Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x  QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

**o  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For the transition period from                 to                 **

** **

**Commission File Number 000-51281**

 

**TENNESSEE COMMERCE BANCORP, INC.**

(Exactname of registrant 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)          |

 

**(615) 599-2274**

(Registrant’stelephone number, including area code)

 

**Not Applicable**

(Formername, former address and former fiscal year if changed since last report)

 

Indicate by check markwhether registrant (1) has filed reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or such shorter period that the registrant wasrequired to submit and post such files).   Yes o   No o

 

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

 

| Large  accelerated filer o                |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                  |   | Smaller  reporting company o |
| (Do  not check if a smaller 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

 

As of August 9, 2010there were 5,648,383 shares of common stock, $0.50 par value per share, issuedand outstanding.

 

 

 

----

Table of Contents

 

**Tennessee Commerce Bancorp, Inc.**

 

Tableof Contents

 
| Part I  | Financial  Information                                                                                                                                          | ** ** |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|         |                                                                                                                                                            |       |
| Item 1.      | Financial Statements                                                                                                                                            |       |
|         |                                                                                                                                                            |       |
|         | Consolidated  Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009                                                                       | 3          |
|         |                                                                                                                                                            |       |
|         | Consolidated  Statements of Income (unaudited) for the Six Months Ended June 30, 2010  and 2009 and for the Three Months Ended June 30, 2010 and 2009 | 4          |
|         |                                                                                                                                                            |       |
|         | Consolidated  Statements of Changes in Shareholders’ Equity (unaudited) for the Six Months  Ended June 30, 2010 and 2009                              | 5          |
|         |                                                                                                                                                            |       |
|         | Consolidated Statements of  Cash Flows (unaudited) for the Six Months Ended June 30, 2010 and 2009                                                         | 6          |
|         |                                                                                                                                                            |       |
|         | Notes to Consolidated Financial Statements (unaudited)                                                                                                          | 7          |
|         |                                                                                                                                                            |       |
| Item 2.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                     | 16         |
|         |                                                                                                                                                            |       |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                     | 30         |
|         |                                                                                                                                                            |       |
| Item 4.      | Controls and  Procedures                                                                                                                                        | 32         |
|         |                                                                                                                                                            |       |
| Part II | Other Information                                                                                                                                               | 32         |
|         |                                                                                                                                                            |       |
| Item 1       | Legal Proceedings                                                                                                                                               | 32         |
|         |                                                                                                                                                            |       |
| Item 1A.     | Risk Factors                                                                                                                                                    | 33         |
|         |                                                                                                                                                            |       |
| Item 6.      | Exhibits                                                                                                                                                        | 35         |
|         |                                                                                                                                                            |       |
| Signatures   |                                                                                                                                                            | 36         |

 

2

----

Table of Contents

** **

**PART I: FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30,2010 (UNAUDITED) AND DECEMBER 31, 2009

 
| ** **                                                                                                                                                                                                           | ** ** | **June  30,** | ** ** | **December  31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|-------------------|------------|
| **(Dollars in thousands, except  per share data)**                                                                                                                                                                   | ** ** | **2010**      | ** ** | **2009  (1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                                           |       |          |       |              |       |
| Cash  and due from banks                                                                                                                                                                                             |       | $             | 9,277      |              | $          | 22,864 |   |
| Federal  funds sold                                                                                                                                                                                                  |       | 11,610        |       | 15,010            |       |
| Cash  and cash equivalents                                                                                                                                                                                           |       | 20,887        |       | 37,874            |       |
|                                                                                                                                                                                                                 |       |          |       |              |       |
| Securities  available for sale                                                                                                                                                                                       |       | 92,887        |       | 93,668            |       |
|                                                                                                                                                                                                                 |       |          |       |              |       |
| Loans                                                                                                                                                                                                                |       | 1,197,059     |       | 1,171,301         |       |
| Allowance  for loan losses                                                                                                                                                                                           |       | (20,346       | )          | (19,913           | )          |
| Net  loans                                                                                                                                                                                                           |       | 1,176,713     |       | 1,151,388         |       |
|                                                                                                                                                                                                                 |       |          |       |              |       |
| Premises  and equipment, net                                                                                                                                                                                         |       | 2,482         |       | 1,967             |       |
| Accrued  interest receivable                                                                                                                                                                                         |       | 8,545         |       | 9,711             |       |
| Restricted  equity securities                                                                                                                                                                                        |       | 2,169         |       | 2,169             |       |
| Income  tax receivable                                                                                                                                                                                               |       | -             |       | 68                |       |
| Bank-owned  life insurance                                                                                                                                                                                           |       | 27,571        |       | 25,673            |       |
| Other  real estate owned                                                                                                                                                                                             |       | 795           |       | 814               |       |
| Reposessions                                                                                                                                                                                                         |       | 36,336        |       | 36,951            |       |
| Other  assets                                                                                                                                                                                                        |       | 21,143        |       | 23,149            |       |
| **Total assets**                                                                                                                                                                                                     |       | $             | 1,389,528  |              | $          | 1,383,432 |   |
|                                                                                                                                                                                                                 |       |          |       |              |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                        |       |          |       |              |       |
| Liabilities                                                                                                                                                                                                          |       |          |       |              |       |
| Deposits                                                                                                                                                                                                             |       |          |       |              |       |
| Non-interest-bearing                                                                                                                                                                                                 |       | $             | 24,553     |              | $          | 30,111 |   |
| Interest-bearing                                                                                                                                                                                                     |       | 1,218,903     |       | 1,212,431         |       |
| **Total deposits**                                                                                                                                                                                                   |       | 1,243,456     |       | 1,242,542         |       |
|                                                                                                                                                                                                                 |       |          |       |              |       |
| Accrued  interest payable                                                                                                                                                                                            |       | 1,390         |       | 1,430             |       |
| Accrued  dividend payable                                                                                                                                                                                            |       | 187           |       | 187               |       |
| Short-term  borrowings                                                                                                                                                                                               |       | 8,750         |       | 14,000            |       |
| Other  liabilities                                                                                                                                                                                                   |       | 8,863         |       | 5,783             |       |
| Long-term  subordinated debt and other borrowings                                                                                                                                                                    |       | 26,100        |       | 23,198            |       |
| **Total liabilities**                                                                                                                                                                                                |       | 1,288,746     |       | 1,287,140         |       |
| 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 June 30, 2010  and December 31, 2009                            |       | 15,000        |       | 15,000            |       |
| Common  stock, $0.50 par value; 20,000,000 shares authorized at June 30, 2010 and at  December 31, 2009; 5,648,384 and 5,646,368 shares issued and outstanding at  June 30, 2010 and December 31, 2009, respectively |       | 2,824         |       | 2,823             |       |
| Common  stock warrant                                                                                                                                                                                                |       | 453           |       | 453               |       |
| Additional  paid-in capital                                                                                                                                                                                          |       | 63,507        |       | 63,247            |       |
| Retained  earnings                                                                                                                                                                                                   |       | 18,921        |       | 16,056            |       |
| Accumulated  other comprehensive (loss) income                                                                                                                                                                       |       | 77            |       | (1,287            | )          |
| **Total shareholders’ equity**                                                                                                                                                                                  |       | 100,782       |       | 96,292            |       |
|                                                                                                                                                                                                                 |       |          |       |              |       |
| **Total liabilities and shareholders’ equity**                                                                                                                                                                  |       | $             | 1,389,528  |              | $          | 1,383,432 |   |

 

----

(1) The balance sheetat December 31, 2009 has been derived from the audited consolidatedfinancial statements at that date but does not include all of the informationand notes required by generally accepted accounting principles for completefinancial statements.

 

See accompanying notes toconsolidated financial statements.

 

3

----

Table of Contents

 

TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

SIXMONTHS ENDED JUNE 30, 2010 AND 2009

THREEMONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

 
| ** **                                                  | ** ** | **Six  Months Ended** | ** **                                                              | **Three  Months Ended** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|-------------------------------------------------------------------------|-------------------------|------------|
| ** **                                                  | ** ** | **June  30,**         | ** **                                                              | **June  30,**           | ** ** |
| **(Dollars in thousands except  per share data)**           | ** ** | **2010**              | ** **                                                              | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  income                                            |       |                  |                                                                    |                    |       |   |   |   |   |
| Loans,  including fees                                      |       | $                     | 39,104                                                                  |                    | $          | 36,570 |   | $ | 19,840 |   | $ | 18,674 |   |
| Securities                                                  |       | 2,003                 |                                                                    | 2,788                   |       | 766 |   | 1,233 |   |
| Federal  funds sold                                         |       | 13                    |                                                                    | 5                       |       | 11 |   | — |   |
| **Total interest income**                                   |       | 41,120                |                                                                    | 39,363                  |       | 20,617 |   | 19,907 |   |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Interest  expense                                           |       |                  |                                                                    |                    |       |   |   |   |   |
| Deposits                                                    |       | 13,495                |                                                                    | 18,083                  |       | 6,774 |   | 8,954 |   |
| Other                                                       |       | 1,033                 |                                                                    | 989                     |       | 500 |   | 502 |   |
| **Total interest expense**                                  |       | 14,528                |                                                                    | 19,072                  |       | 7,274 |   | 9,456 |   |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Net  interest income                                        |       | 26,592                |                                                                    | 20,291                  |       | 13,343 |   | 10,451 |   |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Provision  for loan losses                                  |       | 9,050                 |                                                                    | 21,639                  |       | 4,450 |   | 13,125 |   |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Net  interest income (loss) after provision for loan losses |       | 17,542                |                                                                    | (1,348                  | )          | 8,893 |   | (2,674 | ) |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Non-interest  income                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Service  charges on deposit accounts                        |       | 60                    |                                                                    | 91                      |       | 33 |   | 48 |   |
| Securities  gains (losses)                                  |       | 696                   |                                                                    | 338                     |       | 277 |   | (80 | ) |
| Gain  (loss) on sale of loans                               |       | 530                   |                                                                    | (989                    | )          | 741 |   | (629 | ) |
| Loss  on repossession                                       |       | (2,008                | )                                                                       | (1,368                  | )          | (1,133 | ) | (1,157 | ) |
| Other                                                       |       | 2,303                 |                                                                    | 394                     |       | 976 |   | 257 |   |
| **Total non-interest income (loss)**                        |       | 1,581                 |                                                                    | (1,534                  | )          | 894 |   | (1,561 | ) |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Non-interest  expense                                       |       |                  |                                                                    |                    |       |   |   |   |   |
| Salaries  and employee benefits                             |       | 5,376                 |                                                                    | 5,340                   |       | 2,661 |   | 2,991 |   |
| Occupancy  and equipment                                    |       | 923                   |                                                                    | 792                     |       | 446 |   | 382 |   |
| Data  processing fees                                       |       | 1,007                 |                                                                    | 699                     |       | 473 |   | 395 |   |
| FDIC  expense                                               |       | 1,061                 |                                                                    | 1,151                   |       | 515 |   | 674 |   |
| Professional  fees                                          |       | 1,074                 |                                                                    | 988                     |       | 523 |   | 598 |   |
| Other                                                       |       | 3,779                 |                                                                    | 2,348                   |       | 2,093 |   | 1,345 |   |
| **Total non-interest expense**                              |       | 13,220                |                                                                    | 11,318                  |       | 6,711 |   | 6,385 |   |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Income  (loss) before income taxes                          |       | 5,903                 |                                                                    | (14,200                 | )          | 3,076 |   | (10,620 | ) |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Income  tax expense (benefit)                               |       | 2,288                 |                                                                    | (5,435                  | )          | 1,190 |   | (4,071 | ) |
| Net  income (loss)                                          |       | 3,615                 |                                                                    | (8,765                  | )          | 1,886 |   | (6,549 | ) |
| Preferred  dividends                                        |       | (750                  | )                                                                       | (796                    | )          | (375 | ) | (352 | ) |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Net  income (loss) available to common shareholders         |       | $                     |           2,865            |                    | $          |         (9,561 | ) | $ |          1,511 |   | $ |        (6,901 | ) |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Earnings  (loss) per share (EPS):                           |       |                  |                                                                    |                    |       |   |   |   |   |
| Basic  EPS                                                  |       | $                     |             0.51 |                    | $          |           (2.02 | ) | $ |            0.27 |   | $ |           (1.46 | ) |
| Diluted  EPS                                                |       | 0.50                  |                                                                    | (2.02                   | )          | 0.26 |   | (1.46 | ) |
|                                                        |       |                  |                                                                    |                    |       |   |   |   |   |
| Weighted  average shares outstanding:                       |       |                  |                                                                    |                    |       |   |   |   |   |
| Basic                                                       |       | 5,647,884             |                                                                    | 4,732,387               |       | 5,648,384 |   | 4,733,070 |   |
| Diluted                                                     |       | 5,718,903             |                                                                    | 4,732,387               |       | 5,737,048 |   | 4,733,070 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

Table of Contents

 

TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

SIXMONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

 
| ** **                                                                               | ** ** | ** **    | ** **                      | ** ** | ** ** | **Warrants to**          | ** ** | ** **     | ** **                         | ** **   | ** ** | **Accumulated**                             | ** ** | ** **       | ** **                            |
|------------------------------------------------------------------------------------------|------------|---------------|---------------------------------|------------|------------|--------------------------|------------|----------------|------------------------------------|--------------|------------|---------------------------------------------|------------|------------------|---------------------------------------|
| ** **                                                                               | ** ** | ** **    | ** **                      | ** ** | ** ** | **Purchase**             | ** ** | **Additional** | ** **                         | ** **   | ** ** | **Other**                                   | ** ** | **Total**        | ** **                            |
| ** **                                                                               | ** ** | **Preferred** | ** **                      | **Common** | ** ** | **Common**               | ** ** | **Paid-In**    | ** **                         | **Retained** | ** ** | **Comprehensive**                           | ** ** | **Shareholders** | ** **                            |
| **(Dollars in thousands)**                                                               | ** ** | **Stock**     | ** **                      | **Stock**  | ** ** | **Stock**                | ** ** | **Capital**    | ** **                         | **Earnings** | ** ** | **Income (Loss)**                           | ** ** | **Equity**       | ** **                            |
|                                                                                     |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Balance at December 31,  2008                                                            |       | $             |      15,000 |       | $          |     2,366 |       | $              |       453 |         | $          |        59,946 |       | $                |       23,180 |   | $ | 802 |   | $ | 101,747 |   |
| Comprehensive income                                                                     |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Net loss                                                                                 |       | —        |                            | —     |       | —                   |       | —         |                               | (8,765       | )          | —                                      |       | (8,765           | )                                     |
| Other comprehensive  income, net of income taxes                                         |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Unrealized losses on  securities available for sale during the period, net of income tax |       | —        |                            | —     |       | —                   |       | —         |                               | —       |       | (1,658                                      | )          | (1,658           | )                                     |
| Common stock warrant  accretion                                                          |       | —        |                            | —     |       | —                   |       | 38             |                               | —       |       | —                                      |       | 38               |                                  |
| Preferred stock dividend                                                                 |       |          |                            |       |       |                     |       |           |                               | (796         | )          |                                        |       | (796             | )                                     |
| Stock based compensation  expense                                                        |       | —        |                            | —     |       | —                   |       | 148            |                               | —       |       | —                                      |       | 148              |                                  |
| Issuance of 2,016 shares  of restricted stock and related tax benefit                    |       | —        |                            | 1          |       | —                   |       | 11             |                               | —       |       | —                                      |       | 12               |                                  |
|                                                                                     |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Balance at June 30, 2009                                                                 |       | $             |      15,000 |       | $          |     2,367 |       | $              |       453 |         | $          |        60,143 |       | $                |       13,619 |   | $ |                    (856 | ) | $ |            90,726 |   |
|                                                                                     |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Balance at December 31,  2009                                                            |       | $             |      15,000 |       | $          |     2,823 |       | $              |       453 |         | $          |        63,247 |       | $                |       16,056 |   | $ |                 (1,287 | ) | $ |            96,292 |   |
| Comprehensive income                                                                     |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Net income                                                                               |       | —        |                            | —     |       | —                   |       | —         |                               | 3,615        |       | —                                      |       | 3,615            |                                  |
| Other comprehensive  income, net of income taxes                                         |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Unrealized gains on  securities available for sale during the period, net of income tax  |       | —        |                            | —     |       | —                   |       | —         |                               | —       |       | 1,364                                       |       | 1,364            |                                  |
| Common stock warrant  accretion                                                          |       | —        |                            | —     |       | —                   |       | 46             |                               | —       |       | —                                      |       | 46               |                                  |
| Preferred stock dividend                                                                 |       |          |                            |       |       |                     |       |           |                               | (750         | )          |                                        |       | (750             | )                                     |
| Stock based compensation  expense                                                        |       | —        |                            | —     |       | —                   |       | 208            |                               | —       |       | —                                      |       | 208              |                                  |
| Issuance of 2016 shares  of restricted stock and related tax benefit                     |       | —        |                            | 1          |       | —                   |       | 6              |                               | —       |       | —                                      |       | 7                |                                  |
|                                                                                     |       |          |                            |       |       |                     |       |           |                               |         |       |                                        |       |             |                                  |
| Balance at June 30, 2010                                                                 |       | $             |      15,000 |       | $          |     2,824 |       | $              |       453 |         | $          |        63,507 |       | $                |       18,921 |   | $ |                        77 |   | $ |          100,782 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

