Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(MarkOne)**

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

 

**Forthe quarterly period ended September 30, 2009**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**CommissionFile Number 000-51281**

 

**TENNESSEECOMMERCE BANCORP, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

**Tennessee** | ** ** | **37067**            |
| (Address of  principal executive offices)                              |       | (Zip Code)           |

 

**(615) 599-2274**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

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

 

Indicate by check markwhether registrant (1) has filed reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe 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“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filero                      |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filero                        |   | 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 5,2009 there were 4,742,944 shares of common stock, $0.50 par value per share,issued and outstanding.

 

 

 

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Table of Contents

 

**TennesseeCommerce Bancorp, Inc.**

 

Table of Contents

 
| Part I  | Financial Information                                                                                                                                                      |   |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                                                                       |   |
| Item 1.      | Financial Statements                                                                                                                                                       |   |
|         |                                                                                                                                                                       |   |
|         | Consolidated  Balance Sheets at September 30, 2009 (unaudited) and December 31,  2008                                                                            | 3      |
|         |                                                                                                                                                                       |   |
|         | Consolidated  Statements of Income (unaudited) for the Nine Months Ended September 30,  2009 and 2008 and for the Three Months Ended September 30, 2009 and 2008 | 4      |
|         |                                                                                                                                                                       |   |
|         | Consolidated  Statements of Changes in Shareholders’ Equity (unaudited) for the Nine Months  Ended September 30, 2009 and 2008                                   | 5      |
|         |                                                                                                                                                                       |   |
|         | Consolidated  Statements of Cash Flows (unaudited) for the Nine Months Ended  September 30, 2009 and 2008                                                             | 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                                                                                                                | 26     |
|         |                                                                                                                                                                       |   |
| Item 4.      | Controls and  Procedures                                                                                                                                                   | 28     |
|         |                                                                                                                                                                       |   |
| Part II | Other Information                                                                                                                                                          | 28     |
|         |                                                                                                                                                                       |   |
| Item 1A.     | Risk Factors                                                                                                                                                               | 28     |
|         |                                                                                                                                                                       |   |
| Item 4.      | Submission  of Matters to a Vote of Security Holders                                                                                                                       | 28     |
|         |                                                                                                                                                                       |   |
| Item 6.      | Exhibits                                                                                                                                                                   | 29     |
|         |                                                                                                                                                                       |   |
| Signatures   |                                                                                                                                                                       | 30     |

 

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2009(UNAUDITED) AND DECEMBER 31, 2008

