| Net  deferred loan fees                  |       | 434      |       | 556      |       |
| Federal  net operating loss carryforward |       | 7,472    |       | 778      |       |
| State  net operating loss carryforward   |       | 343      |       | —   |       |
| Depreciation                             |       | 827      |       | 418      |       |
| AMT  credit carryforward                 |       | 294      |       | 428      |       |
| Unrealized  loss on securities           |       | 795      |       | —   |       |
| Other                                    |       | 592      |       | 280      |       |
| Total  deferred tax assets               |       | 19,394   |       | 7,649    |       |
|                                     |       |          |       |     |       |
| Liabilities                              |       |     |       |     |       |
| Tax  leases                              |       | (22,133  | )          | (13,176  | )          |
| Unrealized  (gain) loss on securities    |       | —   |       | (495     | )          |
| FASB  ASC 860 income adjustments         |       | (1,229   | )          | (2,243   | )          |
| Other                                    |       | (353     | )          | (430     | )          |
| Total  deferred tax asset (liability)    |       | (23,715  | )          | (16,344  | )          |
|                                     |       |          |       |     |       |
| Valuation  allowance                     |       | (31      | )          | —   |       |
|                                     |       |     |       |     |       |
| Net  deferred tax asset (liability)      |       | $        | (4,352     | )        | $          | (8,695 | ) |

 

F-19

----

Table of Contents

 

A reconciliation of theamount computed by applying the federal statutory rate (34%) to pretax incomewith income tax expense (benefit) follows:

 
| **(Dollars  in thousands)**    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |     |       |
| Tax  expense at statutory rate |       | $        | (3,055     | )        | $          | 4,259    |       | $ | 3,583 |   |
| State  income tax effect       |       | (470     | )          | 296      |       | 249      |       |
| Other                          |       | 87       |       | 217      |       | (189     | )          |
| Valuation  allowance           |       | 31       |       | —   |       | —   |       |
|                           |       |     |       |     |       |     |       |
| Income  tax expense            |       | $        | (3,407     | )        | $          | 4,772    |       | $ | 3,643 |   |

 

The Corporation had nounrecognized tax benefits as of December 31, 2009, 2008, and 2007.  No significant increase is expected over thenext 12 months.

 

Should the accrual of anyinterest or penalties relative to unrecognized tax benefits be necessary, it isthe Corporation’s policy to record such accruals in its income taxaccounts.  No such accruals existed as ofDecember 31, 2009, 2008, and 2007.

 

The Corporation and itssubsidiaries file a consolidated U.S. federal income tax return and variousreturns in states where its banking offices are located.  The Corporation’s filed income tax returnsare no longer subject to examination by taxing authorities for years before2006.

 

The Corporation has afederal net operating loss carryforward of $22.0 million that will begin toexpire in 2028, if not previously utilized.

 

The Corporation has astate net operating loss carryforward of approximately $7.9 million, which iscomprised of (i) a Tennessee NOL of approximately $6.6 million, which willexpire in 2024, if not previously utilized, (ii) a Minnesota NOL ofapproximately $371,000, which will expire in 2024, if not previously utilized, (iii)an Alabama NOL of approximately $136,000, which will expire in 2017, if notpreviously utilized, and (iv) a Georgia NOL of approximately $740,000, whichwill expire in 2029, if not previously utilized.

 

The Corporation has afederal alternative minimum tax credit carryforward of approximately $294,000that will not expire, and a federal general business tax credit of approximately$47,000 that will begin to expire in 2026, if not previously utilized.

 

The Bank has a Georgia Form900 credit carryforward of approximately $12,000 that will expire in 2014, ifnot previously utilized.

 

**NOTE 10 — COMMITMENTS AND CONTINGENCIES**

 

The Bank is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers. These financialinstruments include commitments to extend credit, standby letters of credit andfinancial guarantees. Those instruments involve, to varying degrees, elementsof credit risk in excess of the amount recognized in the balance sheet. Thecontract or notional amounts of those instruments reflect the extent ofinvolvement the Bank has in those particular financial instruments.

 

The Bank’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit, standby letters of credit andfinancial guarantees is represented by the contractual or notional amount ofthose instruments. The Bank uses the same credit policies in making commitmentsand conditional obligations as it does for on-balance sheet instruments.

 

The following tablereflects financial instruments for which contract amounts represented creditrisk as of December 31, for the following years:

 
| ** **                                          | ** ** | **2009**  | ** ** | **2008**     | ** ** |
|-----------------------------------------------------|------------|-----------|------------|--------------|------------|
| ** **                                          | ** ** | **Fixed** | ** ** | **Variable** | ** ** | **Fixed** | ** ** | **Variable** | ** ** |
| **(Dollars  in thousands)**                         | ** ** | **Rate**  | ** ** | **Rate**     | ** ** | **Rate** | ** ** | **Rate** | ** ** |
|                                                |       |      |       |         |       |   |   |   |   |
| Commitments  to extend credit                       |       | $         | 23,457     |         | $          | 71,800 |   | $ | 39,529 |   | $ | 137,950 |   |
| Standby  letters of credit and financial guarantees |       | —    |       | 9,106        |       | — |   | 12,045 |   |
|                                                     |            |           |            |              |            |  |  |  |  |  |  |  |  |

 

F-20

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Table of Contents

 

Commitments to make loansare generally made for periods of one year or less. The fixed rate loancommitments had interest rates ranging from 3.25% to 11% and maturities rangingfrom two months to five years at December 31, 2009.

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Because many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements. The Bank evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary bythe Bank upon extension of credit, is based on management’s credit evaluation.Collateral held varies but may include accounts receivable, inventory,property, plant and equipment, and income-producing commercial properties.

 

Standby letters of creditare conditional commitments issued by the Bank to guarantee the performance ofa customer to a third party. Those guarantees are primarily issued to supportpublic and private borrowing arrangements, including commercial paper, bondfinancing, and similar transactions. All letters of credit are due within oneyear or less of the original commitment date. The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingloan facilities to customers.

 

The Bank guarantees alease for a commercial airline company. The value of the guarantee is$4,427,000 at December 31, 2009 and 2008, respectively, and is included in thetable above.

 

The Bank primarily servescustomers located in Middle Tennessee. As such, the Bank’s loans, commitmentsand letters of credit have been granted to customers in that area.Concentration of credit by type of loan is presented above in Note 3.

 

The Corporation is partyto proceedings arising from the 2008 termination of its former Chief FinancialOfficer (the “Plaintiff”). Those proceedings include a complaint with theUnited States Department of Labor (the “SOX complaint”) filed by the Plaintiffunder the Sarbanes-Oxley Act of 2002 (“SOX”), and a lawsuit in the UnitedStates District Court for the Middle District of Tennessee.  The Corporation has brought a counter-claimagainst the Plaintiff that he engaged in misfeasance and malfeasance as theCorporation’s Chief Financial Officer, in breach of his fiduciary duty as anofficer of the Corporation under Tennessee law.

 

In 2009, the Departmentof Labor (the “DOL”) indicated that it will likely issue a preliminary order onthe SOX Complaint finding probable cause that the Corporation placed thePlaintiff on administrative leave and subsequently discharged him in retaliationfor engaging in protected activity under SOX. The Corporation has objected tothe issuance of a preliminary order and the DOL has not opined with respect tothose objections.  If the DOL issues anadverse preliminary order, then the Corporation intends to appeal any suchfinding through the DOL’s administrative review process.

 

The Corporation deniesany liability to the Plaintiff or violation of any law, contract or otherwiseand intends to contest all matters brought by the Plaintiff vigorously. It isnot possible at this time to determine the ultimate amount of liabilityincurred, if any. Therefore, no accrual has been made in the financialstatements.

 

**NOTE11 — EMPLOYEE BENEFITS**

 

The Bank maintains a 401(k)plan for all employees who have satisfied the minimum age and servicerequirements. The Bank may make discretionary contributions and employees vestin employer contributions over five years. The Bank made no contributions tothe plan during 2009, 2008 or 2007.

