Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

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

 

**OR**

 

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

 

**For the transition periodfrom                 to                 **

 

**Commission File Number 000-51281**

 

**TENNESSEECOMMERCE 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 November 2, 2010there were 12,194,883 shares of common stock, $0.50 par value per share, issuedand outstanding.

 

 

 

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Table of Contents

 

**Tennessee Commerce Bancorp, Inc.**

 

Tableof Contents

 
| Part I  | Financial Information                                                                                                                                                      | ** ** | ** ** |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|         |                                                                                                                                                                       |       |       |
| Item 1.      | Financial Statements                                                                                                                                                       |       |       |
|         |                                                                                                                                                                       |       |       |
|         | Consolidated  Balance Sheets at September 30, 2010 (unaudited) and December 31,  2009                                                                            |       | 3          |
|         |                                                                                                                                                                       |       |       |
|         | Consolidated  Statements of Income (unaudited) for the Nine Months Ended September 30,  2010 and 2009 and for the Three Months Ended September 30, 2010 and 2009 |       | 4          |
|         |                                                                                                                                                                       |       |       |
|         | Consolidated Statements of Changes in Shareholders’  Equity (unaudited) for the Nine Months Ended September 30, 2010 and 2009                                    |       | 5          |
|         |                                                                                                                                                                       |       |       |
|         | Consolidated Statements of Cash Flows (unaudited) for  the Nine Months Ended September 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                                                                                                                                                                   |       | 34         |
|         |                                                                                                                                                                       |       |       |
| Signatures   |                                                                                                                                                                       |       | 35         |

 

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Table of Contents

 

**PART I: FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

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

 
| ** **                                                                                                                                                                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Dollars in thousands, except per share data)**                                                                                                                                                                      | ** ** | **2010**               | ** ** | **2009 (1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                                                                           |       |                   |       |                  |       |
| Cash  and due from banks                                                                                                                                                                                                                             |       | $                      | 17,693     |                  | $          | 22,864 |   |
| Federal  funds sold                                                                                                                                                                                                                                  |       | 8,005                  |       | 15,010                |       |
| Cash  and cash equivalents                                                                                                                                                                                                                           |       | 25,698                 |       | 37,874                |       |
|                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Securities  available for sale                                                                                                                                                                                                                       |       | 79,242                 |       | 93,668                |       |
|                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Loans                                                                                                                                                                                                                                                |       | 1,241,669              |       | 1,171,301             |       |
| Allowance  for loan losses                                                                                                                                                                                                                           |       | (21,742                | )          | (19,913               | )          |
| Net  loans                                                                                                                                                                                                                                           |       | 1,219,927              |       | 1,151,388             |       |
|                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Premises  and equipment, net                                                                                                                                                                                                                         |       | 2,397                  |       | 1,967                 |       |
| Accrued  interest receivable                                                                                                                                                                                                                         |       | 8,395                  |       | 9,711                 |       |
| Restricted  equity securities                                                                                                                                                                                                                        |       | 2,169                  |       | 2,169                 |       |
| Income  tax receivable                                                                                                                                                                                                                               |       | —                 |       | 68                    |       |
| Bank-owned  life insurance                                                                                                                                                                                                                           |       | 27,775                 |       | 25,673                |       |
| Other  real estate owned                                                                                                                                                                                                                             |       | 1,975                  |       | 814                   |       |
| Reposessions                                                                                                                                                                                                                                         |       | 32,747                 |       | 36,951                |       |
| Other  assets                                                                                                                                                                                                                                        |       | 19,745                 |       | 23,149                |       |
| **Total assets**                                                                                                                                                                                                                                     |       | $                      | 1,420,070  |                  | $          | 1,383,432 |   |
|                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                        |       |                   |       |                  |       |
| Liabilities                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| Deposits                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Non-interest-bearing                                                                                                                                                                                                                                 |       | $                      | 25,942     |                  | $          | 30,111 |   |
| Interest-bearing                                                                                                                                                                                                                                     |       | 1,235,063              |       | 1,212,431             |       |
| **Total deposits**                                                                                                                                                                                                                                   |       | 1,261,005              |       | 1,242,542             |       |
|                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Accrued  interest payable                                                                                                                                                                                                                            |       | 1,562                  |       | 1,430                 |       |
| Accrued  dividend payable                                                                                                                                                                                                                            |       | 188                    |       | 187                   |       |
| Short-term  borrowings                                                                                                                                                                                                                               |       | —                 |       | 14,000                |       |
| Other  liabilities                                                                                                                                                                                                                                   |       | 7,856                  |       | 5,783                 |       |
| Long-term  subordinated debt and other borrowings                                                                                                                                                                                                    |       | 25,621                 |       | 23,198                |       |
| **Total liabilities**                                                                                                                                                                                                                                |       | 1,296,232              |       | 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  September 30, 2010 and December 31, 2009                                        |       | 15,000                 |       | 15,000                |       |
| Common  stock, $0.50 par value; 20,000,000 shares authorized at September 30,  2010 and at December 31, 2009; 12,194,884 and 5,646,368 shares issued  and outstanding at September 30, 2010 and December 31, 2009,  respectively |       | 6,097                  |       | 2,823                 |       |
| Common  stock warrant                                                                                                                                                                                                                                |       | 453                    |       | 453                   |       |
| Additional  paid-in capital                                                                                                                                                                                                                          |       | 84,388                 |       | 63,247                |       |
| Retained  earnings                                                                                                                                                                                                                                   |       | 17,447                 |       | 16,056                |       |
| Accumulated  other comprehensive (loss) income                                                                                                                                                                                                       |       | 453                    |       | (1,287                | )          |
| **Total shareholders’ equity**                                                                                                                                                                                                                  |       | 123,838                |       | 96,292                |       |
|                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| **Total liabilities and shareholders’ equity**                                                                                                                                                                                                  |       | $                      | 1,420,070  |                  | $          | 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.

 

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TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

NINEMONTHS ENDED SEPTEMBER 30, 2010 AND 2009

THREEMONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

 
| ** **                                                                      | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**          | ** ** | **September 30,**           | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2010**                        | ** ** | **2009**                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  income                                                                |       |                            |       |                             |       |   |   |   |   |
| Loans,  including fees                                                          |       | $                               | 58,102     |                             | $          | 55,904 |   | $ | 18,998 |   | $ | 19,334 |   |
| Securities                                                                      |       | 2,492                           |       | 4,089                            |       | 489 |   | 1,301 |   |
| Federal  funds sold                                                             |       | 37                              |       | 12                               |       | 24 |   | 7 |   |
| **Total interest income**                                                       |       | 60,631                          |       | 60,005                           |       | 19,511 |   | 20,642 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Interest  expense                                                               |       |                            |       |                             |       |   |   |   |   |
| Deposits                                                                        |       | 20,306                          |       | 26,807                           |       | 6,811 |   | 8,724 |   |
| Other                                                                           |       | 1,400                           |       | 1,483                            |       | 367 |   | 494 |   |
| **Total interest expense**                                                      |       | 21,706                          |       | 28,290                           |       | 7,178 |   | 9,218 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Net  interest income                                                            |       | 38,925                          |       | 31,715                           |       | 12,333 |   | 11,424 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Provision  for loan losses                                                      |       | 16,243                          |       | 26,889                           |       | 7,193 |   | 5,250 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Net  interest income after provision for loan losses                            |       | 22,682                          |       | 4,826                            |       | 5,140 |   | 6,174 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Non-interest  income                                                            |       |                            |       |                             |       |   |   |   |   |
| Service  charges on deposit accounts                                            |       | 90                              |       | 132                              |       | 30 |   | 41 |   |
| Securities  gains                                                               |       | 734                             |       | 870                              |       | 38 |   | 532 |   |
| Gain  (loss) on sale of loans                                                   |       | 475                             |       | (649                             | )          | (55 | ) | 340 |   |
| (Loss)  gain on repossession                                                    |       | (3,998                          | )          | (1,165                           | )          | (1,990 | ) | 202 |   |
| Other                                                                           |       | 5,575                           |       | 631                              |       | 3,272 |   | 238 |   |
| **Total non-interest income (loss)**                                            |       | 2,876                           |       | (181                             | )          | 1,295 |   | 1,353 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Non-interest  expense                                                           |       |                            |       |                             |       |   |   |   |   |
| Salaries  and employee benefits                                                 |       | 8,235                           |       | 7,428                            |       | 2,859 |   | 2,088 |   |
| Occupancy  and equipment                                                        |       | 1,474                           |       | 1,186                            |       | 551 |   | 394 |   |
| Data  processing fees                                                           |       | 1,529                           |       | 1,148                            |       | 522 |   | 449 |   |
| FDIC  expense                                                                   |       | 2,349                           |       | 1,868                            |       | 1,288 |   | 717 |   |
| Professional  fees                                                              |       | 2,286                           |       | 1,393                            |       | 1,212 |   | 405 |   |
| Other                                                                           |       | 5,666                           |       | 3,314                            |       | 1,887 |   | 966 |   |
| **Total non-interest expense**                                                  |       | 21,539                          |       | 16,337                           |       | 8,319 |   | 5,019 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Income  (loss) before income taxes                                              |       | 4,019                           |       | (11,692                          | )          | (1,884 | ) | 2,508 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Income  tax expense (benefit)                                                   |       | 1,503                           |       | (4,463                           | )          | (785 | ) | 972 |   |
| Net  income (loss)                                                              |       | 2,516                           |       | (7,229                           | )          | (1,099 | ) | 1,536 |   |
| Preferred  dividends                                                            |       | (1,125                          | )          | (1,171                           | )          | (375 | ) | (375 | ) |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Net  income (loss) available to common shareholders                             |       | $                               | 1,391      |                             | $          | (8,400 | ) | $ | (1,474 | ) | $ | 1,161 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Earnings  (loss) per share (EPS):                                               |       |                            |       |                             |       |   |   |   |   |
| Basic  EPS                                                                      |       | $                               | 0.20       |                             | $          | (1.77 | ) | $ | (0.16 | ) | $ | 0.25 |   |
| Diluted  EPS                                                                    |       | 0.20                            |       | (1.77                            | )          | (0.16 | ) | 0.25 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Weighted  average shares outstanding:                                           |       |                            |       |                             |       |   |   |   |   |
| Basic                                                                           |       | 6,871,025                       |       | 4,733,882                        |       | 9,277,422 |   | 4,736,823 |   |
| Diluted                                                                         |       | 6,871,025                       |       | 4,733,882                        |       | 9,277,422 |   | 4,736,823 |   |

 

See accompanying notes toconsolidated financial statements.