 
| **(Dollars in thousands, except  share data)**                                                                                                                                                                                                            | ** ** | **September 30,********2009** | ** ** | **December 31,********2008 (1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                    |       |                               |       |                                  |       |
| Cash  and due from banks                                                                                                                                                                                                                                                      |       | $                                  | 17,038     |                                  | $          | 5,260 |   |
| Federal  funds sold                                                                                                                                                                                                                                                           |       | 8,660                              |       | 35,538                                |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                    |       | 25,698                             |       | 40,798                                |       |
|                                                                                                                                                                                                                                                                          |       |                               |       |                                  |       |
| Securities  available for sale                                                                                                                                                                                                                                                |       | 86,000                             |       | 101,290                               |       |
|                                                                                                                                                                                                                                                                          |       |                               |       |                                  |       |
| Loans                                                                                                                                                                                                                                                                         |       | 1,159,705                          |       | 1,036,725                             |       |
| Allowance  for loan losses                                                                                                                                                                                                                                                    |       | (19,690                            | )          | (13,454                               | )          |
| Net  loans                                                                                                                                                                                                                                                                    |       | 1,140,015                          |       | 1,023,271                             |       |
|                                                                                                                                                                                                                                                                          |       |                               |       |                                  |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                  |       | 2,057                              |       | 2,330                                 |       |
| Accrued  interest receivable                                                                                                                                                                                                                                                  |       | 8,799                              |       | 8,115                                 |       |
| Restricted  equity securities                                                                                                                                                                                                                                                 |       | 2,169                              |       | 1,685                                 |       |
| Income  tax receivable                                                                                                                                                                                                                                                        |       | 2,037                              |       | 4,430                                 |       |
| Bank-owned  life insurance                                                                                                                                                                                                                                                    |       | 25,472                             |       | —                                |       |
| Other  assets                                                                                                                                                                                                                                                                 |       | 43,504                             |       | 36,165                                |       |
| Total  assets                                                                                                                                                                                                                                                                 |       | $                                  | 1,335,751  |                                  | $          | 1,218,084 |   |
|                                                                                                                                                                                                                                                                          |       |                               |       |                                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                 |       |                               |       |                                  |       |
| Liabilities                                                                                                                                                                                                                                                                   |       |                               |       |                                  |       |
| Deposits                                                                                                                                                                                                                                                                      |       |                               |       |                                  |       |
| Non-interest-bearing                                                                                                                                                                                                                                                          |       | $                                  | 25,714     |                                  | $          | 24,217 |   |
| Interest-bearing                                                                                                                                                                                                                                                              |       | 1,176,571                          |       | 1,044,926                             |       |
| Total  deposits                                                                                                                                                                                                                                                               |       | 1,202,285                          |       | 1,069,143                             |       |
|                                                                                                                                                                                                                                                                          |       |                               |       |                                  |       |
| Accrued  interest payable                                                                                                                                                                                                                                                     |       | 2,537                              |       | 3,315                                 |       |
| Accrued  dividend payable                                                                                                                                                                                                                                                     |       | 188                                |       | —                                |       |
| Short-term  borrowings                                                                                                                                                                                                                                                        |       | 10,000                             |       | 10,000                                |       |
| Accrued  bonuses                                                                                                                                                                                                                                                              |       | 52                                 |       | 917                                   |       |
| Deferred  tax liability                                                                                                                                                                                                                                                       |       | 3,190                              |       | 8,695                                 |       |
| Other  liabilities                                                                                                                                                                                                                                                            |       | 1,529                              |       | 1,069                                 |       |
| Long-term  subordinated debt                                                                                                                                                                                                                                                  |       | 23,198                             |       | 23,198                                |       |
| Total  liabilities                                                                                                                                                                                                                                                            |       | 1,242,979                          |       | 1,116,337                             |       |
| Shareholders’  equity                                                                                                                                                                                                                                                    |       |                               |       |                                  |       |
| Preferred  stock, 1,000,000 shares authorized; 30,000 shares of $0.50 par value Fixed  Rate Cumulative Perpetual, Series A issued and outstanding at  September 30, 2009 and December 31, 2008                                                                 |       | 15,000                             |       | 15,000                                |       |
| Common  stock, $0.50 par value; 20,000,000 and 10,000,000 shares authorized at  September 30, 2009 and December 31, 2008, respectively; 4,733,712  and 4,731,696 shares issued and outstanding at September 30, 2009 and  December 31, 2008, respectively |       | 2,371                              |       | 2,366                                 |       |
| Common  stock warrant                                                                                                                                                                                                                                                         |       | 453                                |       | 453                                   |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                   |       | 60,321                             |       | 59,946                                |       |
| Retained  earnings                                                                                                                                                                                                                                                            |       | 14,780                             |       | 23,180                                |       |
| Accumulated  other comprehensive (loss) income                                                                                                                                                                                                                                |       | (153                               | )          | 802                                   |       |
| Total  shareholders’ equity                                                                                                                                                                                                                                              |       | 92,772                             |       | 101,747                               |       |
|                                                                                                                                                                                                                                                                          |       |                               |       |                                  |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                                                                              |       | $                                  | 1,335,751  |                                  | $          | 1,218,084 |   |

 

----

(1) The balancesheet at December 31, 2008 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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TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