----

Table of Contents

 

TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIXMONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

 
| ** **                                                                           | ** ** | **June  30,** | ** ** | **June  30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| **(Dollars in thousands)**                                                           | ** ** | **2010**      | ** ** | **2009**      | ** ** |
|                                                                                 |       |          |       |          |       |
| **Cash flows from operating activities**                                             |       |          |       |          |       |
| Net  income (loss)                                                                   |       | $             | 3,615      |          | $          | (8,765 | ) |
| Adjustments  to reconcile net income (loss) to net cash used by operating activities |       |          |       |          |       |
| Depreciation                                                                         |       | 269           |       | 247           |       |
| Deferred  loan fees                                                                  |       | 193           |       | 62            |       |
| Provision  for loan losses                                                           |       | 9,050         |       | 21,639        |       |
| Stock-based  compensation expense                                                    |       | 208           |       | 148           |       |
| Net  amortization of investment securities                                           |       | 52            |       | 91            |       |
| Gain  on sales of securities                                                         |       | (696          | )          | (338          | )          |
| Increase  in cash surrender value of bank owned life insurance                       |       | (1,898        | )          | —        |       |
| Change  in:                                                                          |       |          |       |          |       |
| Accrued  interest receivable                                                         |       | 1,166         |       | (145          | )          |
| Accrued  interest payable                                                            |       | (40           | )          | (357          | )          |
| Other  assets                                                                        |       | 2,981         |       | (10,909       | )          |
| Other  liabilities                                                                   |       | 1,972         |       | 129           |       |
| Net  cash used by operating activities                                               |       | 16,872        |       | 1,802         |       |
|                                                                                 |       |          |       |          |       |
| **Cash flows from investing activities**                                             |       |          |       |          |       |
| Purchases  of securities available for sale                                          |       | (86,659       | )          | (75,893       | )          |
| Proceeds  from sales of securities available for sale                                |       | 66,586        |       | 19,428        |       |
| Proceeds  from maturities, prepayments and calls on securities available for sale    |       | 23,697        |       | 48,228        |       |
| Net  change in loans                                                                 |       | (34,568       | )          | (126,611      | )          |
| Purchase  of bank owned life insurance                                               |       | —        |       | (25,273       | )          |
| Purchases  of FHLB stock                                                             |       | —        |       | (484          | )          |
| Net  purchases of premises and equipment                                             |       | (784          | )          | (69           | )          |
| Net  cash used by investing activities                                               |       | (31,728       | )          | (160,674      | )          |
|                                                                                 |       |          |       |          |       |
| **Cash flows from financing activities**                                             |       |          |       |          |       |
| Net  change in deposits                                                              |       | 914           |       | 134,538       |       |
| Net  change in federal funds purchased and repurchase agreements                     |       | —        |       | —        |       |
| Payments  on short-term debt                                                         |       | (1,250        | )          | —        |       |
| Payments  on long-term debt                                                          |       | (1,098        | )          | —        |       |
| Proceeds  from long-term subordinated debt                                           |       | —        |       | —        |       |
| Preferred  stock dividends                                                           |       | (750          | )          | (609          | )          |
| Warrant  accretion expense                                                           |       | 46            |       | 38            |       |
| Issuance  of common stock                                                            |       | 7             |       | 12            |       |
| Net  cash (used by) provided by financing activities                                 |       | (2,131        | )          | 133,979       |       |
|                                                                                 |       |          |       |          |       |
| Net  change in cash and cash equivalents                                             |       | (16,987       | )          | (24,893       | )          |
|                                                                                 |       |          |       |          |       |
| Cash  and cash equivalents at beginning of period                                    |       | 37,874        |       | 40,798        |       |
|                                                                                 |       |          |       |          |       |
| Cash  and cash equivalents at end of period                                          |       | $             | 20,887     |          | $          | 15,905 |   |
|                                                                                 |       |          |       |          |       |
| Supplemental  cash flow information:                                                 |       |          |       |          |       |
| Cash  paid during period for interest                                                |       | $             | 14,568     |          | $          | 19,429 |   |
| Cash  paid during period for income taxes                                            |       | 15            |       | 57            |       |
|                                                                                 |       |          |       |          |       |
| Loans  foreclosed upon with repossessions                                            |       | 18,723        |       | 10,430        |       |

 

See accompanying notes toconsolidated financial statements.

 

6

----

Table of Contents

 

TENNESSEE COMMERCE BANCORP, INC.

 

Notes to ConsolidatedFinancial Statements (unaudited)

 

(Dollars in thousands,except per share data, throughout these Notes to Consolidated FinancialStatements (unaudited))

 

Note 1 — Basis ofPresentation

 

Tennessee CommerceBancorp, Inc. (the “Corporation”) is the bank holding company forTennessee Commerce Bank (the “Bank”).  In March 2005, the Corporationformed a wholly owned subsidiary, Tennessee Commerce Bank Statutory Trust I(the “Trust I”).  In June 2008, the Corporation formed a wholly ownedsubsidiary, Tennessee Commerce Bank Statutory Trust II (the “Trust II”). InJuly 2008, the corporation formed a wholly owned subsidiary, TCBCommercial Assets Services, Inc. (“TCB”). As of June 30, 2010, theBank, the Trust I, the Trust II and TCB were the only subsidiaries of theCorporation. 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 unaudited consolidatedfinancial statements as of June 30, 2010 and for the six- and three-monthperiods ended June 30, 2010 and 2009 have been prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)and in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”),and in the opinion of management, include all adjustments, consisting of normalrecurring adjustments, to present fairly the information included therein. Theydo not include all the information and notes required by GAAP for completefinancial statements. Operating results for the six- and three-month periods endedJune 30, 2010 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2010. For further information,refer to the consolidated financial statements and notes thereto included inthe Corporation’s Annual Report on Form 10-K for the year endedDecember 31, 2009.

 

Note 2 — Earnings per Shareof Common Stock

 

The factors used in theearnings per share computation follow:

 
| ** **                                                                      | ** ** | **Six  Months Ended** | ** ** | **Three  Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**     | ** ** | **June 30,**       | ** ** |
| **(Dollars  in thousands except per share data)**                               | ** ** | **2010**              | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Basic                                                                           |       |                  |       |                    |       |   |   |   |   |
| Net  income (loss) available to common shareholders                             |       | $                     | 2,865      |                    | $          | (9,561 | ) | $ | 1,511 |   | $ | (6,901 | ) |
|                                                                            |       |                  |       |                    |       |   |   |   |   |
| Weighted  average common shares outstanding                                     |       | 5,647,884             |       | 4,732,387               |       | 5,648,384 |   | 4,835,602 |   |
|                                                                            |       |                  |       |                    |       |   |   |   |   |
| Basic  earnings (loss) per common share                                         |       | 0.51                  |       | (2.02                   | )          | 0.27 |   | (1.46 | ) |
|                                                                            |       |                  |       |                    |       |   |   |   |   |
| Diluted                                                                         |       |                  |       |                    |       |   |   |   |   |
| Net  income (loss) available to common shareholders                             |       | $                     | 2,865      |                    | $          | (9,561 | ) | $ | 1,511 |   | $ | (6,901 | ) |
|                                                                            |       |                  |       |                    |       |   |   |   |   |
| Weighted  average common shares outstanding for basic earnings per common share |       | 5,647,884             |       | 4,732,387               |       | 5,648,384 |   | 4,835,602 |   |
|                                                                            |       |                  |       |                    |       |   |   |   |   |
| Add:  Dilutive effects of assumed exercises of stock options (1)                |       | 71,019                |       | —                  |       | 88,664 |   | — |   |
|                                                                            |       |                  |       |                    |       |   |   |   |   |
| Average  shares and dilutive potential common shares                            |       | 5,718,903             |       | 4,732,387               |       | 5,737,048 |   | 4,835,602 |   |
|                                                                            |       |                  |       |                    |       |   |   |   |   |
| Diluted  earnings (loss) per common share                                       |       | $                     | 0.50       |                    | $          | (2.02 | ) | $ | 0.26 |   | $ | (1.46 | ) |

 

----

(1) All of the warrant and options were excluded from the calculationof diluted earnings per share in 2009 because they were anti-dilutive.

 

7

----

Table of Contents

 

Note 3 — Stock-BasedCompensation

 

FASB Accounting StandardsCodification (ASC) Topic 718, “Share-Based” Payment” (“FASB ASC 718”),addresses the accounting for share-based payment transactions in which acompany receives employee services in exchange for equity instruments. FASB ASC718 eliminates the ability to account for share-based compensation transactions,as the Corporation formerly did, using the intrinsic value method as prescribedby Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and generally requires that such transactions beaccounted for using a fair-value-based method and recognized as expense in theaccompanying consolidated statement of income.

 

Stock-based compensationexpense recognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Stock-basedcompensation expense recognized in the accompanying consolidated statements ofincome for the period ended June 30, 2010 included any compensationexpense for stock-based payment awards vesting during the period based on thegrant date fair value estimated in accordance with FASB ASC 718. As stock-basedcompensation expense recognized in the accompanying statement of income for theperiod ended June 30, 2010 is based on awards ultimately expected to vest,it has been reduced for estimated forfeitures. FASB ASC 718 requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

 

For the six months endedJune 30, 2010, the Corporation granted options to purchase 12,888 sharesof Corporation common stock and granted 160,760 restricted shares ofCorporation common stock and there were non-vested options to purchase 128,088shares of the Corporation common stock outstanding at June 30, 2010. TheCorporation recognized stock-based expense of approximately $208 for the sixmonths ended June 30, 2010.

 

A summary of the activity inthe Corporation’s stock-based compensation plan is as follows:

 
| ** **                                                                  | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                  | ** ** | ** ** | ** ** | ** **    | ** ** | **Average**     | ** ** | ** **     | ** ** |
| ** **                                                                  | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Contractual** | ** ** | ** **     | ** ** |
| ** **                                                                  | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate**  | ** ** |
| ** **                                                                  | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Term**        | ** ** | **Intrinsic**  | ** ** |
| **(Dollars in thousands except  for per share price)**                      | ** ** | **Number** | ** ** | **Price**     | ** ** | **(in  years)** | ** ** | **Value  (1)** | ** ** |
| Stock-based  options outstanding at December 31, 2009                  |       | 865,820    |       | $             | 13.66      |            |       |           | $          | (8,043 | ) |
| Options  granted                                                            |       | 12,888     |       | 7.76          |       |            |       |           |       |
| Options  exercised                                                          |       | —     |       | —        |       |            |       |           |       |
| Options  forfeited or expired                                               |       | —     |       | —        |       |            |       |           |       |
| Stock-based  options outstanding at June 30, 2010                      |       | 878,708    |       | $             | 13.57      |            | 4.09       |           | $          | (6,256 | ) |
| Stock-based  options outstanding and expected to vest at June 30, 2010 |       | 878,708    |       | $             | 13.57      |            | 4.09       |           | $          | (6,256 | ) |
| Options  exercisable at June 30, 2010                                  |       | 710,620    |       | $             | 12.44      |            | 3.20       |           | $          | (4,257 | ) |

 

----

(1)    Theaggregate intrinsic value is calculated as the difference between the exerciseprice of each option and the closing price per share of Corporation commonstock of $6.45 for the outstanding options to purchase 878,708 shares ofCorporation common stock and exercisable options to purchase 750,620 shares ofCorporation common stock at June 30, 2010.

 
| ** **                                                                            | ** ** | **Number** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|
| Shares  of restricted stock outstanding at December 31, 2009                     |       | 8,063      |       |
| Shares  of restricted stock issued                                                    |       | 160,760    |       |
| Restrictions  lapsed and shares released                                              |       | (2,016     | )          |
| Shares  of restricted stock forfeited or expired                                      |       | —     |       |
| Restricted  stock-based awards outstanding at June 30, 2010                      |       | 166,807    |       |
|                                                                                  |       |       |       |
| Restricted  stock-based awards outstanding and expected to vest at June 30, 2010 |       | 166,807    |       |

 

8

----

Table of Contents

 

The estimated fair values ofoptions are computed using the Black-Scholes option valuation model, using thefollowing weighted-average assumptions as of the grant date shown below:

 
| ** **               | ** ** | **2010**  | ** ** | **2009**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|
|                     |       |      |       |      |       |
| Risk-free  interest rate |       | 2.13      | %          | 0.30      | %          |
| Expected  option life    |       | 10  years |       | 10  years |       |
| Dividend  yield          |       | —    | %          | —    | %          |
| Volatility               |       | 63.00     | %          | 45.00     | %          |

 

The Corporation grantedoptions to purchase 12,888 shares of Corporation common stock and 160,760shares of restricted stock in the first six months of 2010. The options grantedin 2010 had an estimated weighted average fair value of $5.54. The optionsgranted in 2009 had an estimated fair value of $2.57.

 

Note 4 — Securities

 

The fair value of availablefor sale securities and the related gross unrealized gains and losses recognizedin accumulated other comprehensive income (loss) were as follows:

 
| ** **                 | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **    | ** ** |
|----------------------------|------------|------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                 | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized** | ** ** |
| **(Dollars in thousands)** | ** ** | **Value**  | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Cost**      | ** ** |
|                       |       |       |       |           |       |           |       |          |       |
| June 30,  2010        |       |       |       |           |       |           |       |          |       |
|                       |       |       |       |           |       |           |       |          |       |
| U.S.  Government agencies  |       | $          | 31,325     |           | $          | 126            |       | $             | (17        | ) | $ | 31,216 |   |
| U.  S. Treasuries          |       | 55,598     |       | —         |       | (1             | )          | 55,599        |       |
| Corporate  debt securities |       | 165        |       | 9              |       | —         |       | 156           |       |
| Other                      |       | 5,799      |       | —         |       | —         |       | 5,799         |       |
|                       |       |       |       |           |       |           |       |          |       |
|                       |       | $          | 92,887     |           | $          | 135            |       | $             | (18        | ) | $ | 92,770 |   |
|                       |       |       |       |           |       |           |       |          |       |
| December 31,  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 |   |

 

Contractual maturities ofdebt securities at June 30, 2010 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 |       | 64,606          |       |
| Due  after five through ten years |       | 165             |       |
| Due  after ten years              |       | 28,116          |       |
|                              |       |            |       |
|                              |       | $               | 92,887     |   |

 

Gross proceeds from the saleof securities for the six months ended June 30, 2010 and 2009 were $66,586and $19,428, respectively. Gross gains of $786 and $418 on sales of securitieswere recognized for the six months ended June 30, 2010 and 2009,respectively. There were gross losses of $90 on the sale of securitiesrecognized for the six months ended June 30, 2010 and a write-down loss of$80 for the six months ended June 30, 2009. Securities carried at $37,145and $100,013 at June 30, 2010 and December 31, 2009, respectively,were pledged to secure deposits and for other purposes as required or permittedby law.