 

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TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

NINEMONTHS ENDED SEPTEMBER 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                                                                                 |       | —        |       | —     |       | —               |       | —         |       | (7,229       | )          | —                 |       | (7,229           | )          |
| Other comprehensive  income, net of income taxes                                         |       |          |       |       |       |                 |       |           |       |         |       |                   |       |             |       |
| Unrealized losses on  securities available for sale during the period, net of income tax |       | —        |       | —     |       | —               |       | —         |       | —       |       | (955                   | )          | (955             | )          |
| Common stock warrant  accretion                                                          |       | —        |       | —     |       | —               |       | 62             |       | —       |       | —                 |       | 62               |       |
| Preferred stock dividend                                                                 |       |          |       |       |       |                 |       |           |       | (1,171       | )          |                   |       | (1,171           | )          |
| Stock-based compensation  expense                                                        |       | —        |       | —     |       | —               |       | 262            |       | —       |       | —                 |       | 262              |       |
| Issuance of 11,248  shares of restricted stock and related tax benefit                   |       | —        |       | 5          |       | —               |       | 51             |       | —       |       | —                 |       | 56               |       |
|                                                                                     |       |          |       |       |       |                 |       |           |       |         |       |                   |       |             |       |
| Balance at September 30,  2009                                                           |       | $             | 15,000     |       | $          | 2,371                |       | $              | 453        |         | $          | 60,321                 |       | $                | 14,780     |   | $ | (153 | ) | $ | 92,772 |   |
|                                                                                     |       |          |       |       |       |                 |       |           |       |         |       |                   |       |             |       |
| Balance at December 31,  2009                                                            |       | $             | 15,000     |       | $          | 2,823                |       | $              | 453        |         | $          | 63,247                 |       | $                | 16,056     |   | $ | (1,287 | ) | $ | 96,292 |   |
| Comprehensive income                                                                     |       |          |       |       |       |                 |       |           |       |         |       |                   |       |             |       |
| Net income                                                                               |       | —        |       | —     |       | —               |       | —         |       | 2,516        |       | —                 |       | 2,516            |       |
| Other comprehensive  income, net of income taxes                                         |       |          |       |       |       |                 |       |           |       |         |       |                   |       |             |       |
| Unrealized gains on  securities available for sale during the period, net of income tax  |       | —        |       | —     |       | —               |       | —         |       | —       |       | 1,740                  |       | 1,740            |       |
| Common stock warrant  accretion                                                          |       | —        |       | —     |       | —               |       | 70             |       | —       |       | —                 |       | 70               |       |
| Preferred stock dividend                                                                 |       |          |       |       |       |                 |       |           |       | (1,125       | )          |                   |       | (1,125           | )          |
| Stock-based compensation  expense                                                        |       | —        |       | —     |       | —               |       | 313            |       | —       |       | —                 |       | 313              |       |
| Issuance of 2,016 shares  of restricted stock and related tax benefit                    |       | —        |       | 1          |       | —               |       | 6              |       | —       |       | —                 |       | 7                |       |
| Issuance of 6,546,500  shares of common stock, net of issuance costs                     |       | —        |       | 3,273      |       | —               |       | 20,752         |       | —       |       | —                 |       | 24,025           |       |
|                                                                                     |       |          |       |       |       |                 |       |           |       |         |       |                   |       |             |       |
| Balance at September 30,  2010                                                           |       | $             | 15,000     |       | $          | 6,097                |       | $              | 453        |         | $          | 84,388                 |       | $                | 17,447     |   | $ | 453 |   | $ | 123,838 |   |

 

See accompanying notes toconsolidated financial statements.

 

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TENNESSEECOMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINEMONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

 
| ** **                                                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(Dollars in thousands)**                                                 | ** ** | **2010**               | ** ** | **2009**               | ** ** |
|                                                                                 |       |                   |       |                   |       |
| **Cash flows from operating activities**                                             |       |                   |       |                   |       |
| Net  income (loss)                                                                   |       | $                      | 2,516      |                   | $          | (7,229 | ) |
| Adjustments  to reconcile net income (loss) to net cash used by operating activities |       |                   |       |                   |       |
| Depreciation                                                                         |       | 415                    |       | 372                    |       |
| Deferred  loan fees                                                                  |       | 326                    |       | 204                    |       |
| Provision  for loan losses                                                           |       | 16,243                 |       | 26,889                 |       |
| Stock-based  compensation expense                                                    |       | 313                    |       | 262                    |       |
| Deferred  income tax (benefit) expense                                               |       | 2,204                  |       | (5,215                 | )          |
| Net  amortization of investment securities                                           |       | 160                    |       | 148                    |       |
| Gain  on sales of securities                                                         |       | (734                   | )          | (870                   | )          |
| Increase  in cash surrender value of bank owned life insurance                       |       | (2,102                 | )          | —                 |       |
| Change  in:                                                                          |       |                   |       |                   |       |
| Accrued  interest receivable                                                         |       | 1,316                  |       | (684                   | )          |
| Accrued  interest payable                                                            |       | 132                    |       | (778                   | )          |
| Other  assets                                                                        |       | 5,448                  |       | (4,852                 | )          |
| Other  liabilities                                                                   |       | (128                   | )          | (16                    | )          |
| Net  cash provided by operating activities                                           |       | 26,109                 |       | 8,231                  |       |
|                                                                                 |       |                   |       |                   |       |
| **Cash flows from investing activities**                                             |       |                   |       |                   |       |
| Purchases  of securities available for sale                                          |       | (164,862               | )          | (109,871               | )          |
| Proceeds  from sales of securities available for sale                                |       | 76,940                 |       | 67,100                 |       |
| Proceeds  from maturities, prepayments and calls on securities available for sale    |       | 105,727                |       | 57,243                 |       |
| Net  change in loans                                                                 |       | (85,108                | )          | (143,837               | )          |
| Purchase  of bank owned life insurance                                               |       | —                 |       | (25,472                | )          |
| Purchases  of FHLB stock                                                             |       | —                 |       | (484                   | )          |
| Net  purchases of premises and equipment                                             |       | (845                   | )          | (99                    | )          |
| Net  cash used by investing activities                                               |       | (68,148                | )          | (155,420               | )          |
|                                                                                 |       |                   |       |                   |       |
| **Cash flows from financing activities**                                             |       |                   |       |                   |       |
| Net  change in deposits                                                              |       | 18,463                 |       | 133,142                |       |
| Payments  on short-term debt                                                         |       | (10,000                | )          | —                 |       |
| Payments  on long-term debt                                                          |       | (1,577                 | )          | —                 |       |
| Preferred  stock dividends                                                           |       | (1,125                 | )          | (1,171                 | )          |
| Warrant  accretion expense                                                           |       | 70                     |       | 62                     |       |
| Issuance  of common stock                                                            |       | 24,032                 |       | 56                     |       |
| Net  cash provided by (used by) financing activities                                 |       | 29,863                 |       | 132,089                |       |
|                                                                                 |       |                   |       |                   |       |
| Net  change in cash and cash equivalents                                             |       | (12,176                | )          | (15,100                | )          |
|                                                                                 |       |                   |       |                   |       |
| Cash  and cash equivalents at beginning of period                                    |       | 37,874                 |       | 40,798                 |       |
|                                                                                 |       |                   |       |                   |       |
| Cash  and cash equivalents at end of period                                          |       | $                      | 25,698     |                   | $          | 25,698 |   |
|                                                                                 |       |                   |       |                   |       |
| Supplemental  cash flow information:                                                 |       |                   |       |                   |       |
| Cash  paid during period for interest                                                |       | $                      | 21,574     |                   | $          | 29,068 |   |
| Cash  paid during period for income taxes                                            |       | 15                     |       | 72                     |       |
|                                                                                 |       |                   |       |                   |       |
| Loans  foreclosed upon with repossessions                                            |       | 23,867                 |       | 10,430                 |       |

 

See accompanying notes toconsolidated financial statements.

 

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TENNESSEE COMMERCEBANCORP, INC.

 

Notes to ConsolidatedFinancial Statements (unaudited)

 

(Dollars in thousands,except per share data, throughout these Notes to Consolidated Financial Statements(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 September 30, 2010,the Bank, 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 accounting principles generally accepted inthe United States of America (“GAAP”).

 

The unaudited consolidatedfinancial statements as of September 30, 2010 and for the nine- andthree-month periods ended September 30, 2010 and 2009 have been preparedin accordance with GAAP and in accordance with the instructions toForm 10-Q and Article 10 of Regulation S-X as promulgated by theSecurities and Exchange Commission (“SEC”), and in the opinion of management,include all adjustments, consisting of normal recurring adjustments, to presentfairly the information included therein. They do not include all theinformation and notes required by GAAP for complete financial statements.Operating results for the nine- and three-month periods endedSeptember 30, 2010 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2010. For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in the Corporation’s Annual Report on Form 10-K for the yearended December 31, 2009.

 

Note 2 — Earnings per Shareof Common Stock

 

The factors used in theearnings per share computation follow:

 
| ** **                                                                      | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**          | ** ** | **September 30,**           | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2010**                        | ** ** | **2009**                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Basic                                                                           |       |                            |       |                             |       |   |   |   |   |
| Net  income (loss) available to common shareholders                             |       | $                               | 1,391      |                             | $          | (8,400 | ) | $ | (1,474 | ) | $ | 1,161 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Weighted  average common shares outstanding                                     |       | 6,871,025                       |       | 4,733,882                        |       | 9,277,422 |   | 4,736,823 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Basic  earnings (loss) per common share                                         |       | 0.20                            |       | (1.77                            | )          | (0.16 | ) | 0.25 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Diluted                                                                         |       |                            |       |                             |       |   |   |   |   |
| Net  income (loss) available to common shareholders                             |       | $                               | 1,391      |                             | $          | (8,400 | ) | $ | (1,474 | ) | $ | 1,161 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Weighted  average common shares outstanding for basic earnings per common share |       | 6,871,025                       |       | 4,733,882                        |       | 9,277,422 |   | 4,736,823 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Add:  Dilutive effects of assumed exercises of stock options (1)                |       | —                          |       | —                           |       | — |   | — |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Average  shares and dilutive potential common shares                            |       | 6,871,025                       |       | 4,733,882                        |       | 9,277,422 |   | 4,736,823 |   |
|                                                                            |       |                            |       |                             |       |   |   |   |   |
| Diluted  earnings (loss)per common share                                        |       | $                               | 0.20       |                             | $          | (1.77 | ) | $ | (0.16 | ) | $ | 0.25 |   |

 

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(1)The warrant and the options were excluded from the calculation of dilutedearnings per share in 2010 and 2009 because they were anti-dilutive.

 

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Note 3 — Stock-BasedCompensation

 

Financial AccountingStandards Board (“FASB”) Accounting Standards Codification (ASC) Topic 718, “Share-BasedPayment” (“FASB ASC 718”), addresses the accounting for share-based paymenttransactions in which a company receives employee services in exchange forequity instruments. FASB ASC 718 eliminates the ability to account forshare-based compensation transactions, as the Corporation formerly did, usingthe intrinsic value method as prescribed by Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” and generally requiresthat such transactions be accounted for using a fair-value-based method andrecognized as expense in the accompanying 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 expected to vest. Stock-based compensationexpense recognized in the accompanying consolidated statements of income forthe period ended September 30, 2010 included any compensation expense forstock-based payment awards vesting during the period based on the grant datefair value estimated in accordance with FASB ASC 718. As stock-basedcompensation expense recognized in the accompanying statement of income for theperiod ended September 30, 2010 is based on awards expected to vest, ithas 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 nine months endedSeptember 30, 2010, the Corporation granted options to purchase 12,888shares of Corporation common stock and granted 160,760 restricted shares ofCorporation common stock. There were non-vested options to purchase 168,088shares of the Corporation common stock outstanding at September 30, 2010.The Corporation recognized stock-based expense of $313 for the nine monthsended September 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 September 30, 2010                                   |       | 878,708    |       | $             | 13.57      |                | 3.84       |               | $          | (8,374 | ) |
| Stock-based  options outstanding and expected to vest at September 30, 2010              |       | 878,708    |       | $             | 13.57      |                | 3.84       |               | $          | (8,374 | ) |
| Options  exercisable at September 30, 2010                                               |       | 710,620    |       | $             | 12.44      |                | 2.95       |               | $          | (5,969 | ) |

 

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(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 $4.04 and $4.37 at December 31, 2009 and September 30, 2010,respectively.