 

**NOTE12 — REGULATORY MATTERS**

 

Under capital adequacyguidelines and the regulatory framework for prompt corrective action, theCorporation and the Bank are required to meet specific capital adequacyguidelines that involve quantitative measures of a bank’s assets, liabilitiesand certain off-balance sheet items as calculated under regulatory accountingpractices. Failure to meet minimum capital requirements can initiate certainmandatory and possible additional discretionary actions by regulators that, ifundertaken, could have a material effect on the Bank’s financial condition.

 

The Corporation and theBank’s capital amounts and classifications are also subject to qualitativejudgments by the regulators about components, risk weightings and otherfactors. The risk-based guidelines are based on the assignment of risk weightsto assets and off-balance sheet items depending on the level of credit riskassociated with them. In addition to minimum capital requirements, under theregulatory framework for prompt corrective action, regulatory agencies havespecified certain ratios an institution must maintain to be considered “undercapitalized,”“adequately capitalized,” and “well capitalized.” Based solely on analysis offederal banking regulatory categories, on December 31, 2009 and 2008 theCorporation and the Bank both fall within the “well capitalized” categoriesunder the regulations.

 

F-21

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Table of Contents

 

As a result of a recentlycompleted routine bank examination, the Bank’s management expects the examinersto recommend an informal corrective action for the Bank. On the basis ofearlier discussions with these examiners, the board of the Bank voluntarilydetermined in October 2009 to adopt certain measures proactively to reduce riskand strengthen the capital position of the Bank. These measures addressedcapital adequacy and preservation, asset growth and funding sources. Based onthese discussions and the current economic environment, it is management’sintent to take steps to increase the Bank’s capital ratios and reduce creditand funding risk. Management is in the process of finalizing the appropriatelevels for these and other measures with the FDIC and the Tennessee Departmentof Financial Institutions. The board of directors and management of the Companyand the Bank are committed to addressing and resolving any issues that might beraised in an informal corrective action, if and when issued.

 

The Bank and theCorporation’s capital amounts and ratios at December 31, 2009 and 2008 were asfollows:

 
| ** **                  | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **To  Be Well**        | ** ** |
|-----------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **Capitalized  Under** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** **             | ** ** | **For  Capital**       | ** ** | **Prompt  Corrective** | ** ** |
| ** **                  | ** ** | **Actual** | ** ** | **Adequacy  Purposes** | ** ** | **Action  Provisions** | ** ** |
| **(Dollars  in thousands)** | ** ** | **Amount** | ** ** | **Ratio**              | ** ** | **Amount**             | ** ** | **Ratio**              | ** ** | **Amount**             | ** ** | **Ratio** | ** ** |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| 2009                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Total  risk-based           |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Bank                        |       | $          | 132,580    |                   | 10.63      | %                      | $          | 99,778                 |       | 8.0                    | %          | $ | 124,723 |   | 10.0 | % |
| Corporation                 |       | $          | 135,809    |                   | 10.83      | %                      | $          | 100,320                |       | 8.0                    | %          | n/a |   |   |   |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Tier  1 to risk-based       |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Bank                        |       | $          | 116,934    |                   | 9.37       | %                      | $          | 49,918                 |       | 4.0                    | %          | $ | 74,878 |   | 6.0 | % |
| Corporation                 |       | $          | 120,078    |                   | 9.57       | %                      | $          | 50,269                 |       | 4.0                    | %          | n/a |   |   |   |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Tier  1 leverage            |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Bank                        |       | $          | 116,934    |                   | 8.74       | %                      | $          | 53,517                 |       | 4.0                    | %          | $ | 66,896 |   | 5.0 | % |
| Corporation                 |       | $          | 120,078    |                   | 8.93       | %                      | $          | 53,186                 |       | 4.0                    | %          | n/a |   |   |   |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| 2008                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Total  risk-based           |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Bank                        |       | $          | 120,746    |                   | 11.01      | %                      | $          | 87,716                 |       | 8.0                    | %          | $ | 109,645 |   | 10.0 | % |
| Corporation                 |       | $          | 136,900    |                   | 12.42      | %                      | $          | 88,207                 |       | 8.0                    | %          | n/a |   |   |   |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Tier  1 to risk-based       |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Bank                        |       | $          | 107,292    |                   | 9.79       | %                      | $          | 43,858                 |       | 4.0                    | %          | $ | 65,787 |   | 6.0 | % |
| Corporation                 |       | $          | 123,446    |                   | 11.20      | %                      | $          | 44,103                 |       | 4.0                    | %          | n/a |   |   |   |
|                        |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Tier  1 leverage            |       |       |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Bank                        |       | $          | 107,292    |                   | 9.26       | %                      | $          | 46,359                 |       | 4.0                    | %          | $ | 57,949 |   | 5.0 | % |
| Corporation                 |       | $          | 123,446    |                   | 10.62      | %                      | $          | 46,473                 |       | 4.0                    | %          | n/a |   |   |   |

 

**NOTE13 — STOCK COMPENSATION**

 

The purpose of theCorporation’s 2007 Equity Plan (the “Plan”) is to provide financial incentivesfor selected employees and non-employee directors, thereby promoting thelong-term growth and financial success of the Corporation by (a) attracting andretaining employees and non-employee directors of outstanding ability, (b) strengtheningthe Corporation’s capability to develop, maintain, and direct a competentmanagement team, (c) providing an effective means for selected employees andnon-employee directors to acquire and maintain ownership of the Corporation’scommon stock, (d) motivating employees to achieve long-range performance goalsand objectives, and (e) providing incentive compensation opportunitiescompetitive with peer financial institution holding companies. Unless earlierterminated by the Board, the Plan will terminate on the tenth anniversary ofits effective date, or June 8, 2017.

 

F-22

----

Table of Contents

 

Theweighted-average fair value of stock options granted during 2009, 2008 and 2007estimated using the Black-Scholes valuation model, was $2.57, $4.45 and $5.75.The historical volatility is annualized standard deviation of the differencesin the natural logarithms of the possible future stock price. The assumptionsused to determine the fair value of options granted are detailed in the tablebelow.

 
| ** **               | ** ** | **2009** | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|--------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                     |       |     |       |      |       |      |       |
| Risk-free  interest rate |       | 0.30     | %          | 3.27      | %          | 4.94      | %          |
| Expected  option life    |       | 10 years |       | 3.5 years |       | 3.5 years |       |
| Dividend  yield          |       | 0.0      | %          | 0.0       | %          | 0.0       | %          |
| Volatility               |       | 45.0     | %          | 20.0      | %          | 20.0      | %          |

 

A summary of the activityrelated to stock options is as follows:

 
| ** **                        | ** ** | **2009**   | ** ** | **2008**     | ** ** | **2007**   | ** ** |
|-----------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                              |       |       |       |         |       |       |       |   |   |   |   |   |   |
| Outstanding  at beginning of year |       | 833,070    |       | $            | 13.49      |       | 798,570    |   | $ | 13.14 |   | 871,092 |   | $ | 8.78 |   |
| Options  granted                  |       | 200,000    |       | 6.01         |       | 150,000    |       | 22.15 |   | 200,000 |   | 25.00 |   |
| Options  exercised                |       | —     |       | —       |       | (7,500     | )          | 5.00 |   | (272,522 | ) | 7.91 |   |
| Options  forfeited or expired     |       | (167,250   | )          | 6.90         |       | (108,000   | )          | 23.47 |   | — |   | — |   |
| Outstanding  at end of year       |       | 865,820    |       | $            | 13.66      |       | 833,070    |   | $ | 13.49 |   | 798,570 |   | $ | 13.14 |   |
|                              |       |       |       |         |       |       |       |   |   |   |   |   |   |
| Options  exercisable at year-end  |       | 700,620    |       |         |       | 669,470    |       |   |   | 638,570 |   |   |   |

 

At December 31, 2009,options outstanding had a weighted average remaining contractual term of 4.50years and an aggregate intrinsic value of $(8,043,000). At December 31, 2008,options exercisable had a weighted average remaining contractual term of 3.64years and an aggregate intrinsic value of $(5,743,000). During the years ended December31, 2009, 2008 and 2007, the aggregate intrinsic value of options exercisedunder the Corporation’s stock option plans was $0, $136,275 and $5,404,895,respectively. Of the options to purchase 200,000 shares of common stock grantedin 2009, 150,000 were forfeited, and none vested, leaving 50,000 sharesunvested as of December 31, 2009.  Thefair value of shares vested during 2009, 2008 and 2007 were approximately$254,000, $351,000 and $117,000, respectively.