 

9

----

Table of Contents

 

Securities with unrealizedlosses at June 30, 2010 and December 31, 2009, and the length of timethey have been 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** | ** ** |
|                                 |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| June 30,  2010                  |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
|                                 |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| U.S.  Government agencies            |       | $                        | 1,077      |                   | $          | 17        |       | $ | — |   | $ | — |   | $ | 1,077 |   | $ | 17 |   |
| U.S.  Treasuries                     |       | 55,598                   |       | 1                      |       | —    |       | — |   | 55,598 |   | 1 |   |
| Corporate  bonds                     |       | —                   |       | —                 |       | —    |       | — |   | — |   | — |   |
|                                 |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| **Total**                            | ** ** | **$**                    | 56,675     | ** **             | **$**      | 18        | ** ** | **$** | — | ** ** | **$** | — | ** ** | **$** | 56,675 | ** ** | **$** | 18 | ** ** |
|                                 |       |                     |       |                   |       |      |       |   |   |   |   |   |   |
| December 31,  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 | ** ** |

 

Unrealized losses on U.S.government agency securities have not been recognized into income because thesecurities are backed by the U.S. government or its agencies, management hasthe intent and ability to hold for the foreseeable future and the decline infair value is largely a result of increases in market interest rates. Theunrealized losses on corporate securities have not been recognized into incomebecause management has the intent and ability to hold for the foreseeablefuture, and the decline in fair value is largely a result of increases inmarket interest rates. The fair value of the securities above is expected torecover as the securities approach their maturity dates and/or market ratesdecline.

 

Note 5 — Federal Home LoanAdvances and Trust Preferred Securities

 

In October 2008, theBank was approved for funding advances in an aggregate amount of $30,000 withterms from one to 100 days from The Federal Home Loan Bank of Cincinnati (“FHLB”),based on a collateral standard. The Bank’s available advance is based on 150%of eligible one-to-four family loans as collateral. The Bank is also requiredto maintain a minimum required capital stock balance that is based upon itstotal assets.

 

In March 2005, theTrust I issued and sold 8,000 of its fixed/floating rate capital securities,with a liquidation amount of $1 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 tothe Trust I $8,248 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 fixed/floating rate capital securities qualify as “Tier ICapital” for the Corporation under current regulatory definitions subject tocertain limitations.

 

The debentures pay a fixedrate of 6.73% payable quarterly for the first five years and a floating ratebased on a three-month LIBOR rate plus 1.98% thereafter. The distributions onthe capital securities are accounted for as interest expense by theCorporation. Interest payments on the debentures and the corresponding distributionson the capital securities may be deferred at any time at the election of theCorporation for up to 20 consecutive quarterly periods (five years). Thecapital securities and debentures are redeemable at any time commencing afterJune 2010 at par. The Corporation reports as liabilities the subordinateddebentures issued by the Corporation and held by the Trust I.

 

In June 2008, the TrustII issued and sold 14,500 of its floating rate capital securities, with aliquidation amount of $1 per capital security, in a private placement. Thesecurities pay a floating rate per annum, reset quarterly, equal to the primerate of interest published in*  TheWall Street Journal*   on the first business day of eachdistribution period plus 50 basis points (but in no event greater than 8.0% orless than 5.75%). At the same time, the Corporation issued to the Trust II$14,950 of floating rate junior subordinated deferrable interest debentures due2038. The Corporation 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.

 

10

----

Table of Contents

 

The debentures pay afloating rate per annum, reset quarterly, equal to the prime rate of interestpublished in*The Wall Street Journal*  on the first business day of each distribution period plus 50 basispoints (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 liabilitiesthe subordinated debentures issued by the Corporation and held by the Trust II.

 

Note 6 — Subsequent Events

 

On August 11, 2010, theCorporation closed an underwritten public offering of shares of theCorporation’s common stock at a purchase price of $4.00 per share.  The Corporation sold 6,546,500 shares of itscommon stock, which included 796,500 shares of common stock issued upon partialexercise of the underwriters’ 862,500-share over-allotment option.  The net proceeds to the Corporation, afterdeducting underwriting discounts and commissions and estimated offeringexpenses payable by the Corporation, were $24.2 million.

 

Management has evaluatedevents occurring subsequent to the balance sheet date through August 13,2010 (the financial statement issuance date), and has determined that no eventsrequire adjustment to or additional disclosure in the consolidated financialstatements.

 

Note 7 — New AccountingStandards

 

Accounting Standards Update(ASU) No. 2009-16, “Transfers and Servicing (Topic 860) - Accountingfor Transfers of Financial Assets.”  ASU 2009-16 amends prioraccounting guidance to enhance reporting about transfers of financial assets,including securitizations, and where companies have continuing exposure to therisks related to transferred financial assets. ASU 2009-16 eliminates theconcept of a “qualifying special-purpose entity” and changes the requirementsfor derecognizing financial assets. ASU 2009-16 also requires additionaldisclosures about all continuing involvements with transferred financial assetsincluding information about gains and losses resulting from transfers duringthe period. The provisions of ASU 2009-16 became effective onJanuary 1, 2010 and did not have a significant impact on the Corporation’sfinancial statements.

 

ASU No. 2009-17, “Consolidations(Topic 810) - Improvements to Financial Reporting by Enterprises Involvedwith Variable Interest Entities.”  ASU 2009-17 amends prior guidanceto change how a company determines when an entity that is insufficientlycapitalized or is not controlled through voting (or similar rights) should beconsolidated. The determination of whether a company is required to consolidatean entity is based on, among other things, an entity’s purpose and design and acompany’s ability to direct the activities of the entity that mostsignificantly impact the entity’s economic performance. ASU 2009-17requires additional disclosures about the reporting entity’s involvement with variable-interestentities and any significant changes in risk exposure due to that involvementas well as its affect on the entity’s financial statements. As furtherdiscussed below, ASU No. 2010-10, “Consolidations (Topic 810),”deferred the effective date of ASU 2009-17 for a reporting entity’sinterests in investment companies. The provisions of ASU 2009-17 becameeffective on January 1, 2010 and did not have a significant impact on theCorporation’s financial statements.

 

ASU No. 2010-06, “FairValue Measurements and Disclosures (Topic 820) - Improving DisclosuresAbout Fair Value Measurements.”  ASU 2010-06 requires expandeddisclosures related to fair value measurements including (i) the amountsof significant transfers of assets or liabilities between Levels 1 and 2of the fair value hierarchy and the reasons for the transfers, (ii) thereasons for transfers of assets or liabilities in or out of Level 3 of thefair value hierarchy, with significant transfers disclosed separately, (iii) thepolicy for determining when transfers between levels of the fair valuehierarchy are recognized and (iv) for recurring fair value measurements ofassets and liabilities in Level 3 of the fair value hierarchy, a grosspresentation of information about purchases, sales, issuances and settlements.ASU 2010-06 further clarifies that (i) fair value measurementdisclosures should be provided for each class of assets and liabilities (ratherthan major category), which would generally be a subset of assets or liabilitieswithin a line item in the statement of financial position and(ii) companies should provide disclosures about the valuation techniquesand inputs used to measure fair value for both recurring and nonrecurring fairvalue measurements for each class of assets and liabilities included inLevels 2 and 3 of the fair value hierarchy. The disclosures related to thegross presentation of purchases, sales, issuances and settlements of assets andliabilities included in Level 3 of the fair value hierarchy will berequired for the Corporation beginning January 1, 2011. The remainingdisclosure requirements and clarifications made by ASU 2010-06 becameeffective for the Corporation on January 1, 2010. See Note 8 —Fair Value Measurement below for more information.

 

ASU No. 2010-11, “Derivativesand Hedging (Topic 815) - Scope Exception Related to Embedded CreditDerivatives” (“ASU 2010-11”), clarifies that the only forms of an embeddedcredit derivative that are exempt from embedded derivative bifurcationrequirements are those that relate to the subordination of one financialinstrument to another. As a result, entities that have contracts containing anembedded credit derivative feature in a form other than such subordination mayneed to separately account for the embedded credit derivative feature. Theprovisions of ASU 2010-11 will be effective for the Corporation onJuly 1, 2010 and are not expected to have a significant impact on theCorporation’s financial statements.

 

11

----

Table of Contents

 

ASU No. 2010-10, “Consolidations(Topic 810) - Amendments for Certain Investment Funds.” ASU 2010-10defers the effective date of the amendments to the consolidation requirementsmade by* ASU 2009-17*  to acompany’s interest in an entity (i) that has all of the attributes of aninvestment company, as specified under ASC Topic 946, “FinancialServices - Investment Companies,” or (ii) for which it is industrypractice to apply measurement principles of financial reporting that areconsistent with those in ASC Topic 946. As a result of the deferral, acompany will not be required to apply the ASU 2009-17 amendments to theSubtopic 810-10 consolidation requirements to its interest in an entity thatmeets the criteria to qualify for the deferral. ASU 2010-10 also clarifiesthat any interest held by a related party should be treated as though it is anentity’s own interest when evaluating the criteria for determining whether suchinterest represents a variable interest. In addition, ASU 2010-10 alsoclarifies that a quantitative calculation should not be the sole basis forevaluating whether a decision maker’s or service provider’s fee is a variableinterest. The provisions of ASU 2010-10 became effective for theCorporation as of January 1, 2010 and did not have a significant impact onthe Corporation’s financial statements.

 

Note 8 — Fair ValueMeasurement

 

The Bank has an establishedprocess for determining fair values in accordance with FASB ASC 820. Fair valueis based upon quoted market prices, where available. If listed prices or quotesare not available, fair value is based upon internally developed models orprocesses that use primarily market-based or independently-sourced market data,including interest rate yield curves, option volatilities and third partyinformation. Valuation adjustments may be made to ensure that financialinstruments are recorded at fair value. These adjustments include amounts toreflect counterparty credit quality (for financial assets reflected at fairvalue), the Bank’s creditworthiness (for financial liabilities reflected atfair value), liquidity and other unobservable parameters that are appliedconsistently over time as follows:

 

·      Creditvaluation adjustments are necessary when the market price (or parameter) is notindicative of the credit quality of the counterparty.

 

·      Debitvaluation adjustments are necessary to reflect the credit quality of the Bankin the valuation of liabilities measured at fair value.

 

·      Liquidityvaluation adjustments are necessary when the Bank may not be able to observe arecent market price for a financial instrument that trades in inactive (or lessactive) markets or to reflect the cost of exiting larger-than-normalmarket-size risk positions.

 

·      Unobservableparameter valuation adjustments are necessary when positions are valued usinginternally developed models that use as their basis unobservable parameters —that is, parameters that must be estimated and are, therefore, subject tomanagement judgment to substantiate the model valuation. These financialinstruments are normally traded less actively.

 

The methods described abovemay produce a fair value calculation that may not be indicative of netrealizable value or reflective of future fair values. Furthermore, while theBank believes its valuation methods are appropriate and consistent with othermarket participants, the use of different methodologies, or assumptions, todetermine the fair value of certain financial instruments could result in adifferent estimate of fair value at the reporting date.

 

**ValuationHierarchy**

 

FASB ASC 820 establishes athree-level valuation hierarchy for disclosure of fair value measurements. Thevaluation hierarchy is based upon the transparency of inputs to the valuationof an asset or liability as of the measurement date. The three levels aredefined as follows:

 

·     Level1 — inputs to the valuation methodology are quoted prices (unadjusted) foridentical assets or liabilities in active markets.

 

·     Level2 — inputs to the valuation methodology include quoted prices for similarassets and liabilities in active markets, and inputs that are observable forthe asset or liability, either directly or indirectly, for substantially thefull term of the financial instrument.

 

·     Level3 — inputs to the valuation methodology are unobservable and significant to thefair value measurement.

 

A financial instrument’scategorization within the valuation hierarchy is based upon the lowest level ofinput that is significant to the fair value measurement.  Below is adescription of the valuation methodologies used for instruments measured atfair value, as well as the general classification of such instruments pursuantto the valuation hierarchy.

 

12

----

Table of Contents

 

**Assets**

 

*SecuritiesAvailable for Sale -* Available-for-sale securities are recorded at fairvalue on a recurring basis.  Where quoted prices are available in anactive market, securities are classified within level 1 of the valuationhierarchy.  Level 1 securities include highly liquid government bonds,federal funds sold and certain other products.  Fair value measurement isbased upon quoted prices, if available.  If quoted prices are notavailable, securities would generally be classified within Level 2, and fairvalue would be determined by matrix pricing, which is a mathematical techniquewidely 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 six months ended June 30, 2010, all of the Bank’savailable-for-sale securities were valued using matrix pricing and wereclassified within Level 2 of the valuation hierarchy.  At June 30,2010, the Bank had no available-for-sale securities classified within Level 3.

 

*ServicingAssets -* All separately recognized servicing assets andservicing liabilities are initially measured at fair value. Subsequentmeasurement methods include the amortization method, whereby servicing assetsor servicing liabilities are amortized over the period of estimated netservicing income or net servicing loss, or the fair value method, wherebyservicing assets or servicing liabilities are measured at fair value at eachreporting date and changes in fair value are reported in earnings in the periodin which they occur. Because of the unique nature of the Bank’s servicingassets, quoted market prices may not be available. If no quoted market pricesare available, the amortization method is used. The Bank assesses servicingassets or servicing liabilities for impairment or increased obligation based onthe fair value at each reporting date.  At June 30,2010, the Bank had servicing assets measured at fair value on a recurringbasis classified within Level 3 of the valuation hierarchy.

 

*Interest-OnlyStrips -* When the Bank sells loans to others, it may holdinterest-only strips, which is an interest that continues to be held by thetransferor in the securitized receivable. It may also obtain servicing assetsor assume servicing liabilities that are initially measured at fair value. Gainor loss on sale of the receivables depends in part on both (a) theprevious carrying amount of the financial assets involved in the transfer,allocated between the assets sold and the interests that continue to be held bythe transferor based on their relative fair value at the date of transfer, and(b) the proceeds received. To obtain fair values, quoted market prices areused if available. However, quotes are generally not available for intereststhat continue to be held by the transferor, so the Bank generally estimatesfair value based on the future expected cash flows estimated using management’sbest estimates of the key assumptions — credit losses and discount ratescommensurate with the risks involved. At June 30, 2010, the Bank hadinterest-only strips measured at fair value on a recurring basis classifiedwithin Level 3 of the valuation hierarchy.

 

*ImpairedLoans —* A loan is considered to be impaired when it is probable the Bank willbe unable to collect all principal and interest payments due in accordance withthe contractual terms of the loan agreement. Individually identified impairedloans are measured based on the present value of expected payments using theloan’s original effective rate as the discount rate, the loan’s observablemarket price, or the fair value of the collateral if the loan is collateraldependent. If the recorded investment in the impaired loan exceeds the measureof fair value, a valuation allowance may be established as a component of theallowance for loan losses. At June 30, 2010, the Bank had impaired loansmeasured on a nonrecurring basis classified within Level 3 of the valuationhierarchy.

 

*OtherAssets —* Included in other assets are certain assets carriedat fair value, including repossessions and other real estate owned (“OREO”).The carrying amount is based on an observable market price or appraisal value.The Bank reflects these assets within Level 3 of the valuation hierarchy. At June 30,2010, the Bank had repossessions and OREO measured at fair value on anonrecurring basis classified within Level 3 of the valuation hierarchy.

 

*Bank-OwnedLife Insurance—* The Bank includes bank owned life insurance (“BOLI”)within other assets, carried at cash surrender value. The cash surrender value ofbank owned life insurance is based on information received from the insurancecarriers indicating the financial performance of the policies and the amountthe Bank would receive should the policies be surrendered. At June 30,2010, the Bank had BOLI measured at fair value on a recurring basis classifiedwithin Level 3 of the valuation hierarchy.

 

*Inventory—* Repossessed assets are resold at retail prices as soon aspracticable.  If a repossession of the Bank is not resold within the sixmonth holding period allowed by Tennessee law, it is purchased by a subsidiaryof the Corporation. It is held as inventory and carried at fair marketvalue.  The sole purpose of the subsidiary is the resale of assetsrepossessed by the Bank. At June 30, 2010, the subsidiary hadinventory measured at fair value on a nonrecurring basis classified withinLevel 3 of the valuation hierarchy.

 

13

----

Table of Contents

 

**Liabilities**

 

*RecourseObligations* - The maximum extent of the Bank’s recourseobligations on loans transferred is 10% of the amount transferred adjusted forany early payoffs or terminations, based on the Bank’s payment history on loansof the type transferred. At June 30, 2010, the Bank had recourseobligations measured at fair value on a recurring basis classified within Level3 of the valuation hierarchy.