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

 

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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 nine months of 2010. The optionsgranted in 2010 had an estimated weighted average fair value of $5.54. Theoptions granted 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 lossesrecognized in accumulated other comprehensive income (loss) were as follows:

 
| ** **                           | ** ** | ** ** | ** **   | **Gross**      | ** ** | **Gross**      | ** ** | ** **    | ** ** |
|--------------------------------------|------------|------------|--------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                           | ** ** | **Fair**   | ** **   | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized** | ** ** |
| **(Dollars in thousands)** | ** ** | **Value**  | ** **   | **Gains**      | ** ** | **Losses**     | ** ** | **Cost**      | ** ** |
|                                 |       |       |         |           |       |           |       |          |       |
| September  30, 2010                  |       |       |         |           |       |           |       |          |       |
|                                 |       |       |         |           |       |           |       |          |       |
| U.S.  Government agencies            |       | $          | 25,055       |           | $          | 125            |       | $             | (31        | ) | $ | 24,961 |   |
| U.  S. Treasuries                    |       | 2,000      |         | —         |       | —         |       | 2,000         |       |
| Corporate  debt securities           |       | 46,387     |         | 636            |       | —         |       | 45,751        |       |
| Other                                |       | 5,800      |         | —         |       | —         |       | 5,800         |       |
|                                 |       |       |         |           |       |           |       |          |       |
|                                 |       | $          |  79,242 |           | $          | 761            |       | $             | (31        | ) | $ | 78,512 |   |
|                                 |       |       |         |           |       |           |       |          |       |
| 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 September 30, 2010 are shown below. Expected maturitieswill differ from contractual maturities because borrowers may have the right tocall or prepay obligations with or without prepayment penalties.

 
| **(Dollars in thousands)** | ** ** | **Fair Value** | ** ** |
|--------------------------------------|------------|---------------------|------------|
|                                 |       |                |       |
| Due  in less than one year           |       | $                   | 2,000      |   |
| Due  after one through five years    |       | 46,387              |       |
| Due  after five through ten years    |       | 14,033              |       |
| Due  after ten years                 |       | 16,822              |       |
|                                 |       |                |       |
|                                 |       | $                   | 79,242     |   |

 

Gross proceeds from the saleof securities for the nine months ended September 30, 2010 and 2009 were$76,940 and $67,100, respectively. Gross gains of $825 and $950 on sales ofsecurities were recognized for the nine months ended September 30, 2010and 2009, respectively. There were gross losses of $91 on the sale ofsecurities recognized for the nine months ended September 30, 2010 and awrite-down loss of $80 for the nine months ended September 30, 2009.Securities carried at $38,097 and $16,512 at September 30, 2010 andDecember 31, 2009, respectively, were pledged to secure deposits and forother purposes as required or permitted by law.

 

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Securities with unrealizedlosses at September 30, 2010 and December 31, 2009, and the length oftime they 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** | ** ** |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| September  30, 2010                  |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U.S.  Government agencies            |       | $                                      | 10,747     |                                 | $          | 31        |       | $ | — |   | $ | — |   | $ | 10,747 |   | $ | 31 |   |
| U.S.  Treasuries                     |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
| Corporate  debt securities           |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| **Total**                            | ** ** | **$**                                  | 10,747     | ** **                           | **$**      | 31        | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | 10,747 | ** ** | **$** | 31 | ** ** |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| December  31, 2009                   |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U.S.  Government agencies            |       | $                                      | 54,552     |                                 | $          | 1,882     |       | $ | 14,737 |   | $ | 256 |   | $ | 69,289 |   | $ | 2,138 |   |
| Corporate  debt securities           |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| **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 debt securities have not been recognized intoincome because 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 with unrealized lossesis expected to recover as the securities approach their maturity dates and/ormarket rates decline.

 

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 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 2010 at par. The Corporation reports as liabilitiesthe subordinated debentures 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* The WallStreet Journal* on the first business day of each distribution periodplus 50 basis points (but in no event greater than 8.0% or less than 5.75%). Atthe same time, the Corporation issued to the Trust II $14,950 of floating ratejunior subordinated deferrable interest debentures due 2038. The Corporationguarantees the payment of distributions and payments for redemptions orliquidation of the capital securities. The floating rate capital securitiesqualify as “Tier I Capital” for the Corporation under current regulatorydefinitions subject to certain limitations.

 

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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 basis points (butin no event greater than 8.0% or less than 5.75%). The distributions on thecapital securities are accounted for as interest expense by the Corporation.Interest payments on the debentures and the corresponding distributions on thecapital 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 2013 at par. The Corporation reports as liabilities the subordinateddebentures issued by the Corporation and held by the Trust II.

 

Note 6 — Commitments andContingent Liabilities

 

The Corporation and itssubsidiaries are engaged in lines of business that are heavily regulated andinvolve a large volume of financial transactions with numerous customers.Although the Corporation and its subsidiaries have developed policies andprocedures to minimize the impact of legal non-compliance and disputes, litigationpresents an ongoing risk.

 

The Corporation and itssubsidiaries are defendants in various lawsuits, including the litigationdiscussed below and claims arising out of the ordinary course of business.Management of the Corporation evaluates lawsuits based on information currentlyavailable, including advice of counsel and an assessment of available insurancecoverage. Management is currently of the opinion that the ultimate resolutionor financial liability with respect to pending lawsuits will not have a materialadverse effect on the Corporation’s business, consolidated financial positionor results of operations. Litigation is, however, inherently uncertain, andmanagement cannot provide any assurance that the Corporation and/or itssubsidiaries will prevail in any of these actions, nor can management estimatewith reasonable certainty the amount of damages that the Corporation or any ofits subsidiaries might incur.

 

The Corporation hasestablished a litigation reserve account with respect to two pending lawsuits —one related to a claim by the Corporation’s former Chief Financial Officer andone related to a claim by a borrower in Tuskegee, Alabama.

 

Note 7 — New AccountingStandards

 

In the first quarter of2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855) — Amendmentsto Certain Recognition and Disclosure Requirements,” which**amended FASB ASC Topic 855, “Subsequent Events,” so that SECfilers are no longer required to disclose the date through which subsequentevents have been evaluated in originally issued and revised financialstatements. SEC filers must evaluate subsequent events through the date thefinancial statements are issued.

 

ASU No. 2009-16, “Transfersand Servicing (Topic 860) - Accounting for Transfers of Financial Assets” (“ASU 2009-16”), amends prior accounting guidance to enhance reportingabout transfers of financial assets, including securitizations, and wherecompanies have continuing exposure to the risks related to transferred financialassets. ASU 2009-16 eliminates the concept of a “qualifyingspecial-purpose entity” and changes the requirements for derecognizingfinancial assets. ASU 2009-16 also requires additional disclosures aboutall continuing involvements with transferred financial assets includinginformation about gains and losses resulting from transfers during the period.The provisions of ASU 2009-16 became effective on January 1, 2010 anddid not have a significant impact on the Corporation’s financial statements.

 

ASU No. 2009-17, “Consolidations(Topic 810) - Improvements to Financial Reporting by Enterprises Involvedwith Variable Interest Entities”  (“ASU 2009-17”), amends priorguidance to change how a company determines when an entity that isinsufficiently capitalized or is not controlled through voting (or similarrights) should be consolidated. The determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance.ASU 2009-17 requires additional disclosures about the reporting entity’sinvolvement with variable-interest entities and any significant changes in riskexposure due to that involvement as well as its affect on the entity’sfinancial statements. As further discussed below, ASU No. 2010-10, “Consolidations(Topic 810),” deferred the effective date of ASU 2009-17 for areporting entity’s interests in investment companies. The provisions ofASU 2009-17 became effective on January 1, 2010 and did not have asignificant impact on the Corporation’s financial statements.

 

ASU No. 2010-06, “FairValue Measurements and Disclosures (Topic 820) - Improving Disclosures AboutFair 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) the policy for determining when transfers between levels of the fairvalue hierarchy are recognized and (iv) for recurring fair valuemeasurements of assets and liabilities in Level 3 of the fair valuehierarchy, a gross presentation of information about purchases, sales,issuances and settlements. ASU 2010-06 further clarifies that(i) fair value measurement disclosures should be provided for each classof assets and liabilities (rather than major category), which would generallybe a subset of assets or liabilities within a line item in the statement offinancial position and (ii) companies should provide disclosures about thevaluation techniques and inputs used to measure fair value for both recurringand nonrecurring fair value measurements for each class of assets andliabilities included in Levels 2 and 3 of the fair value hierarchy.

 

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The disclosures related tothe gross presentation of purchases, sales, issuances and settlements of assetsand liabilities 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. 2010-10, “Consolidations(Topic 810) - Amendments for Certain Investment Funds” (“ASU 2010-10”),defers 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.

 

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.

 

ASU No. 2010-20, “Receivables(Topic 310): Disclosures about the Credit Quality of Financing Receivables andthe Allowance for Credit Losses” (“ASU 2010-20”), requires a company to providemore information in its disclosures about the credit quality of its financingreceivables and the credit reserves held against it. The amendments thatrequire disclosures as of the end of a reporting period are effective for theperiods ending on or after December 15, 2010. ASU No. 2010-20 willenhance the disclosure requirements for financing receivables and creditlosses, but is not expected to impact the Corporation’s financial position,results of operations or cash flows.

 

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.

 

·      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.

 

·      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 the Bank’s valuation methods are appropriate and consistentwith other market participants, the use of different methodologies, orassumptions, to determine the fair value of certain financial instruments couldresult in a different estimate of fair value at the reporting date.

 

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**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.

 

**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, federalfunds sold and certain other products.  Fair value measurement is basedupon quoted prices, if available.  If quoted prices are not available,securities would generally be classified within Level 2, and fair value wouldbe determined by matrix pricing, which is a mathematical technique widely usedin the industry to value debt securities without relying exclusively on quotedprices for the specific securities but relying on the securities’ relationshipto other benchmark quoted securities. In certain cases where there is limitedactivity or less transparency around inputs to the valuation, securities areclassified within Level 3 of the valuation hierarchy. For the nine months endedSeptember 30, 2010, all of the Bank’s available-for-sale securities werevalued using matrix pricing and were classified within Level 2 of the valuationhierarchy.  At September 30, 2010, the Bank had no available-for-salesecurities 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 September 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 September 30, 2010, the Bankhad interest-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 September 30, 2010, the Bank had impairedloans measured on a nonrecurring basis classified within Level 3 of thevaluation hierarchy.