 

Stock-based compensationexpense totaled $335,000 in 2009, $289,000 in 2008 and $259,000 in 2007.Stock-based compensation expense is recognized ratably over the requisiteservice period for all awards. Unrecognized stock-based compensation expenserelated to non-vested stock options totaled $427,197 at December 31, 2009. Atsuch date, the weighted-average period over which this unrecognized expense wasexpected to be recognized was 1.43 years.

 

A summary of the weightedaverage grant date fair value of options vested during 2009 is as follows:

 
| ** **                   | ** ** | ** **   | ** ** | **Outstanding  at** | ** ** | ** **  | ** ** | ** **    | ** ** | ** ** | ** ** | **Outstanding  at** | ** ** | ** **      | ** ** |
|------------------------------|------------|--------------|------------|---------------------|------------|-------------|------------|---------------|------------|------------|------------|---------------------|------------|-----------------|------------|
| ** **                   | ** ** | **Exercise** | ** ** | **January  1,**     | ** ** | ** **  | ** ** | ** **    | ** ** | ** ** | ** ** | **December  31,**   | ** ** | **Fair  Value** | ** ** |
| ** **                   | ** ** | **Price**    | ** ** | **2009**            | ** ** | **Granted** | ** ** | **Forfeited** | ** ** | **Vested** | ** ** | **2009**            | ** ** | **Price**       | ** ** |
|                         |       | $            | 25.00      |                | 90.000     |        | —     |          | —     |       | 30,000     |                | 60,000     |            | $          | 5.75 |   |
|                         |       | $            | 22.15      |                | 73,600     |        | —     |          | —     |       | 18,400     |                | 55,200     |            | $          | 4.45 |   |
|                         |       | $            | 6.50       |                | —     |        | 50,000     |          | —     |       | —     |                | 50,000     |            | $          | 3.45 |   |
|                         |       | $            | 5.85       |                | —     |        | 150,000    |          | (150,000   | )          | —     |                | —     |            | $          | 2.28 |   |
|                         |       |         |       |                |       |        |       |          |       |       |       |                |       |            |       |
|                         |       |         |       | 163,600             |       | 200,000     |       | (150,000      | )          | 48,400     |       | 165,200             |       |            |       |
|                         |       |         |       |                |       |        |       |          |       |       |       |                |       |            |       |
| Weighted  average fair value |       |         |       | $                   | 5.17       |        | $          | 2.57          |       | $          | 2.28       |                | $          | 5.26            |       | $ | 4.62 |   |   |   |
|                              |            |              |            |                     |            |             |            |               |            |            |            |                     |            |                 |            |  |  |  |  |  |  |  |

 

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Options outstanding atyear-end 2009 were as follows:

 
| ** **               | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** |
|--------------------------|------------|-----------------|------------|-----------------|------------|
| ** **               | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **      | ** ** | **Average**     | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** **      | ** ** | **Remaining**   | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise**             | ** ** | ** **      | ** ** | **Contractual** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **Prices**               | ** ** | **Number**      | ** ** | **Life**        | ** ** | **Number** | ** ** | **Price** | ** ** |
|                     |       |            |       |            |       |   |   |   |   |
| $5.00                    |       | 163,820         |       | 0.04 years      |       | 163,820 |   | $ | 5.00 |   |
| $7.50                    |       | 95,000          |       | 3.14 years      |       | 95,000 |   | $ | 7.50 |   |
| $10.50                   |       | 211,000         |       | 3.67 years      |       | 211,000 |   | $ | 10.50 |   |
| $16.00                   |       | 44,000          |       | 5.50 years      |       | 44,000 |   | $ | 16.00 |   |
| $25.00                   |       | 150,000         |       | 7.46 years      |       | 90,000 |   | $ | 25.00 |   |
| $21.00                   |       | 60,000          |       | 4.06 years      |       | 60,000 |   | $ | 21.00 |   |
| $22.15                   |       | 92,000          |       | 8.03 years      |       | 36,800 |   | $ | 22.15 |   |
| $6.50                    |       | 50,000          |       | 9.42 years      |       | — |   | $ | — |   |
| Outstanding  at year-end |       | 865,820         |       | 4.50 years      |       | 700,620 |   | $ | 12.53 |   |

 

A summary of theactivity related to restricted stock is as follows:

 
| ** **                                                                           | ** ** | **Number** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|
| Shares  of restricted stock outstanding at December 31, 2008                         |       | 10,079     |       |
| Shares  of restricted stock issued                                                   |       | 9,232      |       |
| Restrictions  lapsed and shares released                                             |       | (11,248    | )          |
| Shares  of restricted stock forfeited or expired                                     |       | —     |       |
| Restricted  stock-based awards outstanding at December 31, 2009                      |       | 8,063      |       |
|                                                                                 |       |       |       |
| Restricted  stock-based awards outstanding and expected to vest at December 31, 2009 |       | 8,063      |       |

 

In June of 2009, fourmembers of the board of directors who were also executive officers received anaggregate of 9,232 shares of restricted stock that were expensed as if subjectto a six-month vesting period; each of the remaining five directors receivedoptions to purchase 10,000 shares of commons stock, with an exercise price of$6.50.

 

**NOTE14 — FAIR VALUES OF FINANCIAL INSTRUMENTS**

 

The methods andassumptions used to estimate fair value are described as follows:

 

FASBASC 820 requires disclosure of the fair value of financial assets and financialliabilities, including those financial assets and financial liabilities thatare not measured and reported at fair value on a recurring basis ornonrecurring basis. A detailed description of the valuation methodologies usedin estimating the fair value of financial instruments is set forth in theCorporation’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

Carrying amount is theestimated fair value for cash and due from financial institutions, federalfunds sold and purchased, accrued interest receivable and payable, demanddeposits and variable rate loans or deposits that reprice frequently and fully.Security fair values are based on market prices or dealer quotes, and if nosuch information is available, on the rate and term of the security andinformation about the issue. For fixed rate loans or deposits and for variablerate loans or deposits with infrequent re-pricing or re-pricing limits, fairvalue is based on discounted cash flows using current market rates applied tothe estimated life and credit risk. The fair value of the subordinated longterm debt is based on discounted cash flows using current market rates appliedto the estimated life of the debt. Other assets and accrued liabilities arecarried at fair value. The fair value of off-balance-sheet loan commitments isconsidered nominal.