 

The FASB updated ASC 820 toinclude disclosure requirements surrounding transfers of assets and liabilitiesin and out of Levels 1 and 2.  Previous guidance only required transferdisclosures for Level 3 assets and liabilities.  The Bank monitors thevaluation technique utilized by various pricing agencies, in the case of thebond portfolio to ascertain when transfers between levels have beenaffected.  The nature of the remaining assets and liabilities is such thattransfers in and out of any level are expected to be rare.  For the sixmonths ended June 30, 2010, there were no transfers between levels. The new standard also requires an increased level of disaggregation withasset/liability classes.  The Bank has disaggregated other assets andliabilities as shown to comply with the requirements of this standard.

 

The following table presentsthe financial instruments carried at fair value as of June 30, 2010, bycaption on the consolidated balance sheets and by FASB ASC 820 valuationhierarchy (as described above):

 

**Assets and liabilities measured at fair value on a recurringbasis as of June 30, 2010**

 
| ** **                          | ** ** | ** **        | ** ** | ** **        | ** ** | **Internal**     | ** ** | **Internal**     | ** ** |
|-------------------------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Total**         | ** ** | **Quoted**        | ** ** | **models  with** | ** ** | **models  with** | ** ** |
| ** **                          | ** ** | **carrying**      | ** ** | **market**        | ** ** | **significant**  | ** ** | **significant**  | ** ** |
| ** **                          | ** ** | **value  in the** | ** ** | **prices  in an** | ** ** | **observable**   | ** ** | **unobservable** | ** ** |
| ** **                          | ** ** | **consolidated**  | ** ** | **active**        | ** ** | **market**       | ** ** | **market**       | ** ** |
| ** **                          | ** ** | **balance**       | ** ** | **market**        | ** ** | **parameters**   | ** ** | **parameters**   | ** ** |
| **(Dollars in thousands)**          | ** ** | **sheet**         | ** ** | **(Level  1)**    | ** ** | **(Level  2)**   | ** ** | **(Level  3)**   | ** ** |
| Securities  available for sale      |       |              |       |              |       |             |       |             |       |
| U.S.  Government agencies           |       | $                 | 31,325     |              | $          | —           |       | $                | 31,325     |   | $ | — |   |
| U.S.  Treasuries                    |       | 55,598            |       | —            |       | 55,598           |       | —           |       |
| Corporate  debt securities          |       | 165               |       | —            |       | 165              |       | —           |       |
| Other                               |       | 5,799             |       | —            |       | 5,799            |       | —           |       |
| Servicing  assets                   |       | 123               |       | —            |       | —           |       | 123              |       |
| Interest-only  strips               |       | 1,962             |       | —            |       | —           |       | 1,962            |       |
| Bank-owned  life insurance          |       | 27,571            |       | —            |       | —           |       | 27,571           |       |
| **Total assets at fair value**      |       | $                 | 122,543    |              | $          | —           |       | $                | 92,887     |   | $ | 29,656 |   |
|                                |       |              |       |              |       |             |       |             |       |
| Recourse  obligations               |       | $                 | 239        |              | $          | —           |       | $                | —     |   | $ | 239 |   |
| **Total liabilities at fair value** |       | $                 | 239        |              | $          | —           |       | $                | —     |   | $ | 239 |   |

 

The Corporation may berequired, from time to time, to measure certain assets at fair value on anonrecurring basis in accordance with GAAP. These include assets that are measuredat the lower of cost or market that were recognized at fair value below thecost at the end of the period. The following table presents the financialinstruments carried at fair value as of June 30, 2010, by caption on theconsolidated balance sheets and by FASB ASC 820 valuation hierarchy (asdescribed above):

 

**Assets and liabilities measured at fair value on anonrecurring basis as of June 30, 2010**

 
| ** **                     | ** ** | ** **        | ** ** | ** **        | ** ** | **Internal**     | ** ** | **Internal**     | ** ** |
|--------------------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **Total**         | ** ** | **Quoted**        | ** ** | **models  with** | ** ** | **models  with** | ** ** |
| ** **                     | ** ** | **carrying**      | ** ** | **market**        | ** ** | **significant**  | ** ** | **significant**  | ** ** |
| ** **                     | ** ** | **value  in the** | ** ** | **prices  in an** | ** ** | **observable**   | ** ** | **unobservable** | ** ** |
| ** **                     | ** ** | **consolidated**  | ** ** | **active**        | ** ** | **market**       | ** ** | **market**       | ** ** |
| ** **                     | ** ** | **balance**       | ** ** | **market**        | ** ** | **parameters**   | ** ** | **parameters**   | ** ** |
| **(Dollars in thousands)**     | ** ** | **sheet**         | ** ** | **(Level  1)**    | ** ** | **(Level  2)**   | ** ** | **(Level  3)**   | ** ** |
| Impaired  loans                |       | $                 | 42,866     |              | $          | —           |       | $                | —     |   | $ | 42,866 |   |
| Inventory                      |       | 8,308             |       | —            |       | —           |       | 8,308            |       |
| Other  Assets                  |       | 28,823            |       | —            |       | —           |       | 28,823           |       |
| **Total assets at fair value** |       | $                 | 79,997     |              | $          | —           |       | $                | —     |   | $ | 79,997 |   |

 

14

----

Table of Contents

 

**Changes inLevel 3 fair value measurements**

 

The table below includes aroll-forward of the balance sheet amounts for the first six months of 2010(including the change in fair value) for financial instruments classified bythe Bank within Level 3 of the valuation hierarchy for assets and liabilitiesmeasured at fair value on a recurring basis. When a determination is made toclassify a financial instrument within Level 3 of the valuation hierarchy, thedetermination is based upon the significance of the unobservable factors to theoverall fair value measurement. However, since Level 3 financial instrumentstypically include, in addition to the unobservable or Level 3 components,observable components (that is, components that are actively quoted and can bevalidated to external sources), the gains and losses in the table below includechanges in fair value due in part to observable factors that are part of thevaluation methodology.

 
| **(Dollars in thousands)**                                                                                                                            | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| Fair  value, January 1, 2010                                                                                                                     |       | $          | 28,549     |            | $          | 317 |   |
| Total  realized and unrealized (losses) gains included in income                                                                                      |       | (1,243     | )          | 24              |       |
| Purchases,  issuances and settlements, net                                                                                                            |       | 2,350      |       | (102            | )          |
| Transfers  in and/or out of level 3                                                                                                                   |       | —     |       | —          |       |
| Fair  value, June 30, 2010                                                                                                                       |       | $          | 29,656     |            | $          | 239 |   |
| Total  unrealized gains included in income related to financial assets and  liabilities still on the consolidated balance sheet at June 30, 2010 |       | $          | —     |            | $          | — |   |

 

FASB ASC 820 requiresdisclosure of the fair value of financial assets and financial liabilities,including those financial assets and financial liabilities that are notmeasured and reported at fair value on a recurring basis or nonrecurring basis.

 

The estimated fair values offinancial instruments were as follows:

 
| ** **                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                        | ** ** | **Carrying**      | ** ** | **Estimated  Fair**   | ** ** | **Carrying** | ** ** | **Estimated  Fair** | ** ** |
| **(Dollars in thousands)**                        | ** ** | **Amount**        | ** ** | **Value**             | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial  assets:                                |       |              |       |                  |       |   |   |   |   |
| Cash  and due from banks                          |       | $                 | 9,277      |                  | $          | 9,277 |   | $ | 22,864 |   | $ | 22,864 |   |
| Federal  funds sold                               |       | 11,610            |       | 11,610                |       | 15,010 |   | 15,010 |   |
| Securities                                        |       | 92,887            |       | 92,887                |       | 93,668 |   | 93,668 |   |
| Loans,  net                                       |       | 1,176,713         |       | 1,256,297             |       | 1,151,388 |   | 1,250,425 |   |
| Accrued  interest receivable                      |       | 8,545             |       | 8,545                 |       | 9,711 |   | 9,711 |   |
| Bank-owned  life insurance                        |       | 27,571            |       | 27,571                |       | 25,673 |   | 25,673 |   |
| Restricted  equity securities                     |       | 2,169             |       | 2,169                 |       | 2,169 |   | 2,169 |   |
| Financial  liabilities:                           |       |              |       |                  |       |   |   |   |   |
| Deposits                                          |       | 1,243,456         |       | 1,269,203             |       | 1,242,542 |   | 1,263,535 |   |
| Accrued  interest payable                         |       | 1,390             |       | 1,390                 |       | 1,430 |   | 1,430 |   |
| Accrued  dividend payable                         |       | 187               |       | 187                   |       | 187 |   | 187 |   |
| Short-term  borrowings                            |       | 8,750             |       | 8,750                 |       | 14,000 |   | 14,000 |   |
| Long-term  subordinated debt and other borrowings |       | 26,100            |       | 28,224                |       | 23,198 |   | 27,175 |   |
|                                                   |            |                   |            |                       |            |  |  |  |  |  |  |  |  |

 

The Bank has an establishedprocess for determining fair values of the financial instruments, in accordancewith FASB ASC 820. Fair value is based upon quoted market prices, whereavailable. If listed prices or quotes are not available, fair value is basedupon internally developed models or processes that use primarily market-basedor independently-sourced market data, including interest rate yield curves,option volatilities and third party information. Valuation adjustments may bemade to ensure that financial instruments are recorded at fair value. Theseadjustments include amounts to reflect counterparty credit quality (forfinancial assets reflected at fair value), the Bank’s creditworthiness (forfinancial liabilities reflected at fair value), liquidity and otherunobservable parameters that are applied consistently over time as follows:

 

15

----

Table of Contents

 

·                  Credit valuationadjustments are necessary when the market price (or parameter) is not indicativeof the credit quality of the counterparty;

 

·                  Debit valuationadjustments are necessary to reflect the credit quality of the Bank in thevaluation of liabilities measured at fair value;

 

·                  Liquidityvaluation adjustments are necessary when the Bank may not be able to observe arecent market price for a financial instrument that trades in inactive (or lessactive) markets or to reflect the cost of exiting larger- than-normalmarket-size risk positions; and

 

·                  Unobservableparameter valuation adjustments are necessary when positions are valued usinginternally developed models that use as their basis unobservable parameters —that is, parameters that must be estimated and are, therefore, subject tomanagement judgment to substantiate the model valuation. These financialinstruments are normally traded less actively.

 

The methods described abovemay 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.

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**Forward-LookingStatements**

 

Certain statements containedin 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 torecently adopted accounting standards, fair value measurements, operatingresults, maturities of debt securities, business bank strategy, loan saletransactions, tax rates, management’s review of the loan portfolio, loanclassifications, allowance for loan losses, loan commitments, liquidity,capital resources, interest rates, interest rate sensitivity gap analysis,economic value of equity model, net interest income, net interest margin,interest-bearing liabilities, non-interest income, stock-based compensationexpense and our future growth and profitability. We caution you not to placeundue reliance on the forward-looking statements contained in this report becauseactual results could differ materially from those indicated in suchforward-looking statements as a result of a variety of factors. These factorsinclude, but are not limited to, our concentration of commercial loans andcommercial real estate loans, the sufficiency of our current sources of funds,our reliance on internet and brokered deposits, the effect of capitalconstraints on our pace of growth and our ability to raise additional capitalwhen needed, the adequacy of our allowance for loan losses, informal or formalenforcement actions to which we may become subject, our heavy reliance on theservices of key personnel, the prepayment of FDIC insurance premiums and higherFDIC assessment rates, the success of the local economies in which we do business,the potential disposition of collateral upon foreclosure with respect to ournational market funding outside of the Nashville MSA, the execution of ourbusiness strategies, competition from financial institutions and otherfinancial service providers, material fluctuations in non-interest income,negative developments in the financial services industry and U.S. and globalcredit markets, the effect of recent legislative and regulatory initiatives toaddress difficult market and economic conditions on the stabilization of theU.S. banking system, changes in interest rates, the limitation or restrictionof our activities as a result of the extensive regulation to which we aresubject, our ability to return capital to our shareholders as a result of our issuanceof securities to Treasury, the right of holders of our Series A PreferredStock, the senior rights of holders of our subordinated debentures, any futureissuances of our common stock or other equity securities and other factorsdetailed from time to time in our press releases and filings with theSecurities and Exchange Commission. We undertake no obligation to updatethese forward-looking statements to reflect the occurrence of changes orunanticipated events, circumstances or results that occur after the date ofthis report.

 

16

----

Table of Contents

 

**Overview**

(Dollars in thousands,except per share data, throughout this Item 2)

 

The results of operations,before charges for preferred dividends, for the six months ended June 30,2010 compared to the six months ended June 30, 2009 reflected a 141.24%increase in net income and a 134.13% increase in diluted earnings per share.The increase in earnings resulted partially from a reduction in the provisionfor loan losses to maintain a 1.70% loan loss reserve as a percentage of grossloans. For the six months ended June 30, 2010, net income was $2,865,an increase of $12,426 or 129.97% compared to net loss of $9,561 for the sameperiod in 2009. Diluted earnings per share increased $2.52 per share or 124.80%for the six months ended June 30, 2010 compared to the same period in2009. The six months ended June 30, 2010 reflected a continuation of ourtrend of balance sheet management, as assets increased by $6,096 or 0.44% from$1,383,432 at December 31, 2009 to $1,389,528 at June 30, 2010. Netloans increased by 2.20% or $25,325 from December 31, 2009 toJune 30, 2010, while total deposits increased by 0.07% or $914 during thatsame period.

 

**CorporationOverview**

 

We are headquartered inFranklin, Tennessee and are the bank holding company for the Bank. Organized in January 2000, the Bank has a focused strategy that serves thebanking needs of small to medium-sized businesses, entrepreneurs andprofessionals in the Nashville Metropolitan Statistical Area, or the NashvilleMSA, as well as the funding needs of certain national and regional equipmentvendors and financial services companies.  We call this strategy ourbusiness bank strategy. We primarily conduct business from a single location inthe Cool Springs commercial area of Franklin, Tennessee, 15 miles south ofNashville. We also operate three loan production offices - one in each of Birmingham,Alabama, Minneapolis, Minnesota and Atlanta, Georgia. Each of these offices isstaffed with one senior lending officer.

 

We offer a full range ofcompetitive retail and commercial banking services to local customers in theNashville MSA.  Our deposit services include a broad offering 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-sized businesses and professionals, and letters ofcredit. We issue VISA credit cards and are a merchant depository for cardholderdrafts under VISA credit cards.  We also offer check cards and debit cardsand offer our local customers free courier services, access to third-partyautomated teller machines, or ATMs, remote deposit and state-of-the-artelectronic banking. We have trust powers but do not have a trust department orexercise these powers.

 

**OurBusiness Strategy**

 

We are primarily acommercial lender focused on secured loans in the middle-market businesssegment. Our client base consists largely of local owner-managed businesses,entrepreneurs and professionals. We have been lending to this commercialsegment for over a decade, and our business is built around long-term clientrelationships. We focus on understanding our clients’ businesses and cashflows, and establishing well-secured loans. We also have expertise inasset-based lending, equipment finance and tax-advantaged lending. While we maynot be the lowest cost provider in our markets, we have successfully attractedand retained customers as a result of our service-oriented business model,tailored products and long-term relationships. In addition, our lenders haveextensive experience, with an average tenure of 28 years in the financialservices lending business.

 

The following is a breakdownof our loan portfolio by loan type at June 30, 2010:

 

| **Loan Type**               | ** ** | **% of Total** | ** ** |
|-----------------------------|------------|----------------|------------|
| Commercial  and industrial  |       | 54.5           | %          |
| Real  estate: Commercial(1) |       | 22.4           |       |
| Real  estate: Construction  |       | 11.0           |       |
| Tax  leases                 |       | 8.2            |       |
| Real  estate: 1-4 family    |       | 3.6            |       |
| Consumer                    |       | 0.3            |       |
| Total                       |       | 100.0          | %          |

 

----

*(1) *Commercial realestate loans primarily represent commercial and industrial loans collateralizedby commercial real estate.

 

Our commercial loans aregenerally well-secured by a variety of collateral, including commercial realestate, inventory, accounts receivable, transportation assets and personalguarantees. Management believes that we maintain conservative underwritingstandards, as well as conservative loan-to-value ratios.