 

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*Other Assets—* Included in other assets are certain assets carried at fair value,including repossessions and other real estate owned (“OREO”). The carryingamount is based on an observable market price or appraisal value. The Bankreflects these assets within Level 3 of the valuation hierarchy. AtSeptember 30, 2010, the Bank had repossessions and OREO measured at fairvalue on a nonrecurring basis classified within Level 3 of the valuationhierarchy.

 

*Bank-OwnedLife Insurance—* The Bank includes bank owned life insurance (“BOLI”)within other assets, carried at cash surrender value. The cash surrender valueof bank owned life insurance is based on information received from theinsurance carriers indicating the financial performance of the policies and theamount the Bank would receive should the policies be surrendered. AtSeptember 30, 2010, the Bank had BOLI measured at fair value on arecurring basis classified within 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 September 30, 2010, the subsidiary had aninventory measured at fair value on a nonrecurring basis classified withinLevel 3 of the valuation hierarchy.

 

**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 September 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 ninemonths ended September 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 September 30, 2010,by caption 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 September 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            |       | $                          | 25,055     |                       | $          | —               |       | $                    | 25,055     |   | $ | — |   |
| U.S.  Treasuries                     |       | 2,000                      |       | —                     |       | 2,000                |       | —               |       |
| Corporate  debt securities           |       | 46,387                     |       | —                     |       | 46,387               |       | —               |       |
| Other                                |       | 5,800                      |       | —                     |       | 5,800                |       | —               |       |
| Servicing  assets                    |       | 116                        |       | —                     |       | —               |       | 116                  |       |
| Interest-only  strips                |       | 1,697                      |       | —                     |       | —               |       | 1,697                |       |
| Bank-owned  life insurance           |       | 27,775                     |       | —                     |       | —               |       | 27,775               |       |
| **Total assets at fair value**       |       | $                          | 108,830    |                       | $          | —               |       | $                    | 79,242     |   | $ | 29,588 |   |
|                                 |       |                       |       |                       |       |                 |       |                 |       |
| Recourse  obligations                |       | $                          | 210        |                       | $          | —               |       | $                    | —     |   | $ | 210 |   |
| **Total liabilities at fair value**  |       | $                          | 210        |                       | $          | —               |       | $                    | —     |   | $ | 210 |   |

 

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 aremeasured at the lower of cost or market that were recognized at fair valuebelow the cost at the end of the period. The following table presents thefinancial instruments carried at fair value as of September 30, 2010, bycaption on the consolidated balance sheets and by FASB ASC 820 valuationhierarchy (as described above):

 

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**Assets and liabilities measured at fair value on a nonrecurringbasis as of September 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                      |       | $                          | 84,364     |                       | $          | —               |       | $                    | —     |   | $ | 84,364 |   |
| Inventory                            |       | 7,704                      |       | —                     |       | —               |       | 7,704                |       |
| Other  assets                        |       | 27,018                     |       | —                     |       | —               |       | 27,018               |       |
| **Total assets at fair value**       |       | $                          | 119,086    |                       | $          | —               |       | $                    | —     |   | $ | 119,086 |   |

 

**Changes inLevel 3 fair value measurements**

 

The table below includes aroll-forward of the balance sheet amounts for the first nine 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.

 
| **Nine months ended September 30, 2010**                                                                                     | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| Fair  value, January 1, 2010                                                                                                                          |       | $          | 28,549     |            | $          | 317 |   |
| Total  realized and unrealized (losses) gains included in income                                                                                      |       | (1,666     | )          | 32              |       |
| Purchases,  issuances and settlements, net                                                                                                            |       | 2,705      |       | (139            | )          |
| Transfers  in and/or out of Level 3                                                                                                                   |       | —     |       | —          |       |
| Fair  value, September 30, 2010                                                                                                                       |       | $          | 29,588     |            | $          | 210 |   |
| Total  unrealized gains included in income related to financial assets and  liabilities still on the consolidated balance sheet at September 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:

 
| ** **                                        | ** ** | **September 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                          |       | $                      | 17,693     |                    | $          | 17,693 |   | $ | 22,864 |   | $ | 22,864 |   |
| Federal  funds sold                               |       | 8,005                  |       | 8,005                   |       | 15,010 |   | 15,010 |   |
| Securities                                        |       | 79,242                 |       | 79,242                  |       | 93,668 |   | 93,668 |   |
| Loans,  net                                       |       | 1,219,927              |       | 1,291,547               |       | 1,151,388 |   | 1,250,425 |   |
| Accrued  interest receivable                      |       | 8,395                  |       | 8,395                   |       | 9,711 |   | 9,711 |   |
| Bank-owned  life insurance                        |       | 27,775                 |       | 27,775                  |       | 25,673 |   | 25,673 |   |
| Restricted  equity securities                     |       | 2,169                  |       | 2,169                   |       | 2,169 |   | 2,169 |   |
| Financial  liabilities:                           |       |                   |       |                    |       |   |   |   |   |
| Deposits                                          |       | 1,261,005              |       | 1,288,777               |       | 1,242,542 |   | 1,263,535 |   |
| Accrued  interest payable                         |       | 1,562                  |       | 1,562                   |       | 1,430 |   | 1,430 |   |
| Accrued  dividend payable                         |       | 188                    |       | 188                     |       | 187 |   | 187 |   |
| Short-term  borrowings                            |       | —                 |       | —                  |       | 14,000 |   | 14,000 |   |
| Long-term  subordinated debt and other borrowings |       | 25,621                 |       | 28,013                  |       | 23,198 |   | 27,175 |   |
|                                                   |            |                        |            |                         |            |  |  |  |  |  |  |  |  |

 

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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:

 

·                  Credit valuation adjustmentsare necessary when the market price (or parameter) is not indicative of thecredit quality of the counterparty;

 

·                  Debit valuation adjustmentsare necessary to reflect the credit quality of the Bank in the valuation ofliabilities measured at fair value;

 

·                  Liquidity valuationadjustments are necessary when the Bank may not be able to observe a recentmarket 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

 

·                  Unobservable parametervaluation adjustments are necessary when positions are valued using internallydeveloped models that use as their basis unobservable parameters — that is,parameters that must be estimated and are, therefore, subject to managementjudgment to substantiate the model valuation. These financial instruments arenormally 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.

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS 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, operating results,maturities of debt securities, business bank strategy, loan sale transactions,tax rates, management’s review of the loan portfolio, loan classifications,allowance for loan losses, loan commitments, liquidity, capital resources,interest rates, interest rate sensitivity gap analysis, economic value ofequity model, net interest income, net interest margin, interest-bearingliabilities, non-interest income, stock-based compensation expense and ourfuture growth and profitability. We caution you not to place undue reliance onthe forward-looking statements contained in this report because actual resultscould differ materially from those indicated in such forward-looking statementsas a result of a variety of factors. These factors include, but are not limitedto, our concentration of credit exposure to borrowers in the transportationindustry, the impact of our non-performing assets, the impact of recentlyenacted financial regulatory reforms, our ability to utilize certain netoperating losses, our concentration of commercial loans and commercial realestate loans, the sufficiency of our current sources of funds, our reliance oninternet and brokered deposits, the effect of capital constraints on our paceof growth and our ability to raise additional capital when needed, the adequacyof our allowance for loan losses, informal or formal enforcement actions towhich we may become subject, our heavy reliance on the services of keypersonnel, the prepayment of FDIC insurance premiums and higher FDIC assessmentrates, the success of the local economies in which we do business, thepotential 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 ourissuance of securities to Treasury, the right of holders of our Series APreferred Stock, the rights of holders of our subordinated debentures, anyfuture issuances of our common stock or other equity securities and otherfactors detailed 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 or unanticipatedevents, circumstances or results that occur after the date of this report.

 

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**Overview**

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

 

The results of operations,before charges for preferred dividends, for the nine months endedSeptember 30, 2010 compared to the nine months ended September 30,2009 reflected a 134.80% increase in net income and a 123.98% increase indiluted earnings per share. The increase in earnings resulted partially from adecreased provision for loan losses in the nine months ended September 30,2010 compared to the same period in 2009, because of reduced net charge-offsover the same period. For the nine months ended September 30, 2010,net income, before preferred dividends, was $2,516, an increase of $9,745 or134.80% compared to net loss of $7,229 for the same period in 2009. Dilutedearnings per share increased $1.89 per share or 123.98% for the nine monthsended September 30, 2010 compared to the same period in 2009. The ninemonths ended September 30, 2010 reflected a continuation of our balancesheet management, as assets increased by $36,638 or 2.65% from $1,383,432 atDecember 31, 2009 to $1,420,070 at September 30, 2010. Net loansincreased by 5.95% or $68,539 from December 31, 2009 to September 30,2010, while total deposits increased by 1.49% or $18,463 during that sameperiod.

 

**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 and professionalsin the Nashville Metropolitan Statistical Area, or the Nashville MSA, as wellas the funding needs of certain national and regional equipment vendors andfinancial services companies.  We call this strategy our business bankstrategy. We primarily conduct business from a single location in the CoolSprings commercial area of Franklin, Tennessee, 15 miles south ofNashville. We also operate three loan production offices - one in each ofBirmingham, Alabama, Minneapolis, Minnesota and Atlanta, Georgia. Each of theseoffices is staffed 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.

 

**Our BusinessStrategy**

 

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 commercial segmentfor 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 September 30, 2010:

 
| ** **                              | ** ** | **% of Total** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|
| Commercial,  financial and agricultural |       | 54.04                    | %          |
| Real  estate: Commercial(1)             |       | 23.39                    |       |
| Real  estate: Construction              |       | 9.53                     |       |
| Tax  leases                             |       | 9.24                     |       |
| Real  estate: 1 to 4 family             |       | 3.51                     |       |
| Consumer                                |       | 0.29                     |       |
| **Total**                               |       | 100.00                   | %          |

 

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*(1) *Commercial real estate loansprimarily represent commercial and industrial loans collateralized bycommercial 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.

 

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Our specialty lendingbusiness represents an attractive growth opportunity in the large-ticket,specialized equipment segment. Collateral for large-ticket loans includes,among other things, 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 advantage.

 

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.

 

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 $144,166, or 19.48%,between September 30, 2009 and September 30, 2010, including a $121,035increase during the first nine months of 2010.

 

**Comparisonof Operating Results for the Three Months Ended September 30, 2010 andSeptember 30, 2009**

 

**Net Income** - Net loss forthe three months ended September 30, 2010 was $1,474, a decrease of $2,635or 226.96% compared to net income of $1,161 for the three months endedSeptember 30, 2009.  The decrease is partially attributable to a50.29% increase in provision for loan losses from $5,250 for the three monthsended September 30, 2009 to $7,890 for the same period in 2010, a 199.26%increase in professional fees from $405 for the three months endedSeptember 30, 2009 to $1,212 for the same period in 2010 and an increasein FDIC expense of 79.64% from $717 for the three months ended September 30,2009 to $1,288 for the same period in 2010.  We experienced an increase of$3,300 in operating expense, which was the result of our overall growth, atSeptember 30, 2010 compared to the same date in 2009. Further, during eachof the quarters ended September 30, 2010 and 2009, we made a dividendpayment to the U.S. Department of Treasury in an amount equal to $375 withrespect to shares of our Fixed Rate Cumulative Perpetual Preferred Stock,Series A.