 

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The estimated fair valuesof the Bank’s financial instruments at December 31, 2009 and 2008 were asfollows:

 
| ** **                                | ** ** | **2009**     | ** ** | **2008**  | ** ** |
|-------------------------------------------|------------|--------------|------------|-----------|------------|
| ** **                                | ** ** | **Carrying** | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| **(Dollars  in thousands)**               | ** ** | **Amount**   | ** ** | **Value** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial  assets                         |       |         |       |      |       |   |   |   |   |
| Cash  and due from financial institutions |       | $            | 22,864     |      | $          | 22,864 |   | $ | 5,260 |   | $ | 5,260 |   |
| Federal  funds sold                       |       | 15,010       |       | 15,010    |       | 35,538 |   | 35,538 |   |
| Securities  available for sale            |       | 93,668       |       | 93,668    |       | 101,290 |   | 101,290 |   |
| Loans,  net                               |       | 1,151,388    |       | 1,250,425 |       | 1,023,271 |   | 1,114,151 |   |
| Accrued  interest receivable              |       | 9,711        |       | 9,711     |       | 8,115 |   | 8,115 |   |
| Income  tax receivable                    |       | 68           |       | 68        |       | 4,430 |   | 4,430 |   |
| Bank-owned  life insurance                |       | 25,673       |       | 25,673    |       | — |   | — |   |
| Restricted  equity securities             |       | 2,169        |       | 2,169     |       | 1,685 |   | 1,685 |   |
| Financial  liabilities                    |       |         |       |      |       |   |   |   |   |
| Deposits                                  |       | $            | 1,242,542  |      | $          | 1,263,535 |   | $ | 1,069,143 |   | $ | 1,106,907 |   |
| Accrued  interest payable                 |       | 1,430        |       | 1,430     |       | 3,315 |   | 3,315 |   |
| Accrued  dividends payable                |       | 187          |       | 187       |       | — |   | — |   |
| Short  term borrowings                    |       | 14,000       |       | 14,000    |       | 10,000 |   | 10,000 |   |
| Subordinated  long-term debt              |       | 23,198       |       | 23,175    |       | 23,198 |   | 24,897 |   |

 

The Bank has anestablished process for determining fair values of the financial instruments,in accordance with FASB ASC 820. Fair value is based upon quoted market prices,where available. If listed prices or quotes are not available, fair value isbased upon internally developed models or processes that use primarilymarket-based or independently-sourced market data, including interest rateyield curves, option volatilities and third party information. Valuationadjustments may be made to ensure that financial instruments are recorded atfair value. These adjustments include amounts to reflect counterparty creditquality (for financial assets reflected at fair value), the Bank’screditworthiness (for financial liabilities reflected at fair value), liquidityand other unobservable parameters that are applied consistently over time asfollows:

 

·                      Credit valuation adjustments are necessary when themarket price (or parameter) is not indicative of the credit quality of thecounterparty;

 

·                      Debit valuation adjustments are necessary to reflectthe credit quality of the Bank in the valuation of liabilities measured at fairvalue;

 

·                      Liquidity valuation adjustments are necessary when theBank may not be able to observe a recent market price for a financialinstrument that trades in inactive (or less active) markets or to reflect thecost of exiting larger- than-normal market-size risk positions; and

 

·                      Unobservable parameter valuation adjustments arenecessary when positions are valued using internally developed models that useas their basis unobservable parameters — that is, parameters that must be estimatedand are, therefore, subject to management judgment to substantiate the modelvaluation. These financial instruments are normally traded less actively.

 

The methods describedabove may produce a fair value calculation that may not be indicative of netrealizable value or reflective of future fair values. Furthermore, whilemanagement believes its valuation methods are appropriate and consistent withother market participants, the use of different methodologies, or assumptions,to determine the fair value of certain financial instruments could result in adifferent estimate of fair value at the reporting date.

 

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**ValuationHierarchy**

 

FASB ASC 820 establishesa three-level valuation hierarchy for disclosure of fair value measurements.The valuation hierarchy is based upon the transparency of inputs to thevaluation of an asset or liability as of the measurement date. The three levelsare defined as follows:

 

·                  Level 1 — inputs to the valuation methodology are quoted prices(unadjusted) for identical assets or liabilities in active markets.

 

·                  Level 2 — inputs to the valuation methodology include quoted prices forsimilar assets and liabilities in active markets, and inputs that areobservable for the asset or liability, either directly or indirectly, forsubstantially the full term of the financial instrument, and

 

·                  Level 3 — inputs to the valuation methodology are unobservable andsignificant to the fair value measurement.

 

Afinancial instrument’s categorization within the valuation hierarchy is basedupon the lowest level of input that is significant to the fair valuemeasurement.  Below is a description of thevaluation methodologies used for instruments measured at fair value, as well asthe general classification of such instruments pursuant to the valuationhierarchy.

 

**Assets**

 

*SecuritiesAvailable for Sale -*Available-for-sale securities are recorded at fair value on a recurring basis.  Where quoted prices are available in an activemarket, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities include highly liquidgovernment bonds, federal funds sold and certain other products.  Fair value measurement is based upon quotedprices, if available.  If quoted pricesare not available, securities would generally be classified within Level 2, andfair value would be determined by matrix pricing, which is a mathematicaltechnique widely used in the industry to value debt securities without relyingexclusively on quoted prices for the specific securities but relying on thesecurities’ relationship to other benchmark quoted securities. In certain caseswhere there is limited activity or less transparency around inputs to thevaluation, securities are classified within Level 3 of the valuation hierarchy.For the 12 months ended December 31, 2009, all of the Bank’s available-for-salesecurities were valued using matrix pricing and were classified within Level 2of the valuation hierarchy.

 

*ServicingAssets -* Allseparately recognized servicing assets and servicing liabilities are initiallymeasured at fair value. Subsequent measurement methods include the amortizationmethod, whereby servicing assets or servicing liabilities are amortized overthe period of estimated net servicing income or net servicing loss, or the fairvalue method, whereby servicing assets or servicing liabilities are measured atfair value at each reporting date and changes in fair value are reported inearnings in the period in which they occur. Because of the unique nature of theBank’s servicing assets, quoted market prices may not be available.  If no quoted market prices are available, theamortization method is used.  The Bankassesses servicing assets or servicing liabilities for impairment or increasedobligation based on the fair value at each reporting date.  At December 31, 2009, the Bank had servicingassets measured at fair value on a recurring basis classified within Level 3 ofthe valuation hierarchy.

 

*Interest-OnlyStrips -* When theBank sells loans to others, it may hold interest-only strips, which is aninterest that continues to be held by the transferor in the securitizedreceivable.  It may also retain servicingassets or assume servicing liabilities that are initially measured at fairvalue.  Gain or loss on sale of thereceivables depends in part on both (a) the previous carrying amount of thefinancial assets involved in the transfer, allocated between the assets soldand the interests that continue to be held by the transferor based on theirrelative fair value at the date of transfer, and (b) the proceeds received.  To obtain fair values, quoted market pricesare used if available.  Quotes are generallynot available for interests that continue to be held by the transferor, so theBank generally estimates fair value based on the future expected cash flowsestimated using management’s best estimates of the key assumptions — creditlosses and discount rates commensurate with the risks involved. At December 31,2009, the Bank had interest-only strips measured at fair value on a recurringbasis classified within Level 3 of the valuation hierarchy.

 

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*ImpairedLoans —* A loan isconsidered to be impaired when it is probable the Bank will be unable tocollect all principal and interest payments due in accordance with thecontractual terms of the loan agreement. Individually identified impaired loansare measured based on the present value of expected payments using the loan’soriginal effective rate as the discount rate, the loan’s observable marketprice, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in theimpaired loan exceeds the measure of fair value, a valuation allowance may beestablished as a component of the allowance for loan losses.  At December 31, 2009, the Bank had impairedloans measured on a nonrecurring basis classified within Level 3 of thevaluation hierarchy.

 

*Inventory—*Repossessedassets are resold at retail prices as soon as practicable.  If a repossession of the Bank is not resoldwithin the six month holding period allowed by Tennessee law, it is purchasedby TCB, held as inventory and carried at fair market value.  The sole purpose of TCB is the resale ofassets repossessed by the Bank. At December 31, 2009, TCB had inventorymeasured at fair value on a nonrecurring basis classified within Level 3 of thevaluation hierarchy.

 

*OtherAssets —* Includedin other assets are certain assets carried at fair value, includingrepossessions and other real estate owned (“OREO”). The carrying amount isbased on an observable market price or appraisal value. The Bank reflects theseassets within Level 3 of the valuation hierarchy. At December 31, 2009, theBank had repossessions and OREO measured at fair value on a nonrecurring basisclassified within Level 3 of the valuation hierarchy.