 

Our specialty lendingbusiness represents an attractive growth opportunity in the large-ticket, specializedequipment segment. Collateral for large-ticket loans includes, among otherthings, information technology, rail, item processing, oil and gas,construction, transportation and medical assets. Fewer competitors are lendingto this segment because of capital constraints, coupled with the disruption inthe asset-backed securitization market, both of which create lendingopportunities for us at higher spreads. Management believes that the depth ofour asset-based lending expertise and established infrastructure creates asignificant competitive strength.

 

In the long term, managementbelieves we also have attractive opportunities in the small-ticket specializedequipment segment, including more lending opportunities through U.S. SmallBusiness Administration loan programs. Collateral for small-ticket loansincludes, among other things, trailers, construction, service vehicles, machinetool, plastic injection, telecommunication and manufacturing assets. Managementexpects reduced competition in this segment, resulting in higher returns.Certain underwriting and collateral depreciation assumptions have become morestringent under these programs, however, which could hamper demand.

 

We also see opportunities todevelop further or invest in fee-generating businesses that complement ourexisting commercial loan business, including commercial lines insurance andwealth management.

 

17

----

Table of Contents

 

Finally, we continue toevaluate asset and deposit acquisition opportunities throughout our currentmarket area as well as in contiguous states.

 

Our deposit strategy hasfocused on cross-selling to our existing borrowing customers, expanding ourdistribution channels to attract non-borrowing deposit clients, and investingin electronic banking capabilities, including internet and mobile banking. As aresult of these initiatives, core deposits increased $181.4 million, or27.23%, between June 30, 2009 and June 30, 2010, including a$84.5 million increase experienced during the first six months of 2010.

 

**Comparisonof Operating Results for the Three Months Ended June 30, 2010 andJune 30, 2009**

 

**Net Income** - Net incomefor the three months ended June 30, 2010 was $1,511, an increase of $8,412or 121.90% compared to a net loss of $6,901 for the three months endedJune 30, 2009.  The increase is partially attributable to a 157.27%increase in non-interest income from a loss of $1,561 for the three monthsended June 30, 2009 to $894 for the same period in 2010, as well as adecrease in the provision for loan losses of 66.10% from $13,125 for the threemonths ended June 30, 2009 to $4,450 for the same period in 2010.  Weexperienced an increase of $326 in operating expense which was the result ofour overall growth, including a $129 increase in loan collections expense atJune 30, 2010 compared to the same date in 2009. Further, during thequarter ended June 30, 2010, we made a dividend payment to the U.S.Department of Treasury in an amount equal to $375 with respect to shares of ourFixed Rate Cumulative Perpetual Preferred Stock, Series A.

 
| ** **                                                  | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **June 30,**       | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                                  | ** ** | **2010**                | ** ** | **2009**   | ** ** | **%  Change** | ** ** |
|                                                        |       |                    |       |       |       |   |   |
| Interest  income                                            |       | $                       | 20,617     |       | $          | 19,907 |   | 3.57 | % |
| Interest  expense                                           |       | 7,274                   |       | 9,456      |       | (23.08 | ) |
| Net  interest income                                        |       | 13,343                  |       | 10,451     |       | 27.67 |   |
| Provision  for loan losses                                  |       | 4,450                   |       | 13,125     |       | (66.10 | ) |
| Net  interest income (loss) after provision for loan losses |       | 8,893                   |       | (2,674     | )          | 432.57 |   |
| Non-interest  income (loss)                                 |       | 894                     |       | (1,561     | )          | 157.27 |   |
| Non-interest  expense                                       |       | 6,711                   |       | 6,385      |       | 5.11 |   |
| Net  income (loss) before taxes                             |       | 3,076                   |       | (10,620    | )          | 128.96 |   |
| Income  tax expense (benefit)                               |       | 1,190                   |       | (4,071     | )          | 129.23 |   |
| Net  income (loss)                                          |       | 1,886                   |       | (6,549     | )          | 128.80 |   |
| Preferred  dividends                                        |       | (375                    | )          | (352       | )          | 6.53 |   |
| Net  income (loss) available to common shareholders         |       | $                       | 1,511      |       | $          | (6,901 | ) | 121.90 | % |

 

**Provisionfor Loan Losses** - The provision for loan losses for the threemonths ended June 30, 2010 was $4,450, a decrease of $8,675, or 66.10%,below the provision of $13,125 for the same period in 2009.  This decreasewas primarily a result of reduced charge-offs**.**  At June 30, 2010, the loan loss reserveof $20,346 was 1.70% of gross loans of $1,197,059, compared to a ratio of loanloss reserve to gross loans of 1.65% at June 30, 2009.

 

**Non-interestIncome** - Non-interest income increased by 157.27% or$2,455, from a loss of $1,561 in the quarter ended June 30, 2009 to $894for the same period in 2010. The increase was primarily a result of gains onloan sales during the quarter. There was a net gain on loan sales of $741for the three months ended June 30, 2010, while there was a net loss onloan sales of $629 for the three-month periods ended June 30, 2009.

 

18

----

Table of Contents

 

We did not earn any mortgageorigination fees during the three months ended June 30, 2010 compared to$6 earned during the same period in 2009, a decrease of $6 or 100%.  Werecognized $277 on the sale of securities in the three months ended June 30,2010 compared with a loss of $629 for the same period in 2009. The gain on saleof securities in 2010 was a result of favorable market variations.

 

We had $741 gain on loansale transactions in the three months ended June 30, 2010, a 217.81%increase compared to a loss of $629 loss during the same period in 2009. Thisincrease was primarily as a result of increased loan sales and gains,offsetting buy-backs on prior sales. Management will continue to consider loansale transactions if the opportunity for a reasonable return is available.

 

**Non-interestExpense** - Non-interest expense for the three months ended June 30,2010 was $6,711, an increase of $326 or 5.11%, over the $6,385 expensed in thesame period in 2009.  Approximately 39.57% of the increase was a result ofincreases in loan collections expense.  Approximately 50.00% of theincrease in non-interest expense was attributable to loan servicing expense.

 

**NetInterest Income** - Net interest income for the three months endedJune 30, 2010 was $13,343 compared to $10,451 for the same period in 2009,an increase of $2,892 or 27.67%.  The increase in net interest income waslargely attributable to a lower cost of funds accompanied by an increase inloan fees.  The average net loan balance increased by $51,921 or 4.64%from $1,117,841 for the three months ended June 30, 2009 to $1,169,762 forthe same period in 2010. Loan growth was accompanied by an increase in averageinterest-bearing deposits from $1,115,266 for the three months endedJune 30, 2009 to $1,199,311 for the same period in 2010, an increase of$84,045 or 7.54%.

 

The following table outlinesthe components of net interest income for the three-month periods ended June 30,2010 and 2009 and identifies the impact of changes in volume and rate:

 
| ** **                    | ** ** | **June 30,  2010 change from** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **June 30,  2009 due to:**     | ** ** |
| **(Dollars in thousands)**    | ** ** | **Volume**                          | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                |       |   |   |   |   |
| Interest  income              |       |                                |       |   |   |   |   |
| Loans                         |       | $                                   | 877        |   | $ | 289 |   | $ | 1,166 |   |
| Securities  (taxable) (1)     |       | (308                                | )          | (159 | ) | (467 | ) |
| Federal  funds sold           |       | 11                                  |       | — |   | 11 |   |
| **Total interest income**     |       | 580                                 |       | 130 |   | 710 |   |
|                          |       |                                |       |   |   |   |   |
| Interest  expense             |       |                                |       |   |   |   |   |
| Deposits  (other than demand) |       | 634                                 |       | (2,814 | ) | (2,180 | ) |
| Federal  funds purchased      |       | (32                                 | )          | — |   | (32 | ) |
| Subordinated  debt            |       | 26                                  |       | 4 |   | 30 |   |
| **Total interest expense**    |       | 628                                 |       | (2,810 | ) | (2,182 | ) |
|                          |       |                                |       |   |   |   |   |
| Net  interest income          |       | $                                   | (48        | ) | $ | 2,940 |   | $ | 2,892 |   |

 

----

(1)          Unrealized losses of $234and $418 is excluded from yield calculation for the three months endedJune 30, 2010 and 2009, respectively.

 

**NetInterest Margin** - The net interest margin increased from 3.45% forthe three months ended June 30, 2009 to 4.25% for the same period in 2010because of a decrease in our cost for deposits.  Interest income increasedby $710 or 3.57%, from $19,907 during the three months ended June 30, 2009to $20,617 during the same period in 2010. The increase was primarily a resultof increased loan volume.  Average earning assets increased from$1,215,671 in the three months ended June 30, 2009 to $1,258,461 in thesame period in 2010, an increase of $42,790 or 3.52%, primarily as aresult of loan growth. Average loan balances increased by $51,921 or 4.64% forthe three months ended June 30, 2010, from the same period in 2009. The average yield on earning assets remained at 6.57% in the three months endedJune 30, 2009 and in the same period in 2010. The decrease in the cost offunds, as a percentage of average balances, was primarily a result of decreasesin short-term interest rates paid on deposits that support our loan growth.Between June 30, 2009 and June 30, 2010, the Federal Reserve OpenMarket Committee, or FOMC, lowered the federal funds rate by 13 basis points.

 

19

----

Table of Contents

 

**InterestExpense** — Interest expense decreased from $9,456 in thethree months ended June 30, 2009 to $7,274 in the three months endedJune 30, 2010. The $2,182, or 23.08%, decrease in expense was primarily aresult of a decrease in the cost of funds. Average interest earningliabilities increased by $60,728 or 5.17%.  The cost of funds decreasedfrom 3.17% for the three months ended June 30, 2009 to 2.32% for the samethree months in 2010, a decrease of 85 basis points. The decrease was largelyattributed to time deposits maturing and being re-priced.

 

**IncomeTaxes** - Our effective tax rate for the three months endedJune 30, 2010 was 38.69% compared to 38.33% for the three months ended June 30,2009. Management anticipates that tax rates in future periods will approximatethe rates paid in 2010.

 

**EfficiencyRatio** - Our efficiency ratio for the three months endedJune 30, 2010 and 2009 was 47.14% and 71.82%, respectively, a decrease of2,468 basis points. The following table reflects the calculation of theefficiency ratio:

 
| ** **                  | ** ** | **Three  Months Ended** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **June 30,**       | ** ** |
| **(Dollars in thousands)**  | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Non-interest  expense       |       | $                       | 6,711      |   | $ | 6,385 |   |
|                        |       |                    |       |   |   |
| Net  interest income        |       | 13,343                  |       | 10,451 |   |
| Non-interest  income (loss) |       | 894                     |       | (1,561 | ) |
| Net  revenues               |       | $                       | 14,237     |   | $ | 8,890 |   |
|                        |       |                    |       |   |   |
| Efficiency  ratio           |       | 47.14                   | %          | 71.82 | % |

 

**Comparisonof Operating Results for the Six Months Ended June 30, 2010 andJune 30, 2009**

 

**Net Income** - Net incomefor the six months ended June 30, 2010 was $2,865, an increase of $12,426or 129.97% compared to net loss of $9,561 for the six months endedJune 30, 2009.  The increase is attributable to a 58.18% decrease inthe provision for loan loss from $21,639 for the six months ended June 30,2009 to $9,050 for the same period in 2010. We experienced an increase of$1,902 in operating expense which was the result of our overall growth,including a $376 increase in loan collections expense at June 30, 2010compared to the same date in 2009, as well as an increase of $319 in loanservicing expenses.

 
| ** **                                                  | ** ** | **Six  Months Ended** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                                  | ** ** | **June 30,**     | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                                  | ** ** | **2010**              | ** ** | **2009**   | ** ** | **%  Change** | ** ** |
|                                                        |       |                  |       |       |       |   |   |
| Interest  income                                            |       | $                     | 41,120     |       | $          | 39,363 |   | 4.46 | % |
| Interest  expense                                           |       | 14,528                |       | 19,072     |       | (23.83 | ) |
| Net  interest income                                        |       | 26,592                |       | 20,291     |       | 31.05 |   |
| Provision  for loan losses                                  |       | 9,050                 |       | 21,639     |       | (58.18 | ) |
| Net  interest income (loss) after provision for loan losses |       | 17,542                |       | (1,348     | )          | 1,401.34 |   |
| Non-interest  income (loss)                                 |       | 1,581                 |       | (1,534     | )          | 203.06 |   |
| Non-interest  expense                                       |       | 13,220                |       | 11,318     |       | 16.81 |   |
| Net  income (loss) before taxes                             |       | 5,903                 |       | (14,200    | )          | 141.57 |   |
| Income  tax expense (benefit)                               |       | 2,288                 |       | (5,435     | )          | 142.10 |   |
| Net  income (loss)                                          |       | 3,615                 |       | (8,765     | )          | 141.24 |   |
| Preferred  dividends                                        |       | (750                  | )          | (796       | )          | (5.78 | ) |
| Net  income (loss) available to common shareholders         |       | $                     | 2,865      |       | $          | (9,561 | ) | 129.97 | % |

 

20

----

Table of Contents

 

**Provisionfor Loan Losses** - The provision for loan losses for the six monthsended June 30, 2010 was $9,050, a decrease of $12,589, or 58.18%,above the provision of $21,639 expensed in the same period in 2009.  Thisdecrease was primarily a result of reduced charge-offs and improved creditquality. At June 30, 2010, the loan loss reserve of $20,346 was 1.70% ofgross loans totaling $1,197,059, compared to a ratio of loan loss reserves togross loans of 1.65% at June 30, 2009.

 

**Non-interestIncome** - Non-interest income increased by 203.06% or$3,115, from a loss of $1,534 in the six months ended June 30, 2009 to again of $1,581 for the same period in 2010. The increase was primarily a resultof gains on loan sales and gains on sales of securities.   The netgain on loan sales was $530 and a loss of $989 for the six-month periods endedJune 30, 2010 and 2009, respectively. This increase was primarily a resultof timing differences. Management will continue to consider loan saletransactions if the opportunity for a reasonable return is available.

 

We did not earn any mortgageorigination fees during the six months ended June 30, 2010 compared to $20during the same period in 2009, a decrease of $20 or 100.00%, primarily as aresult of management no longer seeking to originate mortgage loans for sale inthe secondary market. We recognized $696 on the sale of securities in thesix months ended June 30, 2010 compared with $338 for the same period in2009, primarily as a result of the restructuring of portfolios in response tothe prevailing economic situation.

 

**Non-interestExpense** - Non-interest expense for the six months endedJune 30, 2010 was $13,220, an increase of $1,902 or 16.81%, over the$11,318 expensed in the same period in 2009. Approximately 19.77% of theincrease was a result of increased loan collection expense and 16.77% ofthe increase was a result of increased loan servicing expense. At June 30,2010, the Bank had 97 full-time employees compared with 85 full-time employeesat June 30, 2009, which resulted in increased personnel expenses.

 

**NetInterest Income** — Net interest income for the six months endedJune 30, 2010 was $26,592 compared to $20,291 for the same period in 2009,a gain of $6,301 or 31.05%.  The increase in net interest income waslargely attributable to a reduction in the cost of funds.  The average netloan balance for the six months ended June 30, 2010 increased by 7.26% or$78,748 to $1,163,888 from $1,085,140 for that period in 2009. Loan growth wasaccompanied by an increase in average interest-bearing deposits from $1,085,115for the six months ended June 30, 2009, to $1,204,675 for the same periodin 2010, an increase of $119,560 or 11.02%.

 

The following table outlinesthe components of net interest income for the six-month periods endedJune 30, 2010 and 2009 and identifies the impact of changes in volume andrate:

 
| ** **                       | ** ** | **June 30,  2010 change from** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|
| ** **                       | ** ** | **June 30,  2009 due to:**     | ** ** |
| **(Dollars in thousands)**       | ** ** | **Volume**                          | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                             |       |                                |       |   |   |   |   |
| Interest  income                 |       |                                |       |   |   |   |   |
| Loans                            |       | $                                   | 2,646      |   | $ | (112 | ) | $ | 2,534 |   |
| Securities  (taxable) (1)        |       | (497                                | )          | (288 | ) | (785 | ) |
| Federal  funds sold              |       | 6                                   |       | 2 |   | 8 |   |
| **Total interest income (loss)** |       | 2,155                               |       | (398 | ) | 1,757 |   |
|                             |       |                                |       |   |   |   |   |
| Interest  expense                |       |                                |       |   |   |   |   |
| Deposits  (other than demand)    |       | 1,828                               |       | (6,416 | ) | (4,588 | ) |
| Federal  funds purchased         |       | (76                                 | )          | 17 |   | (59 | ) |
| Subordinated  debt               |       | 68                                  |       | 35 |   | 103 |   |
| **Total interest expense**       |       | 1,820                               |       | (6,364 | ) | (4,544 | ) |
|                             |       |                                |       |   |   |   |   |
| Net  interest income             |       | $                                   | 335        |   | $ | 5,966 |   | $ | 6,301 |   |

 

----

(1)   Unrealizedloss of $882 and $257 is excluded from yield calculation for the six monthsended June 30, 2010 and 2009, respectively.