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                 | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **% Change** | ** ** |
|                                                 |       |                             |       |       |       |   |   |
| Interest  income                                     |       | $                                | 19,511     |       | $          | 20,642 |   | (5.48 | )% |
| Interest  expense                                    |       | 7,178                            |       | 9,218      |       | (22.13 | ) |
| Net  interest income                                 |       | 12,333                           |       | 11,424     |       | 7.96 |   |
| Provision  for loan losses                           |       | 7,193                            |       | 5,250      |       | 37.01 |   |
| Net  interest income after provision for loan losses |       | 5,140                            |       | 6,174      |       | (16.75 | ) |
| Non-interest  income                                 |       | 1,295                            |       | 1,353      |       | (4.29 | ) |
| Non-interest  expense                                |       | 8,319                            |       | 5,019      |       | 65.75 |   |
| Net  (loss) income before taxes                      |       | (1,884                           | )          | 2,508      |       | (175.12 | ) |
| Income  tax (benefit) expense                        |       | (785                             | )          | 972        |       | (180.76 | ) |
| Net  (loss) income                                   |       | (1,099                           | )          | 1,536      |       | (171.55 | ) |
| Preferred  dividends                                 |       | (375                             | )          | (375       | )          | — |   |
| Net  (loss) income available to common shareholders  |       | $                                | (1,474     | )          | $          | 1,161 |   | (226.96 | )% |

 

**Provisionfor Loan Losses** - The provision for loan losses for the threemonths ended September 30, 2010 was $7,193, an increase of $1,943, or37.01%, above the provision of $5,250 for the same period in 2009.  Thisincrease was primarily a result of loan growth and increased net charge-offs**.**   At September 30, 2010, theloan loss reserve of $21,742 was 1.75% of gross loans of $1,241,669, comparedto a ratio of loan loss reserve to gross loans of 1.70% at September 30,2009.

 

**Non-interestIncome** - Non-interest income decreased by 4.29% or $58,from $1,353 in the quarter ended September 30, 2009 to $1,295 for the sameperiod in 2010. The decrease was primarily a result of losses on repossessionsand lower gains on securities sales during the quarter, partially offset byincreased other income.

 

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We did not earn any mortgageorigination fees during the three months ended September 30, 2010 comparedto $2 earned during the same period in 2009.  We recognized $38 on thesale of securities in the three months ended September 30, 2010 comparedwith $532 for the same period in 2009. The decreased gain on sale of securitiesin 2010 was a result of the market conditions and interest rate changes.

 

We had a loss onrepossessions of $1,980 during the three months ended September 30, 2010compared to a gain of $202 during the same period in 2009. This decrease wasprimarily a result of decreased sales prices in the wholesale market. We had a$55 loss on loan sale transactions in the three months ended September 30,2010, a 116.18% decrease compared to a gain of $340 during the same period in2009. This decrease was primarily as a result of decreased loan sales andgains, offsetting buy-backs on prior sales. Management will continue toconsider loan sale transactions if the opportunity for a reasonable return isavailable.

 

**Non-interestExpense** - Non-interest expense for the three months endedSeptember 30, 2010 was $8,319, an increase of $3,300 or 65.75%, over the$5,019 expensed in the same period in 2009.  Approximately 24.45% of theincrease was a result of increases in professional services expense. Approximately 17.30% of the increase in non-interest expense was attributableto FDIC insurance expense.

 

**Net InterestIncome** - Net interest income for the three months endedSeptember 30, 2010 was $12,333 compared to $11,424 for the same period in2009, an increase of $909 or 7.96%.  The increase in net interest incomewas largely attributable to a lower cost of funds.  The average net loanbalance increased by $55,573 or 4.88% from $1,139,510 for the three monthsended September 30, 2009 to $1,195,083 for the same period in 2010. Loangrowth was accompanied by an increase in average interest-bearing deposits from$1,184,337 for the three months ended September 30, 2009 to $1,214,770 forthe same period in 2010, an increase of $30,433 or 2.57%.

 

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

 
| ** **                    | ** ** | **September 30, 2010 change from** | ** ** |
|-------------------------------|------------|--------------------------------------------------------|------------|
| ** **                    | ** ** | **September 30, 2009 due to:**     | ** ** |
| ** **                    | ** ** | **Volume**                                             | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                                   |       |   |   |   |   |
| Interest  income              |       |                                                   |       |   |   |   |   |
| Loans                         |       | $                                                      | 917        |   | $ | (1,253 | ) | $ | (336 | ) |
| Securities  (taxable) (1)     |       | (287                                                   | )          | (525 | ) | (812 | ) |
| Federal  funds sold           |       | 15                                                     |       | 2 |   | 17 |   |
| **Total interest income**     |       | 645                                                    |       | (1,776 | ) | (1,131 | ) |
|                          |       |                                                   |       |   |   |   |   |
| Interest  expense             |       |                                                   |       |   |   |   |   |
| Deposits  (other than demand) |       | 219                                                    |       | (2,132 | ) | (1,913 | ) |
| Federal  funds purchased      |       | 5                                                      |       | (11 | ) | (6 | ) |
| Subordinated  debt            |       | (47                                                    | )          | (74 | ) | (121 | ) |
| **Total interest expense**    |       | 177                                                    |       | (2,217 | ) | (2,040 | ) |
|                          |       |                                                   |       |   |   |   |   |
| Net  interest income          |       | $                                                      | 468        |   | $ | 441 |   | $ | 909 |   |

 

----

(1)   Unrealizedgains/ (losses) of $375 and $(1,997) are excluded from yield calculation forthe three months ended September 30, 2010 and 2009, respectively.

 

**NetInterest Margin** - The net interest margin increased from 3.61% forthe three months ended September 30, 2009 to 3.77% for the same period in2010, primarily because of a decrease in our cost for deposits.  Interestincome decreased by $1,131 or 5.48%, from $20,642 during the three months endedSeptember 30, 2009 to $19,511 during the same period in 2010. The decreasewas primarily a result of decreased loan yields.  Average earning assetsincreased from $1,252,195 in the three months ended September 30, 2009 to$1,298,061 in the same period in 2010, an increase of $45,866 or3.66%, primarily as a result of loan growth. Average loan balancesincreased by $55,573 or 4.88% for the three months ended September 30,2010, from the same period in 2009.  The average yield on earning assetsdecreased to 5.97% from 6.53% in the three months ended September 30, 2009and in the same period in 2010. The decrease in the cost of funds, as apercentage of average balances, was primarily a result of decreases in thecosts of deposits.

 

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**InterestExpense** — Interest expense decreased from $9,218 in thethree months ended September 30, 2009 to $7,178 in the three months endedSeptember 30, 2010. The $2,040, or 22.13%, decrease in expense wasprimarily a result of a decrease in the cost of funds. Average interestearning liabilities increased by $26,816 or 2.16%.  The cost of fundsdecreased from 2.94% for the three months ended September 30, 2009 to2.24% for the same three months in 2010, a decrease of 70 basis points. Thedecrease was largely attributed to the maturing and being re-pricing of timedeposits.

 

**IncomeTaxes** - Our effective tax rate for the three months endedSeptember 30, 2010 was 41.67% compared to 38.76% for the three monthsended September 30, 2009.

 

**EfficiencyRatio** - Our efficiency ratio for the three months endedSeptember 30, 2010 and 2009 was 61.04% and 39.28%, respectively, anincrease of 2,176 basis points. The following table reflects the calculation ofthe efficiency ratio:

 
| ** **            | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **September 30,**           | ** ** |
| ** **            | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Non-interest  expense |       | $                                | 8,319      |   | $ | 5,019 |   |
|                  |       |                             |       |   |   |
| Net  interest income  |       | 12,333                           |       | 11,424 |   |
| Non-interest  income  |       | 1,295                            |       | 1,353 |   |
| Net  revenues         |       | $                                | 13,628     |   | $ | 12,777 |   |
|                  |       |                             |       |   |   |
| Efficiency  ratio     |       | 61.04                            | %          | 39.28 | % |

 

**Comparisonof Operating Results for the Nine Months Ended September 30, 2010 andSeptember 30, 2009**

 

**Net Income** - Net incomefor the nine months ended September 30, 2010 was $1,391, an increase of$9,791 or 116.56% compared to net loss of $8,400 for the nine months endedSeptember 30, 2009.  The increase is attributable to a 39.59%decrease in the provision for loan loss from $26,889 for the nine months endedSeptember 30, 2009 to $16,243 for the same period in 2010. We experiencedan increase of $5,202 in operating expense which was the result of our overallgrowth, including a $651 increase in loan collections expense for the nine monthsended September 30, 2010 compared to the same period in 2009, as well asan increase of $893 in professional fees.

 
| ** **                                           | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **% Change** | ** ** |
|                                                 |       |                            |       |       |       |   |   |
| Interest  income                                     |       | $                               | 60,631     |       | $          | 60,005 |   | 1.04 | % |
| Interest  expense                                    |       | 21,706                          |       | 28,290     |       | (23.27 | ) |
| Net  interest income                                 |       | 38,925                          |       | 31,715     |       | 22.73 |   |
| Provision  for loan losses                           |       | 16,243                          |       | 26,889     |       | (39.59 | ) |
| Net  interest income after provision for loan losses |       | 22,682                          |       | 4,826      |       | 370.00 |   |
| Non-interest  income (loss)                          |       | 2,876                           |       | (181       | )          | 1,688.95 |   |
| Non-interest  expense                                |       | 21,539                          |       | 16,337     |       | 31.84 |   |
| Net  income (loss) before taxes                      |       | 4,019                           |       | (11,692    | )          | 134.37 |   |
| Income  tax expense (benefit)                        |       | 1,503                           |       | (4,463     | )          | 133.68 |   |
| Net  income (loss)                                   |       | 2,516                           |       | (7,229     | )          | 134.80 |   |
| Preferred  dividends                                 |       | (1,125                          | )          | (1,171     | )          | 3.93 |   |
| Net  income (loss) available to common shareholders  |       | $                               | 1,391      |       | $          | (8,400 | ) | 116.56 | % |

 

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**Provisionfor Loan Losses** - The provision for loan losses for the nine monthsended September 30, 2010 was $16,243, a decrease of $10,646, or39.59%, from the provision of $26,889 expensed in the same period in2009.  This decrease was primarily a result of reduced charge-offs. AtSeptember 30, 2010, the loan loss reserve of $21,742 was 1.75% of grossloans of $1,241,669, compared to a ratio of loan loss reserve to gross loans of1.70% at September 30, 2009.