 

*Bank-OwnedLife Insurance**—*The Bank also includes bank owned life insurance (“BOLI”) within other assets,carried at book value. At December 31, 2009, the Bank had BOLI measured at fairvalue on a recurring basis classified within Level 3 of the valuationhierarchy.

 

**Liabilities**

 

*RecourseObligations* — Themaximum extent of the Bank’s recourse obligations on loans transferred is 10%of the amount transferred adjusted for any early payoffs or terminations, basedon the Bank’s payment history on loans of the type transferred. At December 31,2009, the Bank had recourse obligations measured at fair value on a recurringbasis classified within Level 3 of the valuation hierarchy.

 

The following tablepresents the financial instruments carried at fair value as of December 31,2009, by caption on the consolidated balance sheets and by FASB ASC 820valuation hierarchy (as described above) (dollars in thousands):

 

**Assetsand liabilities measured at fair value on a recurring basis as of December 31,2009**

 
| ** **                          | ** ** | **Total********carrying********value in the********consolidated********balance** | ** ** | **Quoted********market********prices in an********active********market** | ** ** | **Internal********models with********significant********observable********market********parameters** | ** ** | **Internal********models with********significant********unobservable********market********parameters** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **sheet**                                                                        | ** ** | **(Level  1)**                                                           | ** ** | **(Level  2)**                                                                                       | ** ** | **(Level  3)**                                                                                         | ** ** |
| Securities  available for sale      |       | $                                                                                | 93,668     |                                                                     | $          | —                                                                                               |       | $                                                                                                      | 93,668     |   | $ | — |   |
| Servicing  assets                   |       | 80                                                                               |       | —                                                                   |       | —                                                                                               |       | 80                                                                                                     |       |
| Interest-only  strips               |       | 2,796                                                                            |       | —                                                                   |       | —                                                                                               |       | 2,796                                                                                                  |       |
| BOLI                                |       | 25,673                                                                           |       | —                                                                   |       | —                                                                                               |       | 25,673                                                                                                 |       |
|                                |       |                                                                             |       |                                                                     |       |                                                                                                 |       |                                                                                                   |       |
| **Total assets at fair value**      |       | $                                                                                | 122,217    |                                                                     | $          | —                                                                                               |       | $                                                                                                      | 93,668     |   | $ | 28,549 |   |
|                                |       |                                                                                  |       |                                                                     |       |                                                                                                 |       |                                                                                                   |       |
| Recourse  obligations               |       | 317                                                                              |       | —                                                                   |       | —                                                                                               |       | 317                                                                                                    |       |
| **Total liabilities at fair value** |       | $                                                                                | 317        |                                                                     | $          | —                                                                                               |       | $                                                                                                      | —     |   | $ | 317 |   |

 

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The Corporation may berequired, from time to time, to measure certain assets at fair value on anonrecurring basis in accordance with generally accepted accounting principles.These include assets that are measured at the lower of cost or market that wererecognized at fair value below the cost at the end of the period. The followingtable presents the financial instruments carried at fair value as of December 31,2009, by caption on the consolidated balance sheets and by FASB ASC 820valuation hierarchy (as described above) (dollars in thousands):

 

**Assetsand liabilities measured at fair value on a nonrecurring basis as of December 31,2009**

 
| ** **                          | ** ** | **Total********carrying********value in the********consolidated********balance** | ** ** | **Quoted********market********prices in an********active********market** | ** ** | **Internal********models with********significant********observable********market********parameters** | ** ** | **Internal********models with********significant********unobservable********market********parameters** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **sheet**                                                                        | ** ** | **(Level  1)**                                                           | ** ** | **(Level  2)**                                                                                       | ** ** | **(Level  3)**                                                                                         | ** ** |
| Impaired  loans                     |       | $                                                                                | 41,093     |                                                                     | $          | —                                                                                               |       | $                                                                                                      | —     |   | $ | 41,093 |   |
| Inventory                           |       | 9,782                                                                            |       | —                                                                   |       | —                                                                                               |       | 9,782                                                                                                  |       |
| Other  Assets                       |       | 27,983                                                                           |       | —                                                                   |       | —                                                                                               |       | 27,983                                                                                                 |       |
|                                |       |                                                                             |       |                                                                     |       |                                                                                                 |       |                                                                                                   |       |
| **Total assets at fair value**      |       | $                                                                                | 78,858     |                                                                     | $          | —                                                                                               |       | $                                                                                                      | —     |   | $ | 78,858 |   |
|                                |       |                                                                             |       |                                                                     |       |                                                                                                 |       |                                                                                                   |       |
| Liabilities                         |       | —                                                                           |       | —                                                                   |       | —                                                                                               |       | —                                                                                                 |       |
| **Total liabilities at fair value** |       | $                                                                                | —     |                                                                     | $          | —                                                                                               |       | $                                                                                                      | —     |   | $ | — |   |

 

**Changesin Level 3 Fair Value Measurements**

 

The table below includesa roll-forward of the balance sheet amounts for 2009 (including the change infair value) for financial instruments classified by the Bank within Level 3 ofthe valuation hierarchy for assets and liabilities measured at fair value on arecurring basis. When a determination is made to classify a financialinstrument within Level 3 of the valuation hierarchy, the determination isbased upon the significance of the unobservable factors to the overall fairvalue measurement. Because, Level 3 financial instruments typically include, inaddition to the unobservable or Level 3 components, observable components (thatis, components that are actively quoted and can be validated to external sources),the gains and losses in the table below include changes in fair value due inpart to observable factors that are part of the valuation methodology.

 
| **Twelve months  ended December 31, 2009 (in thousands)**                                                                                            | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| Fair  value, January 1, 2009                                                                                                                         |       | $          | 5,460      |            | $          | 444 |   |
| Total  realized and unrealized (gains) losses included in income                                                                                     |       | (3,865     | )          | 121             |       |
| Purchases,  issuances and settlements, net                                                                                                           |       | 26,954     |       | (248            | )          |
| Transfers  in and/or out of level 3                                                                                                                  |       | —     |       | —          |       |
| Fair  value, December 31, 2009                                                                                                                       |       | $          | 28,549     |            | $          | 317 |   |
| Total  unrealized gains included in income related to financial assets and  liabilities still on the consolidated balance sheet at December 31, 2009 |       | $          | —     |            | $          | — |   |

 

**NOTE15 — EMPLOYMENT AGREEMENTS**

 

The Bank has entered intoemployment agreements with three executive officers that have a term of twoyears and are automatically renewable each day during their term for oneadditional day so that the term of each is always two years, unless and untileither the Bank or the executive provides notice of its intent not to renew.  In the event of a change in control of theBank, each executive would be entitled to receive a lump sum payment equal toone dollar ($1) less than the amount that would constitute an “excess parachutepayment,” as defined in Section 280G of the Internal Revenue Code.

 

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**NOTE 16 — CAPITAL STOCK**

 

TheCorporation’s charter authorizes 1,000,000 shares of preferred stock. Shares ofthe preferred stock may be issued from time to time in one or more series, eachsuch series to be so designated as to distinguish the shares from the shares ofall other series and classes. The Board of Directors has the authority to divideany or all classes of preferred stock into series and to fix and determine therelative rights and preferences of the shares of any series so established.

 

*Series A Preferred Stock andWarrants —* On October3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted. On October14, 2008, the U.S. Department of the Treasury (“Treasury”) announced itsintention to inject capital into nine large U.S. financial institutions underthe Troubled Asset Relief Program Capital Purchase Program (“CPP”)  and since has injected capital into many otherfinancial institutions. On December 19, 2008, the Corporation entered into aLetter Agreement with Treasury pursuant to which, among other things, theCorporation sold to Treasury for an aggregate purchase price of $30 million,30,000 shares of Series A Preferred Stock, par value $0.50, and a warrant topurchase up to 461,538 shares of common stock (the “Warrant”), of theCorporation. As a condition under the CPP, the Corporation’s share repurchasesare currently limited to purchases in connection with the administration of anyemployee benefit plan, consistent with past practices, including purchases tooffset share dilution in connection with any such plans. This restriction iseffective until December 19, 2011, or until Treasury no longer owns any of the SeriesA Preferred Stock.