 

21

----

Table of Contents

 

**NetInterest Margin** - The net interest margin increased from 3.42% forthe six months ended June 30, 2009 to 4.25% for the same period in 2010because of a decrease in our cost for deposits.  Interest income increasedby $1,757 or 4.46%, from $39,363 during the six months ended June 30, 2009to $41,120 during the same period in 2010. The increase was primarily a resultof increased loan volume.  Average earning assets increased from$1,196,124 in the six months ended June 30, 2009 to $1,260,157 in the sameperiod in 2010, an increase of $64,033 or 5.35%, primarily as a result ofloan growth. Average loan balances increased by $78,748 or 7.26% for the sixmonths ended June 30, 2010, from the same period in 2009.  Theaverage yield on earning assets decreased from 6.63% in the six months endedJune 30, 2009 to 6.58% in the same period in 2010. The decrease in thecost of funds, as a percentage of average balances, was primarily a result ofdecreases in short-term interest rates paid on deposits that support our loangrowth. Between June 30, 2009 and June 30, 2010, the FOMC lowered thefederal funds rate by 13 basis points.

 

**InterestExpense** — Interest expense decreased from $19,072 in thesix months ended June 30, 2009 to $14,528 in the six months endedJune 30, 2010. While average interest earning liabilities increased by$101,174 or 8.87%, the cost of funds decreased from 3.30% in the six monthsended June 30, 2009 to 2.32% during the same six months in 2010, adecrease of 98 basis points. The decrease was largely attributed to timedeposits maturing and being re-priced.

 

**IncomeTaxes** — Our effective tax rate for the six months endedJune 30, 2010 was 38.76% compared to 38.27% for the six months endedJune 30, 2009. Management anticipates that tax rates in future periodswill approximate the rates paid in 2010.

 

**EfficiencyRatio** — Our efficiency ratio for the six months endedJune 30, 2010 and 2009 was 46.92% and 60.34%, respectively, an increase of1,342 basis points. The following table reflects the calculation of theefficiency ratio:

 
| ** **                  | ** ** | **Six  Months Ended** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **June 30,**     | ** ** |
| **(Dollars in thousands)**  | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Non-interest  expense       |       | $                     | 13,220     |   | $ | 11,318 |   |
|                        |       |                  |       |   |   |
| Net  interest income        |       | 26,592                |       | 20,291 |   |
| Non-interest  income (loss) |       | 1,581                 |       | (1,534 | ) |
| Net  revenues               |       | $                     | 28,173     |   | $ | 18,757 |   |
|                        |       |                  |       |   |   |
| Efficiency  ratio           |       | 46.92                 | %          | 60.34 | % |

 

**Asset Quality** - Nonperforming assets increased to$37.8 million at June 30, 2010 compared to $31.2 million atJune 30, 2009 and $21.3 million at December 31, 2009. As aresult of seasonal factors related to the transportation industry, ournonperforming assets typically increase during the first quarter andsubsequently decrease throughout the remainder of the year. Repossessed assets,mainly transportation assets, increased by $3.0 million fromDecember 31, 2009 to $39.9 million at March 31, 2010. Bycomparison, repossessed assets decreased to $36.3 million at June 30,2010. The first quarter historically represents the toughest quarter for thetransportation-sensitive assets in our portfolio. As a result, we typicallyextend the holding period of any such repossessed assets beyond the firstquarter to enhance the recovery value. In addition to these seasonal factors,the remainder of the increase in nonperforming assets between December 31,2009 and June 30, 2010 was primarily attributable to four commercial andindustrial loans with an aggregate principal amount of $3.5 million outstandingat June 30, 2010, for which we were under-secured in an aggregate amountof $0.9 million at June 30, 2010 and for which we had reserves in anaggregate amount of $0.9 million at June 30, 2010.

 

The loan loss provision of$9.1 million for the first six months of 2010 exceeded the net charge-offsof $8.6 million, resulting in a loan loss provision to net charge-offratio of 105.0%. The allowance for loan losses at June 30, 2010 was$20.3 million, or 1.7% of total loans. The coverage ratio of allowance forloan losses to nonperforming loans at December 31, 2009, March 31,2010 and June 30, 2010 was 103.4%, 57.6% and 59.6%, respectively.

 

22

----

Table of Contents

 

*AverageBalance Sheets, Net Interest Income, and Changes in Interest Income andInterest Expense*

 

The table below shows theaverage daily balances of each principal category of our assets, liabilitiesand shareholders’ equity, and an analysis of net interest income, and thechange in interest income and interest expense segregated into amountsattributable to changes in volume and changes in rates for the six-monthperiods ended June 30, 2010 and 2009. The table is presented on a taxequivalent basis, as applicable.

 
| ** **                                          | ** ** | **Six  Months**          | ** ** | ** **   | ** ** | **Six  Months**          | ** ** | ** **  | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|--------------|------------|--------------------------|------------|-------------|------------|
| ** **                                          | ** ** | **Ended  June 30,** | ** ** | ** **   | ** ** | **Ended  June 30,** | ** ** | ** **  | ** ** |
| ** **                                          | ** ** | **2010**                 | ** ** | ** **   | ** ** | **2009**                 | ** ** | ** **  | ** ** |
| ** **                                          | ** ** | **Average**              | ** ** | ** **   | ** ** | **Average**              | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**                          | ** ** | **Balance**              | ** ** | **Interest** | ** ** | **Rate**                 | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                          |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Interest  earning assets                            |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Securities  (taxable) (1)                           |       | $                        | 84,940     |         | $          | 2,003                    |       | 4.71        | %          | $ | 105,214 |   | $ | 2,788 |   | 5.33 | % |
| Loans  (2) (3)                                 |       | 1,163,888                |       | 39,104       |       | 6.78                     | %          | 1,085,140   |       | 36,570 |   | 6.80 | % |
| Federal  funds sold                                 |       | 11,329                   |       | 13           |       | 0.23                     | %          | 5,770       |       | 5 |   | 0.17 | % |
| **Total interest earning assets**                   |       | 1,260,157                |       | 41,120       |       | 6.58                     | %          | 1,196,124   |       | 39,363 |   | 6.63 | % |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Non-interest  earning assets                        |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Cash  and due from banks                            |       | 12,380                   |       |         |       |                     |       | 8,606       |       |   |   |   |   |
| Net  fixed assets and equipment                     |       | 2,057                    |       |         |       |                     |       | 2,249       |       |   |   |   |   |
| Accrued  interest and other assets                  |       | 98,859                   |       |         |       |                     |       | 63,056      |       |   |   |   |   |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| **Total assets**                                    |       | $                        | 1,373,453  |         |       |                     |       |        | $          | 1,270,035 |   |   |   |   |   |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS EQUITY**             |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Interest-bearing  liabilities                       |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Deposits  (other than demand)                       |       | $                        | 1,204,675  |         | $          | 13,495                   |       | 2.26        | %          | $ | 1,085,115 |   | $ | 18,083 |   | 3.36 | % |
| Federal  funds purchased                            |       | 2,022                    |       | 8            |       | 0.80                     | %          | 22,805      |       | 67 |   | 0.59 | % |
| Subordinated  debt and other borrowings             |       | 35,595                   |       | 1,025        |       | 5.81                     | %          | 33,198      |       | 922 |   | 5.60 | % |
| **Total interest-bearing liabilities**              |       | 1,242,292                |       | 14,528       |       | 2.36                     | %          | 1,141,118   |       | 19,072 |   | 3.37 | % |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Non-interest  bearing liabilities                   |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Non-interest  bearing demand deposits               |       | 22,977                   |       |         |       |                     |       | 23,079      |       |   |   |   |   |
| Other  liabilities                                  |       | 9,819                    |       |         |       |                     |       | 8,445       |       |   |   |   |   |
| Shareholders’  equity                          |       | 98,365                   |       |         |       |                     |       | 97,393      |       |   |   |   |   |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| **Total liabilities and shareholders’ equity** |       | $                        | 1,373,453  |         |       |                     |       |        | $          | 1,270,035 |   |   |   |   |   |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Net  interest spread                                |       | 4.22                     | %          |         |       |                     |       | 3.26        | %          |   |   |   |   |
|                                                |       |                     |       |         |       |                     |       |        |       |   |   |   |   |
| Net  interest margin                                |       | 4.25                     | %          |         |       |                     |       | 3.42        | %          |   |   |   |   |

 

----

(1)  Unrealizedlosses of $882 and $257 are excluded from yield calculation for the six monthsended June 30, 2010 and 2009, respectively.

(2)  Non-accrualloans are included in average loan balances, and loan fees of $3,067 and $2,990are included in interest income for the six months ended June 30, 2010 and2009, respectively.

(3)  Loansare presented net of allowance for loan loss.

 

23

----

Table of Contents

 

**Comparisonof Financial Condition at June 30, 2010 and December 31, 2009**

 

**Assets****—** Total assets at June 30, 2010 were $1,389,528,an increase of $6,096, or 0.44%, over total assets of $1,383,432 atDecember 31, 2009. Loan growth was the primary reason for theincrease.  At June 30, 2010, net loans equaled $1,176,713, up$25,325, or 2.20%, over the December 31, 2009 total net loans of $1,151,388.The cash and cash equivalents balance decreased by $16,987 betweenDecember 31, 2009 and June 30, 2010, as funds were used to fund loansmade in the first two quarters of 2010.

 

Our business bank model ofoperation generally results in a higher level of earning assets than our peerbanks.  Earning assets are defined as assets that earn interest income andinclude short-term investments, the investment portfolio and net loans. We generally maintain a higher level of earning assets than our peer banksbecause fewer assets are allocated to facilities, cash and “due from” bankaccounts used for transaction processing.  Earning assets at June 30,2010 were $1,281,210 or 92.20% of total assets of $1,389,528.  Earningassets at December 31, 2009 were $1,260,066 or 91.08% of total assets of$1,383,432.

 

**Loans** — We had totalnet loans of $1,176,713 at June 30, 2010. The following table sets forththe composition of our loan portfolio at June 30, 2010 andDecember 31, 2009:

 
| ** **                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**              | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Real  estate                            |       |              |       |                  |       |
| Construction                            |       | $                 | 131,187    |                  | $          | 142,109 |   |
| 1  to 4 family residential              |       | 43,591            |       | 42,425                |       |
| Other                                   |       | 268,743           |       | 259,220               |       |
| Commercial,  financial and agricultural |       | 652,149           |       | 649,475               |       |
| Consumer                                |       | 3,636             |       | 3,476                 |       |
| Tax  leases                             |       | 97,753            |       | 74,596                |       |
|                                    |       |              |       |                  |       |
| **Total loans**                         |       | 1,197,059         |       | 1,171,301             |       |
| Less:  allowance for loan losses        |       | (20,346           | )          | (19,913               | )          |
|                                    |       |              |       |                  |       |
| Net  loans                              |       | $                 | 1,176,713  |                  | $          | 1,151,388 |   |

 

The following table setsforth the percentage composition of our loan portfolio by type at June 30,2010 and December 31, 2009:

 
| ** **                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Real  estate                            |       |              |       |                  |       |
| Construction                            |       | 10.96             | %          | 12.13                 | %          |
| 1  to 4 family residential              |       | 3.64              |       | 3.62                  |       |
| Other                                   |       | 22.45             |       | 22.13                 |       |
| Commercial,  financial and agricultural |       | 54.48             |       | 55.45                 |       |
| Consumer                                |       | 0.30              |       | 0.30                  |       |
| Tax  leases                             |       | 8.17              |       | 6.37                  |       |
|                                    |       |              |       |                  |       |
| **Total loans**                         |       | 100.00            | %          | 100.00                | %          |

 

The following table setsforth the composition of our commercial loan portfolio by source atJune 30, 2010 and December 31, 2009:

 
| ** **                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **(Dollars in thousands)** | ** ** | **Amount**        | ** ** | **%**                 | ** ** | **Amount** | ** ** | **%** | ** ** |
|                       |       |              |       |                  |       |   |   |   |   |
| Direct  funding            |       | $                 | 383,168    |                  | 58.75      | % | $ | 351,933 |   | 54.19 | % |
| Indirect  funding:         |       |              |       |                  |       |   |   |   |   |
| Large                      |       | 118,180           |       | 18.12                 |       | 130,573 |   | 20.10 |   |
| Small                      |       | 150,801           |       | 23.13                 |       | 166,969 |   | 25.71 |   |
| **Total**                  |       | $                 | 652,149    |                  | 100.00     | % | $ | 649,475 |   | 100.00 | % |

 

24

----

Table of Contents

 

Management periodicallyreviews our loan portfolio, particularly non-accrual and renegotiatedloans.  The review may result in a determination that a loan should beplaced on a non-accrual status for income recognition. When a loan isclassified as non-accrual, any unpaid interest is reversed against currentincome.  Interest is included in income thereafter only to the extentreceived in cash.  The loan remains in a non-accrual classification untilsuch time as the loan is brought current, when it may be returned to accrualclassification.

 

The following table presentsinformation regarding non-accrual, past due and restructured loans at June 30,2010 and December 31, 2009:

 
| ** **                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                              | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Non-accrual  loans:                                                                                     |       |              |       |                  |       |
| Number                                                                                                  |       | 469               |       | 225                   |       |
| Amount                                                                                                  |       | $                 | 34,041     |                  | $          | 19,151 |   |
|                                                                                                    |       |              |       |                  |       |
| Accruing  loans which are contractually past due 90 days or more as to principal and  interest payments |       |              |       |                  |       |
| Number                                                                                                  |       | 53                |       | 30                    |       |
| Amount                                                                                                  |       | $                 | 2,943      |                  | $          | 1,328 |   |
|                                                                                                    |       |              |       |                  |       |
| Loans  defined as troubled debt restructurings :                                                        |       |              |       |                  |       |
| Number                                                                                                  |       | 1                 |       | 1                     |       |
| Amount                                                                                                  |       | $                 | 99         |                  | $          | 111 |   |
|                                                                                                    |       |              |       |                  |       |
| Gross  income lost to non-accrual loans                                                                 |       | $                 | 1,156      |                  | $          | 2,708 |   |
|                                                                                                    |       |              |       |                  |       |
| Interest  income included in net income on the accruing loans                                           |       | $                 | 122        |                  | $          | 112 |   |

 

As of June 30, 2010 andDecember 31, 2009, there were no loans which represented trends oruncertainties that management reasonably expects will materially impact futureoperating results, liquidity, or capital resources that have not been disclosedin the above table and classified for regulatory purposes as doubtful orsubstandard.

 

The Bank had no tax-exemptloans during the quarter ended June 30, 2010 or the year endedDecember 31, 2009. The Bank had no loans outstanding to foreignborrowers at June 30, 2010 and December 31, 2009.

 

**Allowancefor Loan Losses** — The maintenance of an adequate allowance for loanlosses, or ALL, is one of the fundamental concepts of risk management for everyfinancial institution. Management is responsible for ensuring that controls arein place to ensure the adequacy of the loan loss reserve in accordance withGAAP, our stated policies and procedures, and regulatory guidance.

 

It is management’s intent tomaintain an ALL that is adequate to absorb current and estimated losses whichare inherent in a loan portfolio.  The historical loss ratio (netcharge-offs as a percentage of average loans) was 0.36% for the six monthsended June 30, 2010, and 0.86% for the six months ended June 30,2009. The ALL as a percentage of the outstanding loans at the end of the periodwas 1.70% at June 30, 2010, and 1.65% at June 30, 2009.