 

**Non-interestIncome** - Non-interest income increased by 1,688.95% or$3,057, from a loss of $181 in the nine months ended September 30, 2009 toa gain of $2,876 for the same period in 2010. The increase was primarily aresult of increased other income and gains on loan sales, partially offsetby increased losses on repossessions. Net loan sales demonstrated a gainof $475 and a loss of $649 for the nine-month periods ended September 30,2010 and 2009, respectively. This increase was primarily a result of timingdifferences. Management will continue to consider loan sale transactions if theopportunity for a reasonable return is available.

 

We did not earn any mortgageorigination fees during the nine months ended September 30, 2010 comparedto $22 during the same period in 2009, primarily as a result of thedetermination by management to cease mortgage loan originations for sale in thesecondary market. We recognized $734 on the sale of securities in the ninemonths ended September 30, 2010 compared with $870 for the same period in2009. This decrease over the periods was primarily a result of therestructuring of portfolios in response to the prevailing economic environment.

 

**Non-interestExpense** - Non-interest expense for the nine months endedSeptember 30, 2010 was $21,539, an increase of $5,202 or 31.84%, over the$16,337 expensed in the same period in 2009. Approximately 12.51% of theincrease was a result of increased loan collection expense and 15.51% ofthe increase was a result of increased personnel expenses. AtSeptember 30, 2010, the Bank had 97 full-time employees compared with 87full-time employees at September 30, 2009.

 

**NetInterest Income** — Net interest income for the nine months endedSeptember 30, 2010 was $38,925 compared to $31,715 for the same period in2009, a gain of $7,210 or 22.73%.  The increase in net interest income waslargely attributable to a reduction in the cost of funds.  The average netloan balance for the nine months ended September 30, 2010 increased by6.43% or $70,938 to $1,174,401 from $1,103,463 for that period in 2009. Loangrowth was accompanied by an increase in average interest-bearing deposits from$1,118,552 for the nine months ended September 30, 2009, to $1,212,837 forthe same period in 2010, an increase of $94,285 or 8.43%.

 

The following table outlinesthe components of net interest income for the nine-month periods endedSeptember 30, 2010 and 2009 and identifies the impact of changes in volumeand rate:

 
| ** **                    | ** ** | **September 30, 2010 change from** | ** ** |
|-------------------------------|------------|--------------------------------------------------------|------------|
| ** **                    | ** ** | **September 30, 2009 due to:**     | ** ** |
| ** **                    | ** ** | **Volume**                                             | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                                   |       |   |   |   |   |
| Interest  income              |       |                                                   |       |   |   |   |   |
| Loans                         |       | $                                                      | 3,532      |   | $ | (1,334 | ) | $ | 2,198 |   |
| Securities  (taxable) (1)     |       | (791                                                   | )          | (806 | ) | (1,597 | ) |
| Federal  funds sold           |       | 20                                                     |       | 5 |   | 25 |   |
| **Total interest income**     |       | 2,761                                                  |       | (2,135 | ) | 626 |   |
|                          |       |                                                   |       |   |   |   |   |
| Interest  expense             |       |                                                   |       |   |   |   |   |
| Deposits  (other than demand) |       | 2,111                                                  |       | (8,612 | ) | (6,501 | ) |
| Federal  funds purchased      |       | (58                                                    | )          | (7 | ) | (65 | ) |
| Subordinated  debt            |       | 18                                                     |       | (36 | ) | (18 | ) |
| **Total interest expense**    |       | 2,071                                                  |       | (8,655 | ) | (6,584 | ) |
|                          |       |                                                   |       |   |   |   |   |
| Net  interest income          |       | $                                                      | 690        |   | $ | 6,520 |   | $ | 7,210 |   |

 

----

(1)          Unrealized losses of $458and $843 are excluded from yield calculation for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

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**NetInterest Margin** - The net interest margin increased from 3.49% forthe nine months ended September 30, 2009 to 4.09% for the same period in2010, primarily because of a decrease in our cost for deposits.  Interestincome increased by $626 or 1.04%, from $60,005 during the nine months endedSeptember 30, 2009 to $60,631 during the same period in 2010. The increasewas primarily a result of increased loan volume.  Average earning assetsincreased from $1,215,020 in the nine months ended September 30, 2009 to$1,272,931 in the same period in 2010, an increase of $57,911 or4.77%, primarily as a result of loan growth. Average loan balancesincreased by $70,938 or 6.43% for the nine months ended September 30,2010, from the same period in 2009.  The average yield on earning assetsdecreased from 6.60% in the nine months ended September 30, 2009 to 6.37%in the same period in 2010. The decrease in the cost of funds, as a percentageof average balances was primarily a result of decreases in the cost ofdeposits.

 

**InterestExpense** — Interest expense decreased from $28,290 in thenine months ended September 30, 2009 to $21,706 in the nine months endedSeptember 30, 2010. While average interest earning liabilities increasedby $79,937 or 6.70%, the cost of funds decreased from 3.17% in the ninemonths ended September 30, 2009 to 2.28% during the same nine months in2010, a decrease of 89 basis points. The decrease was largely attributed to thematuring and re-pricing of time deposits.

 

**IncomeTaxes** — Our effective tax rate for the nine months endedSeptember 30, 2010 was 37.40% compared to 38.17% for the nine months endedSeptember 30, 2009. Management anticipates that tax rates in futureperiods will approximate the rates paid in 2010.

 

**EfficiencyRatio** — Our efficiency ratio for the nine months endedSeptember 30, 2010 and 2009 was 51.53% and 51.81%, respectively, adecrease of 28 basis points. The following table reflects the calculation ofthe efficiency ratio:

 
| ** **                  | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Non-interest  expense       |       | $                                                   | 21,539     |   | $ | 16,337 |   |
|                        |       |                                                |       |   |   |
| Net  interest income        |       | 38,925                                              |       | 31,715 |   |
| Non-interest  income (loss) |       | 2,876                                               |       | (181 | ) |
| Net  revenues               |       | $                                                   | 41,801     |   | $ | 31,534 |   |
|                        |       |                                                |       |   |   |
| Efficiency  ratio           |       | 51.53                                               | %          | 51.81 | % |

 

**AssetQuality** - Nonperforming assets, which includesnon-accruing loans, troubled debt, loans 90+ days past due, repossessions andother real estate owned, increased to $86,507 at September 30, 2010compared to $59,002 at September 30, 2009 and $58,355 at December 31,2009. As a result of seasonal factors related to the transportation industry,our nonperforming assets typically increase during the first quarter anddecrease throughout the remainder of the year. Repossessed assets, mainlytransportation assets, increased by $3,042 from $36,951 at December 31,2009 to $39,993 at March 31, 2010, decreased to $36,336 at June 30,2010 and then decreased to $32,747 at September 30, 2010. The firstquarter 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, theremainder of the increase in nonperforming assets between December 31,2009 and September 30, 2010 was primarily attributable to one real estateand three commercial and industrial loans with an aggregate principal amount of$19,690 outstanding at September 30, 2010, for which we were secured in anaggregate amount of $18,890 at September 30, 2010 and for which we hadreserves in an aggregate amount of $800 at September 30, 2010.

 

The loan loss provision of$16,243 for the first nine months of 2010 exceeded the net charge-offs of$14,414, resulting in a loan loss provision to net charge-off ratio of 112.7%.The allowance for loan losses at September 30, 2010 was $21,742, or 1.75%of total loans. The coverage ratio of allowance for loan losses to nonperformingloans at December 31, 2009, March 31, 2010, June 30, 2010 and September 30,2010 was 103.38%, 57.60%, 59.60% and 45.83%, respectively.

 

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*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 nine-monthperiods ended September 30, 2010 and 2009. The table is presented on a taxequivalent basis, as applicable.

 
| ** **                                          | ** ** | **Nine Months  Ended September 30,  2010** | ** ** | ** **   | ** ** | **Nine Months  Ended September 30,  2009** | ** ** | ** **  | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------|------------|-----------------------------------------------------------|------------|-------------|------------|
| ** **                                          | ** ** | **Average**                                               | ** ** | ** **   | ** ** | **Average**                                               | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                          | ** ** | **Balance**                                               | ** ** | **Interest** | ** ** | **Rate**                                                  | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                          |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Interest  earning assets                            |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Securities  (taxable) (1)                           |       | $                                                         | 81,329     |         | $          | 2,492                                                     |       | 4.07        | %          | $ | 104,123 |   | $ | 4,089 |   | 5.21 | % |
| Loans  (2) (3)                                 |       | 1,174,401                                                 |       | 58,102       |       | 6.61                                                      | %          | 1,103,463   |       | 55,904 |   | 6.77 | % |
| Federal  funds sold                                 |       | 17,201                                                    |       | 37           |       | 0.29                                                      | %          | 7,434       |       | 12 |   | 0.22 | % |
| **Total interest earning assets**                   |       | 1,272,931                                                 |       | 60,631       |       | 6.37                                                      | %          | 1,215,020   |       | 60,005 |   | 6.60 | % |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Non-interest  earning assets                        |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Cash  and due from banks                            |       | 14,315                                                    |       |         |       |                                                      |       | 8,905       |       |   |   |   |   |
| Net  fixed assets and equipment                     |       | 2,188                                                     |       |         |       |                                                      |       | 2,205       |       |   |   |   |   |
| Accrued  interest and other assets                  |       | 96,791                                                    |       |         |       |                                                      |       | 68,587      |       |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| **Total assets**                                    |       | $                                                         | 1,386,225  |         |       |                                                      |       |        | $          | 1,294,717 |   |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS EQUITY**             |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Interest-bearing  liabilities                       |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Deposits  (other than demand)                       |       | $                                                         | 1,212,837  |         | $          | 20,306                                                    |       | 2.24        | %          | $ | 1,118,552 |   | $ | 26,807 |   | 3.20 | % |
| Federal  funds purchased                            |       | 2,468                                                     |       | 10           |       | 0.54                                                      | %          | 16,596      |       | 75 |   | 0.60 | % |
| Subordinated  debt and other borrowings             |       | 33,629                                                    |       | 1,390        |       | 5.53                                                      | %          | 33,198      |       | 1,408 |   | 5.67 | % |
| **Total interest-bearing liabilities**              |       | 1,248,934                                                 |       | 21,706       |       | 2.32                                                      | %          | 1,168,346   |       | 28,290 |   | 3.24 | % |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Non-interest  bearing liabilities                   |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Non-interest  bearing demand deposits               |       | 23,204                                                    |       |         |       |                                                      |       | 23,855      |       |   |   |   |   |
| Other  liabilities                                  |       | 10,120                                                    |       |         |       |                                                      |       | 6,873       |       |   |   |   |   |
| Shareholders’  equity                          |       | 103,967                                                   |       |         |       |                                                      |       | 95,643      |       |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| **Total liabilities and shareholders’ equity** |       | $                                                         | 1,386,225  |         |       |                                                      |       |        | $          | 1,294,717 |   |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Net  interest spread                                |       | 4.05                                                      | %          |         |       |                                                      |       | 3.36        | %          |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |
| Net  interest margin                                |       | 4.09                                                      | %          |         |       |                                                      |       | 3.49        | %          |   |   |   |   |
|                                                |       |                                                      |       |         |       |                                                      |       |        |       |   |   |   |   |

 

----

(1)          Unrealized losses of $458and $843 are excluded from yield calculation for the nine months endedSeptember 30, 2010 and 2009, respectively.