 

The SeriesA Preferred Stock ranks senior to the Corporation’s common shares. The Series APreferred Stock pays a compounding cumulative dividend, in cash, at a rate of5% per annum for the first five years, and 9% per annum thereafter on theliquidation preference of $1,000 per share. The Corporation is prohibited frompaying any dividend with respect to shares of common stock, other juniorsecurities or preferred stock ranking *pari passu*with the Series A Preferred Stock or repurchasing or redeeming any shares ofthe Corporation’s common shares, other junior securities or preferred stockranking *pari passu* with the SeriesA Preferred Stock in any quarter unless all accrued and unpaid dividends arepaid on the Series A Preferred Stock for all past dividend periods (includingthe latest completed dividend period), subject to certain limited exceptions.The Series A Preferred Stock is non-voting, other than class voting rights onmatters that could adversely affect the Series A Preferred Stock. The Series APreferred Stock is callable at par after three years. Prior to the end of threeyears, the Series A Preferred Stock may be redeemed with the proceeds from oneor more qualified equity offerings of any Tier 1 perpetual preferred or commonstock (each a “Qualified Equity Offering”). Treasury may also transfer the SeriesA Preferred Stock to a third party at any time.

 

Inaddition, the terms of the Series A Preferred Stock include a restrictionagainst increasing the Corporation’s common stock dividends from levels at thetime of the initial investment by Treasury and prevent the Corporation fromredeeming, purchasing or otherwise acquiring its common stock other than forcertain stated exceptions. Historically, the Corporation has paid no dividendson its common stock. Therefore, the Corporation would have to seek Treasury’sconsent to pay any dividends on shares of Corporation common stock. Theserestrictions will terminate on the earlier of the third anniversary of the dateof issuance of the Series A Preferred Stock to Treasury and the date on whichthe Series A Preferred Stock issued to Treasury has been redeemed in whole orTreasury has transferred all of its Series A Preferred Stock to third parties.  In addition, the Corporation will be unable todeclare or pay dividends or distributions on, or repurchase, redeem orotherwise acquire for consideration, shares of its common stock or other stockranking junior to, or in parity with, the Series A Preferred Stock if theCorporation fails to declare and pay full dividends (or declare and set aside asum sufficient for payment thereof) on its Series A Preferred Stock.

 

The SeriesA Preferred Stock qualifies as Tier 1 capital in accordance with regulatorycapital requirements.

 

*Warrant —*The Warrant has a term of ten years andis exercisable at any time, in whole or in part, at an exercise price of $9.75per share (subject to certain anti-dilution adjustments). Based on the BlackScholes options pricing model, the Warrant has been assigned a fair value of$1.2 million in the aggregate, as of December 19, 2008. Treasury may notexercise the Warrant for, or transfer the Warrant with respect to, more thanhalf of the initial shares of common stock underlying the Warrant prior to theearlier of (i) the date on which the Corporation receives aggregate grossproceeds of not less than $30 million from one or more Qualified EquityOfferings and (ii) December 31, 2009. The number of shares of common stock tobe delivered upon settlement of the Warrant will be reduced by 50% if theCorporation receives aggregate gross proceeds of at least 100% of the aggregateliquidation preference of the Series A Preferred Stock ($30 million) from oneor more Qualified Equity Offerings prior to December 31, 2009.

 

*Stock Issuance: —* Effective as of December 18, 2009, inconnection with the Corporation’s Registration Statement on Form S-3(Registration No. 333-160712), the Corporation sold 788,924 shares ofCorporation common stock to non-affiliates of the Corporation at a price of$3.63****per share and 114,500****shares of Corporation common stock to affiliates of theCorporation at a price of $3.65****pershare. The common stock was offered without a placement agent, underwriter, brokeror dealer. The net proceeds of the offering to the Corporation wereapproximately $3.3 million. The Corporation intends to use the net proceedsfrom the offering for general corporate purposes.

 

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**NOTE17 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION**

 

Condensed financialinformation of the Corporation follows:

 

**CONDENSEDBALANCE SHEETS**

 
| ** **                        | ** ** | **December  31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|
| **(Dollars  in thousands)**       | ** ** | **2009**          | ** ** | **2008** | ** ** |
| ASSETS                            |       |              |       |   |   |
| Cash  and cash equivalents        |       | $                 | 3,873      |   | $ | 17,427 |   |
| Investment  in banking subsidiary |       | 122,279           |       | 115,010 |   |
| Other                             |       | 3,591             |       | 2,782 |   |
|                              |       |                   |       |   |   |
| Total  assets                     |       | $                 | 129,743    |   | $ | 135,219 |   |
|                              |       |                   |       |   |   |
| LIABILITIES  AND EQUITY           |       |              |       |   |   |
| Interest  payable                 |       | $                 | 66         |   | $ | 24 |   |
| Dividend  payable                 |       | 187               |       | — |   |
| Other  short term payables        |       | 10,000            |       | 10,250 |   |
| Subordinated  long term debt      |       | 23,198            |       | 23,198 |   |
| Shareholders’  equity        |       | 96,292            |       | 101,747 |   |
|                              |       |                   |       |   |   |
| Total  liabilities and equity     |       | $                 | 129,743    |   | $ | 135,219 |   |

 

**CONDENSEDSTATEMENTS OF INCOME**

 
| ** **                                          | ** ** | **For  Years ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                |       |                              |       |   |   |   |   |
| Dividend  and interest income                       |       | $                                 | 43         |   | $ | 69 |   | $ | 17 |   |
| Management  fee                                     |       | 698                               |       | — |   | — |   |
| Interest  expense                                   |       | (1,890                            | )          | (1,487 | ) | (632 | ) |
| Non-interest  expense                               |       | (1,998                            | )          | (2,508 | ) | (1,261 | ) |
|                                                |       |                              |       |   |   |   |   |
| Loss  before income taxes                           |       | (3,147                            | )          | (3,926 | ) | (1,876 | ) |
| Income  tax expense                                 |       | 1,212                             |       | 1,388 |   | 696 |   |
| Equity  in undistributed subsidiary (loss) income   |       | (3,643                            | )          | 10,292 |   | 8,076 |   |
|                                                |       |                              |       |   |   |   |   |
| Net  (loss) income                                  |       | (5,578                            | )          | 7,754 |   | 6,896 |   |
|                                                |       |                              |       |   |   |   |   |
| CPP  Preferred dividends                            |       | (1,546                            | )          | — |   | — |   |
|                                                |       |                              |       |   |   |   |   |
| Net  (loss) income available to common shareholders |       | $                                 | (7,124     | ) | $ | 7,754 |   | $ | 6,896 |   |

 