 

25

----

Table of Contents

 

An analysis of our ALL andnet charge-offs is furnished in the following table for the six months endedJune 30, 2010 and the same period ended June 30, 2009:

 
| ** **                                                                                      | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| **(Dollars in thousands)**                                                                      | ** ** | **2010**          | ** ** | **2009**          | ** ** |
| Allowance  for loan losses at beginning of period                                               |       | $                 | 19,913     |              | $          | 13,454 |   |
| Charge-offs:                                                                                    |       |              |       |              |       |
| Real  estate:                                                                                   |       |              |       |              |       |
| Construction                                                                                    |       | 110               |       | 2,918             |       |
| 1  to 4 family residential                                                                      |       | 343               |       | 346               |       |
| Other                                                                                           |       | —            |       | 202               |       |
| Commercial,  financial and agricultural                                                         |       | 8,379             |       | 13,312            |       |
| Consumer                                                                                        |       | 4                 |       | 8                 |       |
| **Total Charge-offs**                                                                           |       | 8,836             |       | 16,786            |       |
|                                                                                            |       |              |       |              |       |
| Recoveries:                                                                                     |       |              |       |              |       |
| Real  estate:                                                                                   |       |              |       |              |       |
| Construction                                                                                    |       | 77                |       | —            |       |
| 1  to 4 family residential                                                                      |       | —            |       | —            |       |
| Other                                                                                           |       | 25                |       | —            |       |
| Commercial,  financial and agricultural                                                         |       | 117               |       | 631               |       |
| Consumer                                                                                        |       | —            |       | —            |       |
| **Total Recoveries**                                                                            |       | 219               |       | 631               |       |
|                                                                                            |       |              |       |              |       |
| Net  Charge-offs                                                                                |       | 8,617             |       | 16,155            |       |
|                                                                                            |       |              |       |              |       |
| Provision  for loans charged to expense                                                         |       | 9,050             |       | 21,639            |       |
| Allowance  for loan losses at end of period                                                     |       | $                 | 20,346     |              | $          | 18,938 |   |
|                                                                                            |       |              |       |              |       |
| Net  charge-offs as a percentage of average total loans outstanding during the  period          |       | 0.73              | %          | 1.47              | %          |
|                                                                                            |       |              |       |              |       |
| Ending  allowance for loan losses as a percentage of total loans outstanding during  the period |       | 1.70              | %          | 1.65              | %          |

 

The ALL is established bycharges to operations based on management’s evaluation of the loan portfolio,past due loan experience, collateral values, current economic conditions andother factors considered necessary to maintain the allowance at an adequatelevel.

 

**Securities** — Thesecurities portfolio at June 30, 2010 was $92,887 compared to $93,668 atDecember 31, 2009.  We view the securities portfolio as a source ofincome and liquidity.  The securities portfolio was 6.68% of total assetsat June 30, 2010 and 6.77% of total assets at December 31, 2009.

 

**Liabilities****—** We depend on a growing deposit base to fund loanand other asset growth. We compete for local deposits by offering attractiveproducts with premium rates.  We also obtain funding in the wholesaledeposit market which is accessed by means of an electronic bulletinboard.  This electronic market links banks and acquirers of funds tocredit unions, school districts, labor unions and other organizations withexcess liquidity. The process is highly efficient and the average rate isgenerally less than rates paid in the local market. Wholesale deposits arecategorized as “Purchased time deposits” on the detail of deposits shown in thetable below.

 

26

----

Table of Contents

 

**Deposits andFunding** — Total deposits at June 30, 2010 were$1,243,456, up $914 or 0.07% over the December 31, 2009 totaldeposits of $1,242,542. Total average deposits during the six months endedJune 30, 2010 were $1,227,652, an increase of $119,458, or 10.78% over thetotal average deposits of $1,108,194 during the six months ended June 30,2009. Average non-interest bearing deposits decreased by $102, or 0.44%, from$23,079 in the six months ended June 30, 2009, to $22,977 in the sixmonths ended June 30, 2010.

 

Utilizing a combination offunding sources from the pledging of investment securities and the Federal HomeLoan Bank (FHLB), this funding portfolio has a weighted average maturity of onemonth and a weighted average rate of 0.26%. This strategy was primarilyexecuted to reduce overnight liquidity risk and to mitigate interest ratesensitivity on the balance sheet. At June 30, 2010, the maximum availableadvance was $5,480 with no outstanding principal balance. At December 31,2009, there was no outstanding principle balance. At June, 2010, the totalcapital stock balance was 2,169 shares with a value of $2,169.

 

The following table setsforth average deposit balances for the six months ended June 30, 2010 and2009 and the average rates paid on those balances:

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **                            | ** ** | ** **                                        | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                            | ** ** | **Average**                                       | ** ** | **Rate** | ** ** | **Average** | ** ** | **Rate** | ** ** |
| **(Dollars in thousands)**            | ** ** | **Balance**                                       | ** ** | **Paid (1)** | ** ** | **Balance** | ** ** | **Paid (1)** | ** ** |
| Types  of Deposits:                   |       |                                              |       |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                                 | 22,977     |   | — | % | $ | 23,079 |   | — | % |
| Interest-bearing  demand deposits     |       | 6,546                                             |       | 0.20 |   | 7,113 |   | 0.14 |   |
| Money  market accounts                |       | 46,494                                            |       | 1.69 |   | 45,327 |   | 0.71 |   |
| Savings  accounts                     |       | 250,322                                           |       | 2.18 |   | 16,456 |   | 2.29 |   |
| IRA  accounts                         |       | 36,485                                            |       | 2.78 |   | 35,090 |   | 4.01 |   |
| Purchased  time deposits              |       | 508,918                                           |       | 2.34 |   | 540,774 |   | 3.72 |   |
| Time  deposits                        |       | 355,910                                           |       | 2.25 | % | 440,355 |   | 3.23 | % |
| **Total deposits**                    |       | $                                                 | 1,227,652  |   |   |   | $ | 1,108,194 |   |   |   |

 

----

(1)          Rate is annualized

 

**Short-TermDebt** — In May 2009, we entered into a loan with aqualified investor, pursuant to which the qualified investor loaned $8,750 atan interest rate of 5.00%.  The maturity date of this loan was throughFebruary 4, 2011.  We agreed withthe qualified investor that, until the note, together with interest, and all ofour other indebtedness to the lender were paid in full, we would (i) makeall financial information available, (ii) pay all taxes and claims priorto date of penalty, (iii) preserve our corporate status, (iv) givenotice of adverse events, (v) maintain capital ratios and (vi) givenotice of changes in management. The loan was secured by 100% of alloutstanding stock of the Bank. On August 11, 2010, we paid off theoutstanding balance of the loan.

 

27

----

Table of Contents

 

**SubordinatedDebt and Long-Term Debt**— In March 2005, weformed a financing subsidiary, Tennessee Commerce Statutory Trust I, a Delawarestatutory trust, or the Trust I. In March 2005, the Trust I issued andsold 8,000 of the Trust I’s fixed/floating rate capital securities, with aliquidation amount of $1 per capital security, to First Tennessee Bank,National Association. At the same time, we issued to Trust I $8,248 offixed/floating rate junior subordinated deferrable interest debentures due2035. The debentures pay a 6.73% fixed rate payable quarterly for the firstfive years and a floating rate based on a three-month LIBOR rate plus a marginthereafter.

 

In April 2008, weformed a financing subsidiary, Tennessee Commerce Statutory Trust II, aDelaware statutory trust, or the Trust II. In June 2008, the Trust IIissued and sold 14,500 of the Trust II’s floating rate capital securities, witha liquidation amount of $1 per capital security, in a private placement. At thesame time, we issued to Trust II $14,950 of floating rate junior subordinateddeferrable interest debentures due 2038. The debentures pay a floating rate perannum, reset quarterly, equal to the prime rate of interest published in*The Wall Street Journal* on the firstbusiness day of each distribution period plus 50 basis points (but in no eventgreater than 8.00% or less than 5.75%).

 

In accordance with GAAP,neither the Trust I nor the Trust II is consolidated. We report as liabilitiesthe subordinated debentures issued by us and held by the Trust I and Trust II.

 

On March 29, 2010, TCBentered into a long-term revolving line with a qualified investor, pursuant towhich the qualified investor agreed to loan TCB up to $5,000 at an interestrate of prime plus 1.00% with a floor of 6.25%.  The qualified investor’sobligation to make advances to TCB under this line of credit terminates onMarch 29, 2012. TCB had outstanding borrowings of $2,902 under this lineof credit at June 30, 2010. The loan is guaranteed by us and secured byinventory and the outstanding shares of common stock of TCB.

 

**Off-BalanceSheet Arrangements**

 

We are a party to financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of our customers. At June 30, 2009, we hadunfunded loan commitments outstanding of $105,337 and standby letters ofcredit and financial guarantees of $10,028. Those instruments involve, tovarying degrees, elements of credit risk in excess of the amount recognized inthe balance sheet.  The contract or notional amounts of those instrumentsreflect the extent of our involvement in those particular financialinstruments. We use the same credit policies in making commitments andconditional obligations as we do for on-balance sheet instruments.

 

Because these commitmentsgenerally have fixed expiration dates and many will expire without being drawnupon, the total commitment level does not necessarily represent future cashrequirements. If needed, we can liquidate federal funds sold or securitiesavailable for sale or borrow and purchase federal funds from other financialinstitutions, where we had available federal fund lines at June 30, 2010totaling $53,700.

 

**Liquidity/Capital Resources**

 

**Liquidity** - Of primaryimportance to depositors, creditors and regulators is the ability to havereadily 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 toprojecting on a monthly basis the amount of funds that will be required andmaintains relationships 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.

 

Although the Bank has noformal liquidity policy, in the opinion of management, its liquidity levels areconsidered adequate.  The Bank is subject to general FDIC guidelines whichdo not require a minimum level of liquidity.  Management believes the Bank’sliquidity ratios meet or exceed general FDIC guidelines.  Management doesnot know of any trends or demands that are reasonably likely to result inliquidity increasing or decreasing in any material manner over the next threemonths.

 

**CapitalResources****-** Our objective is tomaintain a level of capitalization that is sufficient to take advantage ofprofitable growth opportunities while meeting regulatory requirements. Tocontinue to grow, we must increase capital by generating earnings, issuingequities, borrowing funds or a combination of those activities.

 

28

----

Table of Contents

 

The capital guidelinesclassify capital into two tiers, referred to as Tier I and Tier II.Under risk-based capital requirements, total capital consists of Tier Icapital which is generally common shareholders’ equity less goodwill and TierII capital which is primarily a portion of the ALL and certain preferred stockand qualifying debt instruments. In determining risk-based capital requirements,assets are assigned risk-weights of 0.00% to 100.00%, depending primarily onthe regulatory assigned levels of credit risk associated with such assets.Off-balance sheet items are considered in the calculation of risk-adjustedassets through conversion factors established by bank regulators. The frameworkfor calculating risk-based capital requires banks and bank holding companies tomeet the regulatory minimums of 4.00% Tier I and 8.00% total risk-basedcapital. In 1990, regulators added a leverage computation to the capitalrequirements, comparing Tier I capital to total average assets lessgoodwill.

 

The Federal DepositInsurance Corporation Improvement Act of 1991 established five capitalcategories for banks and bank holding companies. The bank regulators adoptedregulations defining these five capital categories in September 1992.Under these regulations, each bank is classified into one of the fivecategories based on its level of risk-based capital as measured by Tier Icapital, total risk-based capital, Tier I leverage ratios and itssupervisory ratings.

 

At June 30, 2010 andDecember 31, 2009, the Bank’s and our risk-based capital ratios and theminimums for capital adequacy and to be considered well capitalized under theFederal Reserve Board’s prompt corrective action guidelines were as follows:

 
| ** **                                      | ** ** | ** **        | ** ** | ** **            | ** ** | ** **           | ** ** | **Minimum to**    | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                      | ** ** | ** **        | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **be considered** | ** ** |
| ** **                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **well-**              | ** ** |
| ** **                                      | ** ** | **2010**          | ** ** | **2009**              | ** ** | **adequacy**         | ** ** | **capitalized**        | ** ** |
| ** **                                      | ** ** | **%**             | ** ** | **%**                 | ** ** | **%**                | ** ** | **%**                  | ** ** |
| **Tier 1 leverage ratio**                       |       |              |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                        |       | 8.93              |       | 8.74                  |       | 4.00                 |       | 5.00                   |       |
| Tennessee  Commerce Bancorp, Inc.          |       | 8.96              |       | 8.93                  |       | 4.00                 |       | N/A                    |       |
|                                            |       |              |       |                  |       |                 |       |                   |       |
| **Tier 1 core capital to risk-weighted assets** |       |              |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                        |       | 9.69              |       | 9.37                  |       | 4.00                 |       | 6.00                   |       |
| Tennessee  Commerce Bancorp, Inc.          |       | 9.73              |       | 9.54                  |       | 4.00                 |       | N/A                    |       |
|                                            |       |              |       |                  |       |                 |       |                   |       |
| **Total capital to risk-weighted assets**       |       |              |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                        |       | 10.95             |       | 10.63                 |       | 8.00                 |       | 10.00                  |       |
| Tennessee  Commerce Bancorp, Inc.          |       | 10.99             |       | 10.83                 |       | 8.00                 |       | N/A                    |       |

 

Based solely on our analysisof federal banking regulatory categories, at June 30, 2010 andDecember 31, 2009, we and the Bank were within the “well capitalized”categories under the regulations.

 

**Impact ofInflation and Changing Prices** — The financial statementsand related financial data presented herein have been prepared in accordancewith GAAP which require the measurement of financial position and operatingresults in terms of historical dollars without considering the changes in therelative purchasing power of money over time and resulting from inflation. Theimpact of inflation on operations of the Bank is reflected in increasedoperating costs. Unlike most industrial companies, almost all of the assets andliabilities of the Bank are monetary in nature. As a result, interest rateshave a more significant impact on the Bank’s performance than the effects ofgeneral levels of inflation. Interest rates do not necessarily move in the samedirection or in the same magnitude as the price of goods and services.

 

29

----

Table of Contents

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK.**

 

Like all financialinstitutions, we are subject to market risk from changes in interest rates.Interest rate risk is inherent in the balance sheet because of the mismatchbetween the maturities of rate sensitive assets and rate sensitive liabilities.If rates are rising, and the level of rate sensitive liabilities exceeds thelevel of rate sensitive assets, the net interest margin will be negativelyimpacted. Conversely, if rates are falling, and the level of rate sensitiveliabilities is greater than the level of rate sensitive assets, the impact onthe net interest margin will be favorable. Managing interest rate risk isfurther complicated by the fact that all rates do not change at the same pace,in other words, short-term rates may be rising while longer term rates remainstable. In addition, different types of rate sensitive assets and ratesensitive liabilities react differently to changes in rates.

 

To manage interest raterisk, we must take a position on the expected future trend of interest rates.Rates may rise, fall or remain the same. The Bank’s asset liability committeedevelops its view of future rate trends and strives to manage rate risk withina targeted range by monitoring economic indicators, examining the views ofeconomists and other experts, and understanding the current status of ourbalance sheet. Our annual budget reflects the anticipated rate environment forthe next twelve months. The asset liability committee conducts a quarterlyanalysis of the rate sensitivity position and reports its results to the Bank’sboard of directors.

 

The asset liabilitycommittee uses a computer model to analyze the maturities of rate sensitiveassets and liabilities. The model measures the “gap” which is defined as thedifference between the dollar amount of rate sensitive assets re-pricing duringa period and the volume of rate sensitive liabilities re-pricing during thesame period. Gap is also expressed as the ratio of rate sensitive assetsdivided by rate sensitive liabilities. If the ratio is greater than one, thedollar value of assets exceeds the dollar value of liabilities, and the balancesheet is “asset sensitive.” Conversely, if the value of liabilities exceeds thevalue of assets, the ratio is less than one and the balance sheet is “liabilitysensitive.” Our internal policy requires management to maintain the gap withina range of 0.75 to 1.25.

 

The model measures scheduledmaturities in periods of one to three months, four to 12 months, one to fiveyears and over five years. The chart below illustrates our rate sensitiveposition at June 30, 2010. Management uses the one-year gap as the appropriatetime period for setting strategy.