(2)          Non-accrual loans areincluded in average loan balances, and loan fees of $4,636 and $3,951 areincluded in interest income for the nine months ended September 30, 2010and 2009, respectively.

(3)          Loans are presented net ofallowance for loan loss.

 

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

 

**Assets****—** Total assets at September 30, 2010 were$1,420,070, an increase of $36,638, or 2.65%, over total assets of $1,383,432at December 31, 2009. Loan growth was the primary reason for theincrease.  At September 30, 2010, net loans equaled $1,219,927, up$68,539, or 5.95%, over the December 31, 2009 total net loans of$1,151,388. The cash and cash equivalents balance decreased by $12,176 betweenDecember 31, 2009 and September 30, 2010, as funds were used to fundloans made in the first nine months 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 atSeptember 30, 2010 were $1,307,174 or 92.05% of total assets of$1,420,070.  Earning assets at December 31, 2009 were $1,260,066 or91.08% of total assets of $1,383,432.

 

**Loans** — We had totalnet loans of $1,219,927 at September 30, 2010. The following table setsforth the composition of our loan portfolio at September 30, 2010 andDecember 31, 2009:

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Real  estate                            |       |                   |       |                  |       |
| Construction                            |       | $                      | 118,376    |                  | $          | 142,109 |   |
| 1  to 4 family residential              |       | 43,639                 |       | 42,425                |       |
| Other                                   |       | 290,383                |       | 259,220               |       |
| Commercial,  financial and agricultural |       | 671,013                |       | 649,475               |       |
| Consumer                                |       | 3,547                  |       | 3,476                 |       |
| Tax  leases                             |       | 114,711                |       | 74,596                |       |
|                                    |       |                   |       |                  |       |
| **Total loans**                         |       | 1,241,669              |       | 1,171,301             |       |
| Less:  allowance for loan losses        |       | (21,742                | )          | (19,913               | )          |
|                                    |       |                   |       |                  |       |
| Net  loans                              |       | $                      | 1,219,927  |                  | $          | 1,151,388 |   |

 

Our real estate constructionloan portfolio decreased 16.70% from December 31, 2009 to September 30,2010. This change was primarily the result of construction loans being repaidat a faster rate than the Bank made new loans. Our tax lease loan portfolioincreased 53.78% from December 31, 2009 to September 30, 2010primarily because of the favorable market environment for such loans.

 

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

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Real  estate                            |       |                   |       |                  |       |
| Construction                            |       | 9.53                   | %          | 12.13                 | %          |
| 1  to 4 family residential              |       | 3.51                   |       | 3.62                  |       |
| Other                                   |       | 23.39                  |       | 22.13                 |       |
| Commercial,  financial and agricultural |       | 54.04                  |       | 55.45                 |       |
| Consumer                                |       | 0.29                   |       | 0.30                  |       |
| Tax  leases                             |       | 9.24                   |       | 6.37                  |       |
|                                    |       |                   |       |                  |       |
| **Total loans**                         |       | 100.00                 | %          | 100.00                | %          |

 

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The following table setsforth the composition of our commercial, financial and agricultural loanportfolio by source at September 30, 2010 and December 31, 2009:

 
| ** **         | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | **Amount**                   | ** ** | **%**                       | ** ** | **Amount** | ** ** | **%** | ** ** |
|               |       |                         |       |                        |       |   |   |   |   |
| Direct  funding    |       | $                            | 417,112    |                        | 62.16      | % | $ | 351,933 |   | 54.19 | % |
| Indirect  funding: |       |                         |       |                        |       |   |   |   |   |
| Large              |       | 107,449                      |       | 16.01                       |       | 130,573 |   | 20.10 |   |
| Small              |       | 146,452                      |       | 21.83                       |       | 166,969 |   | 25.71 |   |
| **Total**          |       | $                            | 671,013    |                        | 100.00     | % | $ | 649,475 |   | 100.00 | % |

 

Our direct funding loansincreased 7.97% from December 31, 2009 to September 30, 2010primarily because of shifts in the market place.

 

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 atSeptember 30, 2010 and December 31, 2009:

 
| ** **                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Non-accrual  loans:                                                                                     |       |                   |       |                  |       |
| Number                                                                                                  |       | 492                    |       | 225                   |       |
| Amount                                                                                                  |       | $                      | 47,351     |                  | $          | 19,151 |   |
|                                                                                                    |       |                   |       |                  |       |
| Accruing  loans which are contractually past due 90 days or more as to principal and  interest payments |       |                   |       |                  |       |
| Number                                                                                                  |       | 83                     |       | 30                    |       |
| Amount                                                                                                  |       | $                      | 4,340      |                  | $          | 1,328 |   |
|                                                                                                    |       |                   |       |                  |       |
| Loans  defined as troubled debt restructurings :                                                        |       |                   |       |                  |       |
| Number                                                                                                  |       | 1                      |       | 1                     |       |
| Amount                                                                                                  |       | $                      | 94         |                  | $          | 111 |   |
|                                                                                                    |       |                   |       |                  |       |
| Gross  income lost to non-accrual loans                                                                 |       | $                      | 2,163      |                  | $          | 2,708 |   |
|                                                                                                    |       |                   |       |                  |       |
| Interest  income included in net income on the accruing loans                                           |       | $                      | 365        |                  | $          | 112 |   |

 

As of September 30,2010 and December 31, 2009, there were no loans which represented trendsor uncertainties that management reasonably expects will materially impactfuture operating results, liquidity, or capital resources that have not beendisclosed in the above table and classified for regulatory purposes as doubtfulor substandard.

 

The Bank had no tax-exemptloans during the quarter ended September 30, 2010 or the year endedDecember 31, 2009. The Bank had no loans outstanding to foreignborrowers at September 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 1.21% for the nine monthsended September 30, 2010, and 1.85% for the nine months ended September 30,2009. The ALL as a percentage of the outstanding loans at the end of the periodwas 1.75% at September 30, 2010, and 1.70% at September 30, 2009.

 

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

 
| ** **                                                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                         | ** ** | **2010**               | ** ** | **2009**               | ** ** |
| Allowance  for loan losses at beginning of period                                                  |       | $                      | 19,913     |                   | $          | 13,454 |   |
| Charge-offs:                                                                                       |       |                   |       |                   |       |
| Real  estate:                                                                                      |       |                   |       |                   |       |
| Construction                                                                                       |       | 1,117                  |       | 2,918                  |       |
| 1  to 4 family residential                                                                         |       | 343                    |       | 346                    |       |
| Other                                                                                              |       | —                 |       | 346                    |       |
| Commercial,  financial and agricultural                                                            |       | 13,219                 |       | 18,242                 |       |
| Consumer                                                                                           |       | 14                     |       | 13                     |       |
| **Total Charge-offs**                                                                              |       | 14,693                 |       | 21,865                 |       |
|                                                                                               |       |                   |       |                   |       |
| Recoveries:                                                                                        |       |                   |       |                   |       |
| Real  estate:                                                                                      |       |                   |       |                   |       |
| Construction                                                                                       |       | 77                     |       | —                 |       |
| 1  to 4 family residential                                                                         |       | —                 |       | —                 |       |
| Other                                                                                              |       | 33                     |       | —                 |       |
| Commercial,  financial and agricultural                                                            |       | 166                    |       | 1,211                  |       |
| Consumer                                                                                           |       | 3                      |       | 1                      |       |
| **Total Recoveries**                                                                               |       | 279                    |       | 1,212                  |       |
|                                                                                               |       |                   |       |                   |       |
| Net  Charge-offs                                                                                   |       | 14,414                 |       | 20,653                 |       |
|                                                                                               |       |                   |       |                   |       |
| Provision  for loans charged to expense                                                            |       | 16,243                 |       | 26,889                 |       |
| Allowance  for loan losses at end of period                                                        |       | $                      | 21,742     |                   | $          | 19,690 |   |
|                                                                                               |       |                   |       |                   |       |
| Net  charge-offs as a percentage of average total loans outstanding during the  period             |       | 1.21                   | %          | 1.85                   | %          |
|                                                                                               |       |                   |       |                   |       |
| Ending  allowance for loan losses as a percentage of total loans outstanding at end  of the period |       | 1.75                   | %          | 1.70                   | %          |

 

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 September 30, 2010 was $79,242 compared to $93,668at December 31, 2009.  We view the securities portfolio as a sourceof income and liquidity.  The securities portfolio decreased to 5.58% oftotal assets at September 30, 2010 and 6.77% of total assets atDecember 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.

 

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**Depositsand Funding** — Total deposits at September 30, 2010 were$1,261,005, up $18,463 or 1.49% over the December 31, 2009 totaldeposits of $1,242,542. Total average deposits during the nine months endedSeptember 30, 2010 were $1,236,041, an increase of $93,634, or 8.20% overthe total average deposits of $1,142,407 during the nine months endedSeptember 30, 2009. Average non-interest bearing deposits decreased by$651, or 2.73%, from $23,855 in the nine months ended September 30, 2009,to $23,204 in the nine months ended September 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 0.21%. This strategy was primarilyexecuted to reduce overnight liquidity risk and to mitigate interest ratesensitivity on the balance sheet. At September 30, 2010, the maximum availableadvance was $5,480 with no outstanding principal balance. At December 31,2009, there was no outstanding principal balance. At September, 2010, the totalcapital stock balance was 2,169 shares with a value of $2,169.

 

The following table setsforth average deposit balances for the nine months ended September 30,2010 and 2009 and the average rates paid on those balances:

 
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                           | ** ** | ** **                                              | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                           | ** ** | **Average**                                             | ** ** | **Rate** | ** ** | **Average** | ** ** | **Rate** | ** ** |
| ** **                           | ** ** | **Balance**                                             | ** ** | **Paid (1)** | ** ** | **Balance** | ** ** | **Paid (1)** | ** ** |
| Types of Deposits:                   |       |                                                    |       |   |   |   |   |   |   |
| Non-interest-bearing demand deposits |       | $                                                       | 23,204     |   | — | % | $ | 23,855 |   | — | % |
| Interest-bearing demand deposits     |       | 5,937                                                   |       | 0.19 |   | 6,991 |   | 0.14 |   |
| Money market accounts                |       | 48,168                                                  |       | 1.78 |   | 42,851 |   | 0.77 |   |
| Savings accounts                     |       | 260,107                                                 |       | 2.16 |   | 48,942 |   | 2.22 |   |
| IRA accounts                         |       | 37,100                                                  |       | 2.71 |   | 37,279 |   | 3.82 |   |
| Purchased time deposits              |       | 505,476                                                 |       | 2.35 |   | 550,128 |   | 3.54 |   |
| Time deposits                        |       | 356,049                                                 |       | 2.18 | % | 432,361 |   | 3.13 | % |
| **Total deposits**                   |       | $                                                       | 1,236,041  |   |   |   | $ | 1,142,407 |   |   |   |

 

----

(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 wasFebruary 4, 2011 and the loan was secured by 100% of all outstanding stockof the Bank. On August 11, 2010, we paid off the outstanding balance ofthe loan.