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**CONDENSEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                          | ** ** | **For  Years ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cash  flows from operating activities                               |       |                              |       |   |   |   |   |
| Net(loss)  income                                                   |       | $                                 | (5,578     | ) | $ | 7,754 |   | $ | 6,896 |   |
| Adjustments:                                                        |       |                              |       |   |   |   |   |
| Change  in other assets and liabilities                             |       | (1,018                            | )          | (8,677 | ) | (25 | ) |
| Equity  in undistributed subsidiary income                          |       | 3,643                             |       | (10,292 | ) | (8,076 | ) |
| Stock  option expense                                               |       | 335                               |       | 289 |   | 259 |   |
| Proceeds  from dividend paid by subsidiary                          |       | 1,000                             |       | — |   | — |   |
| Net  cash used by operating activities                              |       | (1,618                            | )          | (10,926 | ) | (946 | ) |
|                                                                |       |                              |       |   |   |   |   |
| Cash  flows from investing activities                               |       |                              |       |   |   |   |   |
| Investments  in subsidiaries                                        |       | (14,000                           | )          | (20,303 | ) | (15,990 | ) |
|                                                                |       |                              |       |   |   |   |   |
| Net  cash used by investing activities                              |       | (14,000                           | )          | (20,303 | ) | (15,990 | ) |
|                                                                |       |                              |       |   |   |   |   |
| Cash  flows from financing activities                               |       |                              |       |   |   |   |   |
| Proceeds  from long-term subordinated debt                          |       | —                            |       | 14,950 |   | — |   |
| Proceeds  from issuance of common stock                             |       | 3,338                             |       | — |   | — |   |
| Preferred  stock dividend                                           |       | (1,359                            | )          | — |   | — |   |
| Warrant  accretion expense                                          |       | 85                                |       | — |   | — |   |
| Purchase  of capital securities of unconsolidated subsidiary        |       | —                            |       | (450 | ) | — |   |
| Proceeds  from issuance of preferred stock and common stock warrant |       | —                            |       | 30,000 |   | — |   |
| Proceeds  from exercise of stock options and excess tax benefit     |       | —                            |       | 379 |   | 4,405 |   |
| Proceeds  from issuance of short-term debt                          |       | —                            |       | 3,000 |   | 7,000 |   |
| Net  cash provided by financing activities                          |       | 2,064                             |       | 47,879 |   | 11,405 |   |
|                                                                |       |                              |       |   |   |   |   |
| Net  change in cash and cash equivalents                            |       | (13,554                           | )          | 16,650 |   | (5,531 | ) |
|                                                                |       |                              |       |   |   |   |   |
| Beginning  cash and cash equivalents                                |       | 17,427                            |       | 777 |   | 6,308 |   |
|                                                                |       |                              |       |   |   |   |   |
| Ending  cash and cash equivalents                                   |       | $                                 | 3,873      |   | $ | 17,427 |   | $ | 777 |   |

 

**NOTE18 — EARNINGS PER SHARE**

 

The factors used in theearnings per share computation follow:

 
| **(Dollars  in thousands except share data)**                                   | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|---------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Basic                                                                           |       |      |       |      |       |      |       |
| Net  (loss) income                                                              |       | $         | (7,124     | )         | $          | 7,754     |       | $ | 6,896 |   |
|                                                                            |       |      |       |      |       |      |       |
| Weighted  average common shares outstanding                                     |       | 4,738,638 |       | 4,731,204 |       | 4,613,342 |       |
|                                                                            |       |      |       |      |       |      |       |
| Basic  earnings (loss) per common share                                         |       | $         | (1.50      | )         | $          | 1.64      |       | $ | 1.49 |   |
|                                                                            |       |      |       |      |       |      |       |
| Diluted                                                                         |       |      |       |      |       |      |       |
| Net  (loss) income                                                              |       | $         | (7,124     | )         | $          | 7,754     |       | $ | 6,896 |   |
|                                                                            |       |      |       |      |       |      |       |
| Weighted  average common shares outstanding for basic earnings per common share |       | 4,738,638 |       | 4,731,204 |       | 4,613,342 |       |
| Add:  Dilutive effects of assumed exercises of stock options                    |       | —    |       | 120,861   |       | 278,825   |       |
|                                                                            |       |      |       |      |       |      |       |
| Average  shares and dilutive potential common shares                            |       | 4,738,638 |       | 4,852,065 |       | 4,892,167 |       |
|                                                                            |       |      |       |      |       |      |       |
| Diluted  earnings (loss) per common share                                       |       | $         | (1.50      | )         | $          | 1.60      |       | $ | 1.41 |   |

 

For 2007, vested optionsto purchase 40,000 shares at a strike price of $25.00 were anti-dilutive andwere excluded from the calculation of diluted earnings per share. For 2008,vested options to purchase 439,250 shares and 461,538 warrants wereanti-dilutive. For 2009, all vested options and all warrants were anti-dilutivebecause the exercise prices thereof exceeded the fair market value of theCorporation’s common stock at December 31, 2009.

 

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**NOTE 19 — TRUST PREFERRED SECURITIES**

 

In March2005, the Corporation formed a financing subsidiary, Tennessee CommerceStatutory Trust I, a Delaware statutory trust (“Trust I”). In March 2005, TrustI issued and sold 8,000 of Trust I’s fixed/floating rate capital securities, witha liquidation amount of $1,000 per capital security, to First Tennessee BankNational Association. The securities pay a fixed rate of 6.73% payablequarterly for the first five years and a floating rate based on a three-monthLIBOR rate plus 1.98% thereafter. At the same time, the Corporation issued toTrust I $8,248,000 of fixed/floating rate junior subordinated deferrableinterest debentures due 2035. The Corporation guarantees the payment ofdistributions and payments for redemptions or liquidation of the capitalsecurities. The trust preferred securities qualify as “Tier I Capital” undercurrent regulatory definitions subject to certain limitations.

 

Thedebentures pay a fixed rate of 6.73% payable quarterly for the first five yearsand a floating rate based on a three-month LIBOR rate plus 1.98% thereafter.The distributions on the capital securities are accounted for as interestexpense by the Corporation. Interest payments on the debentures and thecorresponding distributions on the capital securities may be deferred at anytime at the election of the Corporation for up to 20 consecutive quarterlyperiods (five years). The capital securities and debentures are redeemable atany time commencing after June 2010 at par. The Corporation reports as liabilitiesthe subordinated debentures issued by the Corporation and held by Trust I.

 

In June2008, Tennessee Commerce Statutory Trust II, a Delaware statutory trust (“TrustII”), issued and sold 14,500 of its floating rate capital securities, with aliquidation amount of $1,000 per capital security, in a private placement. Thesecurities pay a floating rate per annum, reset quarterly, equal to the primerate of interest published in *The WallStreet Journal* on the first business day of each distribution periodplus 50 basis points (but in no event greater than 8.0% or less than 5.75%). Atthe same time, the Corporation issued to Trust II $14.95 million of floatingrate junior subordinated deferrable interest debentures due 2038. TheCorporation guarantees the payment of distributions and payments forredemptions or liquidation of the capital securities. The floating rate capitalsecurities qualify as “Tier I Capital” for the Corporation under currentregulatory definitions subject to certain limitations.

 

The debenturespay a floating rate per annum, reset quarterly, equal to the prime rate ofinterest published in *The Wall StreetJournal* on the first business day of each distribution period plus50 basis points (but in no event greater than 8.0% or less than 5.75%). Thedistributions on the capital securities are accounted for as interest expenseby the Corporation. Interest payments on the debentures and the correspondingdistributions on the capital securities may be deferred at any time at theelection of the Corporation for up to 20 consecutive quarterly periods (fiveyears). The capital securities and debentures are redeemable at any timecommencing after June 2013 at par. The Corporation reports as liabilities thesubordinated debentures issued by the Corporation and held by Trust II.