 

30

----

Table of Contents

 

Rate Sensitivity GapAnalysis

(Dollars in thousands)

 
| ** **                                                       | ** ** | ** **   | ** ** | **1-3**    | ** ** | **4-12**   | ** ** | **1-5**   | ** ** | **Over**     | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|-----------|------------|--------------|------------|------------|------------|
| ** **                                                       | ** ** | **Floating** | ** ** | **Months** | ** ** | **Months** | ** ** | **Years** | ** ** | **5  years** | ** ** | **Total**  | ** ** |
| Maturities  :                                                    |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Interest-Earnings  Assets                                        |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Federal  funds sold                                              |       | $            | —     |       | $          | 11,610     |       | $         | —     |         | $          | —     |       | $ | — |   | $ | 11,610 |   |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |         |       |       |       |
| U.S.  government agencies                                        |       | —       |       | 5          |       | 13         |       | 75        |       | 37,040       |       | 37,133     |       |
| U.S.  Treasuries                                                 |       | —       |       | 55,599     |       | —     |       | —    |       | —       |       | 55,599     |       |
| Corporate  bonds                                                 |       | —       |       | —     |       | —     |       | —    |       | 155          |       | 155        |       |
| **Total securities**                                             |       | —       |       | 55,604     |       | 13         |       | 75        |       | 37,195       |       | 92,887     |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| **Total loans**                                                  |       | —       |       | 225,611    |       | 314,364    |       | 610,158   |       | 46,926       |       | 1,197,059  |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| **Total interest-earning assets**                                |       | —       |       | 292,825    |       | 314,377    |       | 610,233   |       | 84,121       |       | 1,301,556  |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Other  assets                                                    |       | —       |       | —     |       | —     |       | —    |       | 87,972       |       | 87,972     |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| **Total assets**                                                 |       | —       |       | 292,825    |       | 314,377    |       | 610,233   |       | 172,093      |       | 1,389,528  |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Interest-bearing  liabilities                                    |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Interest  checking                                               |       | $            | —     |       | $          | 335        |       | $         | 850        |         | $          | 2,183      |       | $ | 761 |   | $ | 4,129 |   |
| Money  market and savings                                        |       | —       |       | 32,685     |       | 75,085     |       | 157,929   |       | 49,490       |       | 315,189    |       |
| Time  deposits                                                   |       | —       |       | 122,999    |       | 326,441    |       | 449,863   |       | 282          |       | 899,585    |       |
| **Total deposits**                                               |       | —       |       | 156,019    |       | 402,376    |       | 609,975   |       | 50,533       |       | 1,218,903  |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Federal  funds purchased                                         |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Short-term  debt                                                 |       | —       |       | —     |       | 8,750      |       | —    |       | —       |       | 8,750      |       |
| Subordinated  debt                                               |       | —       |       | —     |       | —     |       | 2,902     |       | 23,198       |       | 26,100     |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| **Total interest-bearing liabilities**                           |       | —       |       | 156,019    |       | 411,126    |       | 612,877   |       | 73,731       |       | 1,253,753  |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Other  liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 34,993       |       | 34,993     |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Shareholders  equity                                             |       | —       |       | —     |       | —     |       | —    |       | 100,782      |       | 100,782    |       |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| **Total liabilities and shareholders equity**                    |       | $            | —     |       | $          | 156,019    |       | $         | 411,126    |         | $          | 612,877    |       | $ | 209,506 |   | $ | 1,389,528 |   |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Rate  sensitive gap by period                                    |       | $            | —     |       | $          | 136,806    |       | $         | (96,749    | )            | $          | (2,644     | )          | $ | 10,390 |   |   |   |
| Cumulative  gap                                                  |       |         |       | $          | 136,806    |       | $          | 40,057    |       | $            | 37,413     |       | $          | 47,803 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |         |       |       |       |
| Cumulative  gap as a percentage of total assets                  |       |         |       | 9.85       | %          | 2.88       | %          | 2.69      | %          | 3.44         | %          |       |       |
| Rate  sensitive assets / rate sensitive liabilities (cumulative) |       |         | —     |       |       | 1.88       |       |      | 1.07       |         |       | 1.03       |       |   | 1.04 |   |   |   |

 

31

----

Table of Contents

 

Our earnings simulationmodel measures the impact of changes in interest rates on net interest income.To limit interest rate risk, we have a guideline for our earnings at risk whichsets a limit on the variance of net interest income to less than a5% percent decline for a 100-basis point change up or down in rates frommanagement’s flat interest rate forecast over the next twelve months. At June 30,2010, we were in compliance with this guideline.

 

Our economic value of equitymodel measures the extent that estimated economic values of our assets,liabilities and off-balance sheet items will change as a result of interestrate changes. To help limit interest rate risk, we have a guideline statingthat for an instantaneous 100-basis point increase or decrease in interestrates, the economic value of equity will not decrease by more than 10% from thebase case. At June 30, 2010, we were in compliance with this guideline.

 

The above analysis may noton its own be an entirely accurate indicator of how net interest income or netinterest margin will be affected by changes in interest rates. Incomeassociated with interest-earning assets and costs associated withinterest-bearing liabilities may not be affected uniformly by changes ininterest rates. In addition, the magnitude and duration of changes in interestrates may have a significant impact on net interest income. Interest rates oncertain types of assets and liabilities fluctuate in advance of changes ingeneral market rates, while interest rates on other types may lag behindchanges in general market rates. The asset liability committee develops itsview of future rate trends by monitoring economic indicators, examining theviews of economists and other experts, and understanding the current status ofour balance sheet and conducts a quarterly analysis of the rate sensitivityposition. The results of the analysis are reported to the Bank’s board ofdirectors.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

**Evaluationof Disclosure Controls and Procedures**

 

We maintain disclosurecontrols and procedures, as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”),that are designed to ensure that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. We carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures as of theend of the period covered by this report. Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures are effective toallow timely decisions regarding disclosure in the reports that we file orsubmit to the Securities and Exchange Commission under the Exchange Act.

 

**InternalControl Over Financial Reporting**

 

There were no changes in ourinternal control over financial reporting during the quarter endedJune 30, 2010 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II: OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS.**

 

Inconnection with litigation previously disclosed on our Annual Report on Form 10-Kfiled with the SEC on March 9, 2010, the United States Secretary of Labor, or the Secretary, acting throughthe Regional Administrator for the Occupational Safety and HealthAdministration, issued a preliminary order on March 17, 2010 to reinstateour former Chief Financial Officer. We appealed the Secretary’s preliminaryorder and the appeal is currently scheduled to be heard by an AdministrativeLaw Judge in August 2010.

 

Wedeny any liability to our former Chief Financial Officer, any violation of anylaw and any breach of any contract and intend to contest vigorously allallegations brought by our former Chief Financial Officer in administrative andjudicial forums.

 

32

----

Table of Contents

 

OnMay 17, 2010, as previously disclosed on two separate Current Reports on Form 8-Kfiled with the SEC on May 24, 2010 and May 25, 2010, the Secretaryfiled a complaint in the United States District Court for the Middle Districtof Tennessee requesting that a temporary restraining order and preliminaryinjunction be issued to enforce the Secretary’s preliminary order. On May 17,2010, we filed a motion to dismiss the Secretary’s complaint on the groundsthat the district court lacked the necessary subject matter jurisdiction toenforce the Secretary’s preliminary order. On May 19, 2010, the districtcourt issued an order denying our motion to dismiss and issued a temporaryrestraining order and preliminary injunction instructing us to reinstate ourformer Chief Financial Officer to his former position, with back pay,restoration of benefits and attorney fees. We appealed the preliminaryinjunction to the United States Court of Appeals for the Sixth Circuit andfiled a motion with the Sixth Circuit to stay the temporary restraining orderand preliminary injunction. On May 25, 2010, the Sixth Circuit Court ofAppeals granted our motion to stay. As a result, the district court’s temporaryrestraining order and preliminary injunction that reinstated our former ChiefFinancial Officer is no longer in effect.

 

**ITEM 1A.RISK FACTORS.**

 

The following additionalrisk factors supplement our risk factors included in Part I, Item 1Aof our Annual Report on  Form 10-K for the year endedDecember 31, 2009, as filed with the Securities and ExchangeCommission on March 9, 2010:

 

***We have a concentration ofcredit exposure to borrowers in the transportation industry.***

 

At June 30, 2010, wehad total credit exposure to borrowers in the transportation industry of $124.6million, or 10.63% of our total loans. Our borrowers in this industry areprimarily small businesses and owner-operators. This industry is experiencingadversity in the current economic environment and, as a result, some borrowersin this industry have been unable to perform their obligations under their loanagreements with us, which has negatively impacted our results of operations.When any of these borrowers default on the corresponding loans, we typicallyrepossess the transportation-related collateral, primarily over-the-roadtractors, and endeavor to sell the asset at retail value through selecteddealers. During the 12 months ended June 30, 2010, we repossessedapproximately 1,000 trucks in connection with defaulted loans in this industry andresold approximately 370 trucks we had repossessed. If the current recessionaryenvironment continues, additional borrowers in this industry may be unable tomeet their obligations under existing loan agreements, which could cause ourearnings to be negatively impacted. Further, we may not be able to sellrepossessed assets in this industry at favorable prices, which could have anadverse effect on our net income. Any of our large credit exposures in thisindustry that deteriorate unexpectedly could cause us to have to makesignificant additional loan loss provisions, negatively impacting our earnings.

 

***Nonperforming assetsadversely affect our results of operations and financial condition.***

 

Our nonperforming assetsadversely affect our net income in various ways. We do not realize interestincome on nonaccrual loans or other real estate owned, thereby adverselyaffecting our income and increasing our loan administration costs. When we takecollateral in foreclosures and similar proceedings, we are required to mark therelated loan to the then fair market value of the collateral, which may resultin a loss. Nonaccrual loans and other real estate owned also increase our riskprofile, which could result in an increase in the capital that our regulatorsbelieve is appropriate in light of such risks. In addition, the resolution ofnonperforming assets requires significant commitments of time from management,which can be detrimental to the performance of their other responsibilities.

 

Further, our nonperformingassets typically increase during the first quarter and subsequently decreasethroughout the remainder of the year. Nonperforming assets increased from $21.3million at December 31, 2009 to $41.5 million at March 31, 2010 andrepossessed assets, mainly transportation assets, increased by $3.0 millionfrom December 31, 2009 to $39.9 million at March 31, 2010. Bycomparison, nonperforming assets and repossessed assets decreased to $37.8million and $36.3 million, respectively, at June 30, 2010. Because the firstquarter historically represents the toughest quarter for thetransportation-sensitive assets in our portfolio, we typically extend theholding period of any such repossessed assets beyond the first quarter toenhance the recovery value.

 

33

----

Table of Contents

 

***Recently enacted financial regulatory reforms could have a significantimpact on our business, financial condition and results of operations.***

 

On July 21, 2010, thePresident signed the Dodd-Frank Wall Street Reform and Consumer Protection Actinto law. The law includes, among other things:

 

·      the creation of a FinancialServices Oversight Council to identify emerging systemic risks and improveinteragency cooperation;

 

·      the elimination of theOffice of Thrift Supervision and the transfer of oversight of federallychartered thrift institutions to the Office of the Comptroller of the Currency;

 

·      the creation of a ConsumerFinancial Protection Agency authorized to promulgate and enforce consumerprotection regulations relating to financial products, which would affect bothbanks and non-bank finance companies;

 

·      the establishment ofstrengthened capital and prudential standards for banks and bank holdingcompanies;

 

·      enhanced regulation offinancial markets, including derivatives and securitization markets;

 

·      the elimination of certaintrading activities from banks;

 

·      a permanent increase of thepreviously implemented temporary increase of FDIC deposit insurance to$250,000; and

 

·      the creation of an Office ofNational Insurance within Treasury.

 

While the bill has beensigned into law, a number of provisions of the law remain to be implementedthrough the rulemaking process at various regulatory agencies. We are unable topredict what the final form of these rules will be when implemented by therespective agencies, but management believes that certain aspects of the newlegislation, including, without limitation, the additional cost of higherdeposit insurance and the costs of compliance with disclosure and reportingrequirements and examinations by the new Consumer Financial Protection Agency,could have a significant impact on our business, financial condition andresults of operations. Additionally, we cannot predict whether there will beadditional proposed laws or reforms that would affect the U.S. financial systemor financial institutions, whether or when such changes may be adopted, howsuch changes may be interpreted and enforced or how such changes may affect us.

 

***Our ability to utilizecertain NOLs may be limited under Section 382 of the Internal Revenue Codeand certain state and federal law provisions.***

 

As of June 30, 2010, wehad NOLs of $16.1 million for U.S. federal income tax purposes and $6.0 millionfor state income tax purposes. State NOLs exist in the jurisdictions ofTennessee, Alabama, Georgia and Minnesota. These NOLs will expire at variousdates beginning in 2017 if not previously utilized. Utilization of U.S. federaland certain state NOLs may be subject to a substantial annual limitation if theownership change thresholds under Section 382 of the Internal Revenue Codeare triggered by changes in the ownership of our capital stock, including byreason of this offering. Such an annual limitation could result in theexpiration of our NOLs before utilization. In the event we merge into anothercompany, certain of the state NOLs remaining at such time may be lost. As aTARP CPP participant, we are not permitted to make the special election for onetaxable year ending after December 31, 2007 and beginning before January 1,2010 to carry-back losses for five years for federal income tax purposes asotherwise permitted generally under the Worker, Homeownership, and BusinessAssistance Act of 2009.

 

***Any permanent or long-termreinstatement of our former Chief Financial Officer could be disruptive to ouroperations.***

 

On May 19, 2010, theUnited States District Court for the Middle District of Tennessee issued atemporary restraining order and preliminary injunction instructing us toreinstate our former Chief Financial Officer. Although the Sixth Circuit Courtof Appeals granted our motion to stay the temporary restraining order andpreliminary injunction on May 25, 2010, we cannot provide any assurancethat a court or administrative tribunal will not, at a later stage in theproceedings, order us to reinstate our former Chief Financial Officer on apermanent or long-term basis. Because it has been two years since he lastworked for us and, in the intervening period since his dismissal, we have hireda new Chief Financial Officer, management believes that any court-orderedreinstatement of our former Chief Financial Officer could be disruptive to ouroperations. The existence of any ongoing litigation between us and our formerChief Financial Officer at the time of any court-ordered reinstatement wouldincrease the likelihood of disruption until such time as all avenues of appealhave been exhausted in connection with all related legal proceedings.Management believes that any court-ordered reinstatement could adversely affectthe cohesiveness of our senior management team, the assessment of effectivenessof our management by federal and state banking regulators in connection withtheir routine examination of the Bank, management’s relationship with ourindependent registered public accounting firm, management’s relationship withour board of directors, and particularly the Audit Committee, and retention ofpersonnel in our finance department and in other areas of the Bank that mustinteract with the finance department.

 

34

----

Table of Contents

 

**ITEM 6.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(6) |
| 4.5                  |       |            | Guarantee Agreement, dated  as of June 20, 2008, between Tennessee Commerce Bancorp, Inc. and  Wilmington Trust Company(5) |
| 10.1                 |       |            | Amendment to the Tennessee  Commerce Bancorp, Inc. 2007 Equity Plan |
| 10.2                 |       |            | Tennessee Commerce  Bancorp, Inc. Deferred Compensation Plan (7) |
| 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 |

 

----

| (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/A, as filed with the Securities and Exchange Commission on  June 30, 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 July 26, 2010, and  incorporated herein by reference.                                                      |

 

35

----

Table of Contents

 

SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                 | Tennessee Commerce  Bancorp, Inc. |
|----------------------|----------------------------------------|
|                 | (Registrant)                           |
|                 |                                   |
|                 |                                   |
| August 12, 2010 |                                   | /s/ Frank Perez |
| (Date)               | Frank Perez                            |
|                 | Chief Financial Officer                |
|                      |                                        |  |

 

36

----

Table of Contents

 

**INDEX TO 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(6) |
| 4.5                  |       |            | Guarantee Agreement, dated  as of June 20, 2008, between Tennessee Commerce Bancorp, Inc. and  Wilmington Trust Company(5) |
| 10.1                 |       |            | Amendment to the Tennessee  Commerce Bancorp, Inc. 2007 Equity Plan |
| 10.2                 |       |            | Tennessee Commerce  Bancorp, Inc. Deferred Compensation Plan (7) |
| 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 |

 

----

| (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/A, as filed with the Securities and Exchange Commission on  June 30, 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 July 26, 2010,  and incorporated herein by reference.                                                      |

 

37

----