 

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**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’s obligationto make advances to TCB under this line of credit terminates on March 29,2012. TCB had outstanding borrowings of $2,423 under this line of credit atSeptember 30, 2010. The loan is guaranteed by us and secured by inventoryand 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 September 30, 2010, we hadunfunded loan commitments outstanding of $101,790 and standby letters ofcredit and financial guarantees of $11,009. 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 September 30,2010 totaling $59,180.

 

**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 areaccessible.  Liquidity requirements can also be met through short-termborrowings or the disposition of short-term assets which are generally matchedto correspond to 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.

 

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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 capitalrequirements, assets are assigned risk-weights of 0.00% to 100.00%, dependingprimarily on the regulatory assigned levels of credit risk associated with suchassets. Off-balance sheet items are considered in the calculation ofrisk-adjusted assets through conversion factors established by bank regulators.The framework for calculating risk-based capital requires banks and bankholding companies to meet the regulatory minimums of 4.00% Tier I and8.00% total risk-based capital. In 1990, regulators added a leveragecomputation to the capital requirements, comparing Tier I capital to totalaverage assets less goodwill.

 

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 September 30, 2010and December 31, 2009, the Bank’s and our risk-based capital ratios andthe minimums for capital adequacy and to be considered well capitalized underthe Federal Reserve Board’s prompt corrective action guidelines were asfollows:

 
| ** **                                      | ** ** | ** **             | ** ** | ** **            | ** ** | ** **           | ** ** | **Minimum to**    | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                      | ** ** | ** **             | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **be considered** | ** ** |
| ** **                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **well-**              | ** ** |
| ** **                                      | ** ** | **2010**               | ** ** | **2009**              | ** ** | **adequacy**         | ** ** | **capitalized**        | ** ** |
| ** **                                      | ** ** | **%**                  | ** ** | **%**                 | ** ** | **%**                | ** ** | **%**                  | ** ** |
| **Tier 1 leverage ratio**                       |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                        |       | 9.09                   |       | 8.74                  |       | 4.00                 |       | 5.00                   |       |
| Tennessee  Commerce Bancorp, Inc.          |       | 10.34                  |       | 8.93                  |       | 4.00                 |       | N/A                    |       |
|                                            |       |                   |       |                  |       |                 |       |                   |       |
| **Tier 1 core capital to risk-weighted assets** |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                        |       | 9.80                   |       | 9.37                  |       | 4.00                 |       | 6.00                   |       |
| Tennessee  Commerce Bancorp, Inc.          |       | 11.16                  |       | 9.54                  |       | 4.00                 |       | N/A                    |       |
|                                            |       |                   |       |                  |       |                 |       |                   |       |
| **Total capital to risk-weighted assets**       |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                        |       | 11.06                  |       | 10.63                 |       | 8.00                 |       | 10.00                  |       |
| Tennessee  Commerce Bancorp, Inc.          |       | 12.42                  |       | 10.83                 |       | 8.00                 |       | N/A                    |       |

 

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

 

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**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 September 30, 2010. Management uses the one-year gap as theappropriate time period for setting strategy.

 

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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                                              |       | $            | —     |       | $          | 8,005      |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 8,005 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |             |       |       |       |
| U.S.  government agencies                                        |       | —       |       | 30         |       | 93         |       | 535       |       | 30,833           |       | 31,491     |       |
| U.S.  Treasuries                                                 |       | —       |       | 2,000      |       | —     |       | —    |       | —           |       | 2,000      |       |
| Corporate  bonds                                                 |       | —       |       | 9          |       | 21         |       | 127       |       | 45,594           |       | 45,751     |       |
| **Total securities**                                             |       | —       |       | 2,039      |       | 114        |       | 662       |       | 76,427           |       | 79,242     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| **Total loans**                                                  |       | —       |       | 181,140    |       | 371,526    |       | 622,816   |       | 66,187           |       | 1,241,669  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| **Total interest-earning assets**                                |       | —       |       | 191,184    |       | 371,640    |       | 623,478   |       | 142,614          |       | 1,328,916  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  assets                                                    |       | —       |       | —     |       | —     |       | —    |       | 91,154           |       | 91,154     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| **Total assets**                                                 |       | —       |       | 191,184    |       | 371,640    |       | 623,478   |       | 233,768          |       | 1,420,070  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest-bearing  liabilities                                    |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest  checking                                               |       | $            | —     |       | $          | 420        |       | $         | 1,067      |             | $          | 2,740      |       | $ | 955 |   | $ | 5,182 |   |
| Money  market and savings                                        |       | —       |       | 35,922     |       | 82,221     |       | 171,491   |       | 53,462           |       | 343,096    |       |
| Time  deposits                                                   |       | —       |       | 127,480    |       | 327,404    |       | 422,009   |       | 9,892            |       | 886,785    |       |
| **Total deposits**                                               |       | —       |       | 163,822    |       | 410,692    |       | 596,240   |       | 64,309           |       | 1,235,063  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Federal  funds purchased                                         |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Short-term  debt                                                 |       | —       |       | —     |       | —     |       | —    |       | —           |       | —     |       |
| Subordinated  debt and other borrowings                          |       | —       |       | —     |       | —     |       | 2,423     |       | 23,198           |       | 25,621     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| **Total interest-bearing liabilities**                           |       | —       |       | 163,822    |       | 410,692    |       | 598,663   |       | 87,507           |       | 1,260,684  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 35,548           |       | 35,548     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Shareholders  equity                                             |       | —       |       | —     |       | —     |       | —    |       | 123,838          |       | 123,838    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| **Total liabilities and shareholders equity**                    |       | $            | —     |       | $          | 163,822    |       | $         | 410,692    |             | $          | 598,663    |       | $ | 246,893 |   | $ | 1,420,070 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate  sensitive gap by period                                    |       | $            | —     |       | $          | 27,362     |       | $         | (39,052    | )                | $          | 24,815     |       | $ | 55,107 |   |   |   |
| Cumulative  gap                                                  |       |         |       | $          | 27,362     |       | $          | (11,690   | )          | $                | 13,125     |       | $          | 68,232 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Cumulative  gap as a percentage of total assets                  |       |         |       | 1.93       | %          | (0.82      | )%         | 0.92      | %          | 4.80             | %          |       |       |
| Rate  sensitive assets / rate sensitive liabilities (cumulative) |       | $            | —     |       | $          | 1.17       |       | $         | 0.98       |             | $          | 1.01       |       | $ | 1.05 |   |   |   |

 

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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. AtSeptember 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 September 30, 2010, we were in compliance with thisguideline.

 

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 disclosure controlsand procedures, as defined in Rule 13a-15(e) promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. We carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe 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 endedSeptember 30, 2010 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART II: OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

Inconnection with litigation previously disclosed in our Annual Report on Form 10-Kfiled with the SEC on March 9, 2010 and our Quarterly Report on Form 10-Qfiled with the SEC on August 12, 2010, all lawsuits, administrativeproceedings, administrative orders and claims relating to actions brought by oron behalf of our former Chief Financial Officer have been dismissed.

 

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**ITEM 1A.RISK FACTORS.**

 

The following additional risk factor supplementsour risk factors included in Part I, Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2009, as filed with the Securities and ExchangeCommission on March 9, 2010, and our Quarterly Report on Form 10-Q for thequarter ended June 30, 2010, as filed with the Securities and ExchangeCommission on August 12, 2010:

 

***In the future we may become subject to informal or formal enforcementactions that could have a material adverse effect on our business, operations,financial condition, results of operations or the value of our common stock.***

 

Neither we nor the Bank iscurrently under a formal enforcement action. Following a review of us by theFederal Reserve Bank at its inspection of us as of June 30, 2009, which wasupdated through December 31, 2009, the Federal Reserve Bank instructed ourboard of directors to adopt, no later than August 7, 2010, a board resolutionwhereby we will agree to obtain the written approval of the Federal ReserveBank prior to:

 

· incurring additionalindebtedness at the parent level, including indebtedness associated with trustpreferred securities;

 

· taking any action thatwould cause a change in debt instruments relating to indebtedness incurred atthe parent level;

 

· declaring or payingdividends to common or preferred shareholders;

 

· reducing our capitalposition by purchasing or redeeming treasury stock; and

 

· making any distributions ofinterest, principal or other sums on subordinated debentures or trust preferredsecurities.

 

Our board of directorsapproved such a resolution prior to the deadline set by the Federal ReserveBank. As of November 8, 2010, we have been approved by the Federal Reserve Bankto make dividend payments on our Fixed Rate Cumulative Perpetual PreferredStock, Series A that are due on November 15, 2010 and distributions for ouroutstanding trust preferred securities that are due on December 15 and 30,2010. We can provide no assurance, however, that the Federal Reserve Bank willapprove future dividend and distribution payments on these securities.

 

Following the delivery to usof a Joint Report of Examination from the FDIC and the Tennessee Department ofFinancial Institutions, or TDFI,  inJanuary 2010 in connection with a regularly scheduled examination of the Bankin July 2009, the FDIC and TDFI indicated that they were considering aninformal enforcement action in the form of a memorandum of understanding, orMOU,  an informal agreement between theBank and its regulators that seeks to obtain corrective action by identifyingthe Bank’s problem areas and establishing responsibility for ensuring thatdeficiencies are addressed. In anticipation of the regulators directing theBank to maintain higher levels of capital, the board of directors of the Bankadopted a series of resolutions putting into place responsive measures tostrengthen the Bank’s capital position and overall balance sheet. Thesemeasures included (i) maintaining certain capital levels exceeding the minimumlevels required under current regulations to be “well capitalized,” (ii) makingprovisions to increase our allowance for loan and lease losses and (iii)reducing the level of classified assets. To date, however, no MOU has beenentered into by the Bank.

 

The TDFI and the FDICperformed an inspection of the Bank from August 2, 2010 to September 3, 2010and are currently in the process of finalizing a new Joint Report ofExamination based on this examination. The examination remains open withongoing discussions regarding the classification of loans. We can provide noassurance that the Bank will not become subject to an informal or formalenforcement action arising from the completion of this examination.

 

Any enforcement action,whether informal or formal, to which we or the Bank become subject may includea varying degree of requirements or limitations in addition to those previouslyadopted by board resolution, as described above, including, among other things,restrictions on our ability to develop any new business, as well as restrictionson our existing business, and requirements that we raise additional capital,require increased levels of loan and lease loss allowance and/or dispose ofcertain assets and liabilities within a prescribed period of time, or both. Theterms of any such enforcement action could have a material adverse effect onour business, operations, financial condition, results of operations and thevalue of our common stock.

 

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**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) |
| 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.                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                 |

 

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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)                           |
|                   |   |                                   |
|                   |   |                                   |
| November 12, 2010 |   | /s/ Frank Perez                        |
| (Date)                 |   | Frank Perez                            |
|                   |   | Chief Financial Officer                |

 

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**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) |
| 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.                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                 |

 

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