 

**NOTE20 — QUARTERLY FINANCIAL RESULTS (UNAUDITED)**

 

A summary of selectedconsolidated quarterly financial data for the years ended December 31, 2009 and2008 follows:

 
| ** **                                          | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **(In thousands  except share data)**               | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2009                                                |       |        |       |        |       |        |       |        |       |
| Interest  income                                    |       | $           | 19,456     |        | $          | 19,907      |       | $           | 20,642     |   | $ | 21,103 |   |
| Net  interest income                                |       | 9,840       |       | 10,451      |       | 11,424      |       | 13,201      |       |
| Provision  for loan losses                          |       | 8,514       |       | 13,125      |       | 5,250       |       | 4,150       |       |
| Income  (loss) before taxes                         |       | (3,580      | )          | (10,620     | )          | 2,508       |       | 2,707       |       |
| Net  (loss) income                                  |       | (2,216      | )          | (6,549      | )          | 1,536       |       | 1,651       |       |
| CPP  preferred dividends                            |       | (444        | )          | (352        | )          | (375        | )          | (375        | )          |
| Net  (loss) income available to common shareholders |       | (2,660      | )          | (6,901      | )          | 1,161       |       | 1,276       |       |
| Basic  earnings per share                           |       | $           | (0.56      | )           | $          | (1.46       | )          | $           | 0.25       |   | $ | 0.27 |   |
| Diluted  earnings per share                         |       | $           | (0.56      | )           | $          | (1.46       | )          | $           | 0.25       |   | $ | 0.27 |   |
|                                                |       |        |       |        |       |        |       |        |       |
| 2008                                                |       |        |       |        |       |        |       |        |       |
| Interest  income                                    |       | $           | 17,486     |        | $          | 18,429      |       | $           | 19,756     |   | $ | 20,307 |   |
| Net  interest income                                |       | 7,462       |       | 8,396       |       | 9,274       |       | 9,819       |       |
| Provision  for loan losses                          |       | 1,600       |       | 2,340       |       | 1,850       |       | 3,321       |       |
| Income  before taxes                                |       | 2,245       |       | 3,009       |       | 3,076       |       | 4,196       |       |
| Net  income                                         |       | 1,375       |       | 1,846       |       | 1,886       |       | 2,647       |       |
| Basic  earnings per share                           |       | $           | 0.29       |        | $          | 0.39        |       | $           | 0.40       |   | $ | 0.56 |   |
| Diluted  earnings per share                         |       | $           | 0.28       |        | $          | 0.38        |       | $           | 0.39       |   | $ | 0.55 |   |

 

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**INDEXTO EXHIBITS**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                            |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                       |
| 3.1              |       | Charter of  Tennessee Commerce Bancorp, Inc., as amended(1)                                                                                                                                                                                                                |
| 3.2              |       | Bylaws of  Tennessee Commerce Bancorp, Inc.(2)                                                                                                                                                                                                                             |
| 3.3              |       | Amendment to  Bylaws of Tennessee Commerce Bancorp, Inc.(3)                                                                                                                                                                                                                |
| 4.1              |       | Shareholders’  Agreement(2)                                                                                                                                                                                                                                           |
| 4.2              |       | Form of Stock  Certificate(4)                                                                                                                                                                                                                                              |
| 4.3              |       | Indenture, dated  as of June 20, 2008, between Tennessee Commerce Bancorp, Inc. and Wilmington  Trust Company, as trustee(5)                                                                                                                                               |
| 4.4              |       | Amended and  Restated Declaration of Trust, dated as of June 20, 2008, among Tennessee  Commerce Bancorp, Inc. , as sponsor, Wilmington Trust Company, as  institutional and Delaware trustee, and Arthur F. Helf, H. Lamar Cox and  Michael R. Sapp, as administrators(5) |
| 4.5              |       | Guarantee  Agreement, dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.  and Wilmington Trust Company(5)                                                                                                                                                 |
| 4.6              |       | Form of  Certificate of Series A Preferred Stock(6)                                                                                                                                                                                                                        |
| 4.7              |       | Warrant for  Purchase of Shares of Common Stock, dated December 19, 2008(6)                                                                                                                                                                                                |
| 10.1             |       | Tennessee  Commerce Bancorp, Inc. Stock Option Plan - Employees(2)                                                                                                                                                                                                         |
| 10.2             |       | Form of  Tennessee Commerce Bancorp, Inc. 1999 Stock Option — Directors(2)                                                                                                                                                                                            |
| 10.3             |       | Form of  Tennessee Commerce Bancorp, Inc. 1999 Stock Option - Incorporators(2)                                                                                                                                                                                             |
| 10.4             |       | Form of  Tennessee Commerce Bancorp, Inc. 2003 Stock Option - Directors(2)                                                                                                                                                                                                 |
| 10.5             |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with Arthur F. Helf(2)                                                                                                                                                                                       |
| 10.6             |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with Michael R. Sapp(2)                                                                                                                                                                                      |
| 10.7             |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with H. Lamar Cox(2)                                                                                                                                                                                         |
| 10.8             |       | Amended and  Restated Employment Agreement, dated as of May 19, 2009, between Tennessee  Commerce Bank and Michael R. Sapp(7)                                                                                                                                              |
| 10.9             |       | Amended and  Restated Employment Agreement, dated as of May 19, 2009, between Tennessee  Commerce Bank and H. Lamar Cox(7)                                                                                                                                                 |
| 10.10            |       | Offer of  Employment, dated as of August 5, 2008, between Tennessee Commerce Bancorp, Inc.  and Frank Perez(8)                                                                                                                                                             |
| 10.11            |       | Tennessee  Commerce Bancorp, Inc. 2007 Equity Plan(9)                                                                                                                                                                                                                      |
| 10.12            |       | Letter  Agreement, dated as of December 19, 2008, between the United States  Department of the Treasury and Tennessee Commerce Bancorp, Inc.(6)                                                                                                                            |
| 10.13            |       | Tennessee  Commerce Bancorp, Inc. Form of Split Dollar Agreement(7)                                                                                                                                                                                                        |
| 10.14            |       | Tennessee  Commerce Bancorp, Inc. Form of Salary Continuation Plan(7)                                                                                                                                                                                                      |
| 10.15            |       | Tennessee  Commerce Bancorp, Inc. Form of Consulting and Non-Competition Agreement(7)                                                                                                                                                                                      |
| 21.1             |       | Subsidiaries*                                                                                                                                                                                                                                                              |
| 23.1             |       | Consent of Independent  Registered Public Accounting Firm*                                                                                                                                                                                                                 |
| 31.1             |       | Certification of  Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 31.2             |       | Certification of  Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 32.1             |       | Certification of  Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 32.2             |       | Certification of  Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                  |
| 99.1             |       | Certification  pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act  of 2008 as amended by the American Recovery and Reinvestment Act of 2009*                                                                                                      |
| 99.2             |       | Certification  pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act  of 2008 as amended by the American Recovery and Reinvestment Act of 2009*                                                                                                      |

 

----

|   | (1)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Quarterly Report on Form 10-Q,  as filed with the Securities and Exchange Commission on November 6, 2009 and  incorporated herein by reference.                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                            |
|   | (2)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Registration Statement on  Form 10, as filed with the Securities and Exchange Commission on April 29,  2005 and incorporated herein by reference.                                    |
|   |   |                                                                                                                                                                                                                                                            |
|   | (3)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on Form 8-K,  as filed with the Securities and Exchange Commission on February 5, 2008 and  incorporated herein by reference.                                         |
|   |   |                                                                                                                                                                                                                                                            |
|   | (4)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Registration Statement on  Form S-8, as filed with the Securities and Exchange Commission on December 31,  2007 (Registration No. 333-148415), and incorporated herein by reference. |

 

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Table of Contents

 
|   | (5)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on Form 8-K,  as filed with the Securities and Exchange Commission on June 23, 2008 and  incorporated herein by reference.      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                      |
|   | (6)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on Form 8-K,  as filed with the Securities and Exchange Commission on December 23, 2008 and  incorporated herein by reference.  |
|   |   |                                                                                                                                                                                                                      |
|   | (7)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on Form 8-K,  as filed with the Securities and Exchange Commission on May 26, 2009, and  incorporated herein by reference.      |
|   |   |                                                                                                                                                                                                                      |
|   | (8)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on Form 8-K,  as filed with the Securities and Exchange Commission on August 5, 2008 and  incorporated herein by reference.     |
|   |   |                                                                                                                                                                                                                      |
|   | (9)    | Previously filed  as an exhibit to Tennessee Commerce Bancorp, Inc.’s Quarterly Report on Form 10-Q,  as filed with the Securities and Exchange Commission on August 14, 2007 and  incorporated herein by reference. |

 
|   | * | Filed herewith. |
|--------|---|-----------------|

 

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