NINE MONTHS ENDEDSEPTEMBER 30, 2009 AND 2008

THREE MONTHS ENDEDSEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

 
| ** **                                                             | ** ** | **Nine Months Ended September 30,** | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(Dollars in thousands, except share data)** | ** ** | **2009**                                                | ** ** | **2008**                                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  income                                                       |       |                                                    |       |                                                     |       |   |   |   |   |
| Loans,  including fees                                                 |       | $                                                       | 55,904     |                                                     | $          | 52,125 |   | $ | 19,334 |   | $ | 18,528 |   |
| Securities                                                             |       | 4,089                                                   |       | 3,398                                                    |       | 1,301 |   | 1,221 |   |
| Federal  funds sold                                                    |       | 12                                                      |       | 148                                                      |       | 7 |   | 7 |   |
| Total  interest income                                                 |       | 60,005                                                  |       | 55,671                                                   |       | 20,642 |   | 19,756 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Interest  expense                                                      |       |                                                    |       |                                                     |       |   |   |   |   |
| Deposits                                                               |       | 26,807                                                  |       | 29,340                                                   |       | 8,724 |   | 9,902 |   |
| Other                                                                  |       | 1,483                                                   |       | 1,199                                                    |       | 494 |   | 580 |   |
| Total  interest expense                                                |       | 28,290                                                  |       | 30,539                                                   |       | 9,218 |   | 10,482 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Net  interest income                                                   |       | 31,715                                                  |       | 25,132                                                   |       | 11,424 |   | 9,274 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Provision  for loan losses                                             |       | 26,889                                                  |       | 5,790                                                    |       | 5,250 |   | 1,850 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Net  interest income after provision for loan losses                   |       | 4,826                                                   |       | 19,342                                                   |       | 6,174 |   | 7,424 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Non-interest  income                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Service  charges on deposit accounts                                   |       | 132                                                     |       | 89                                                       |       | 41 |   | 40 |   |
| Securities  gains (losses)                                             |       | 870                                                     |       | (67                                                      | )          | 532 |   | (97 | ) |
| Gain  on sale of loans                                                 |       | (649                                                    | )          | 1,419                                                    |       | 340 |   | 28 |   |
| (Loss)  gain on repossessions                                          |       | (1,165                                                  | )          | (172                                                     | )          | 202 |   | 95 |   |
| Other                                                                  |       | 631                                                     |       | 159                                                      |       | 238 |   | 32 |   |
| Total  non-interest income                                             |       | (181                                                    | )          | 1,428                                                    |       | 1,353 |   | 98 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Non-interest  expense                                                  |       |                                                    |       |                                                     |       |   |   |   |   |
| Salaries  and employee benefits                                        |       | 7,428                                                   |       | 6,151                                                    |       | 2,088 |   | 2,058 |   |
| Occupancy  and equipment                                               |       | 1,186                                                   |       | 1,037                                                    |       | 394 |   | 315 |   |
| Data  processing fees                                                  |       | 1,148                                                   |       | 910                                                      |       | 449 |   | 376 |   |
| FDIC  expense                                                          |       | 1,868                                                   |       | 486                                                      |       | 717 |   | 170 |   |
| Professional  fees                                                     |       | 1,393                                                   |       | 1,531                                                    |       | 405 |   | 627 |   |
| Other                                                                  |       | 3,314                                                   |       | 2,325                                                    |       | 966 |   | 900 |   |
| Total  non-interest expense                                            |       | 16,337                                                  |       | 12,440                                                   |       | 5,019 |   | 4,446 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| (Loss)  income before income taxes                                     |       | (11,692                                                 | )          | 8,330                                                    |       | 2,508 |   | 3,076 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Income  tax (benefit) expense                                          |       | (4,463                                                  | )          | 3,223                                                    |       | 972 |   | 1,190 |   |
| Net  (loss) income                                                     |       | (7,229                                                  | )          | 5,107                                                    |       | 1,536 |   | 1,886 |   |
| Preferred  stock dividends and accretion                               |       | (1,171                                                  | )          | —                                                   |       | (375 | ) | — |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Net  (loss) income available to common shareholders                    |       | $                                                       | (8,400     | )                                                        | $          | 5,107 |   | $ | 1,161 |   | $ | 1,886 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Earnings  per share (EPS):                                             |       |                                                    |       |                                                     |       |   |   |   |   |
| Basic  EPS                                                             |       | $                                                       | (1.77      | )                                                        | $          | 1.08 |   | $ | 0.25 |   | $ | 0.40 |   |
| Diluted  EPS                                                           |       | (1.77                                                   | )          | 1.05                                                     |       | 0.25 |   | 0.39 |   |
|                                                                   |       |                                                    |       |                                                     |       |   |   |   |   |
| Weighted  average shares outstanding:                                  |       |                                                    |       |                                                     |       |   |   |   |   |
| Basic                                                                  |       | 4,733,882                                               |       | 4,731,039                                                |       | 4,736,823 |   | 4,731,696 |   |
| Diluted                                                                |       | 4,733,882                                               |       | 4,878,150                                                |       | 4,736,823 |   | 4,851,831 |   |

 

See accompanying notes toconsolidated financial statements.

 

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TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY

NINE MONTHS ENDEDSEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

 
| ** **                                                                                  | ** ** | ** **    | ** ** | ** ** | ** ** | **Warrant to** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------|------------|------------|------------|---------------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                  | ** ** | ** **    | ** ** | ** ** | ** ** | **Purchase**        | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**              | ** ** | **Total**              | ** ** |
| ** **                                                                                  | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common**          | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | **Comprehensive**      | ** ** | **Shareholders’** | ** ** |
| **(Dollars in thousands, except share  data)**                          | ** ** | **Stock**     | ** ** | **Stock**  | ** ** | **Stock**           | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance  at December 31, 2007                                                          |       | —        |       | $          | 2,362      |                | —     |           | $          | 45,024       |       | $                      | 15,426     |                   | $          | 309 |   | $ | 63,121 |   |
| Comprehensive  income                                                                       |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Net  income                                                                                 |       | —        |       | —     |       | —              |       | —         |       | 5,107        |       | —                 |       | 5,107                  |       |
| Other  comprehensive income, net of income taxes                                            |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Unrealized  gains on securities available for sale during the period, net of income taxes   |       | —        |       | —     |       | —              |       | —         |       | —       |       | (1,121                 | )          | (1,121                 | )          |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Total  comprehensive income                                                                 |       | —        |       | —     |       | —              |       | —         |       | —       |       | —                 |       | 3,986                  |       |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Stock-based  compensation expense                                                           |       |          |       |       |       |                |       | 155            |       |         |       |                   |       | 155                    |       |
| Exercise  of stock options to purchase 7,500 common shares and related tax benefit          |       | —        |       | 4          |       | —              |       | 86             |       | —       |       | —                 |       | 90                     |       |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance  at September 30, 2008                                                         |       | —        |       | $          | 2,366      |                | —     |           | $          | 45,265       |       | $                      | 20,533     |                   | $          | (812 | ) | $ | 67,352 |   |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| 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                 | )          |
| Unrealized  losses on securities available for sale during the period, net of income  taxes |       | —        |       | —     |       | —              |       | —         |       | —       |       | (955                   | )          | (955                   | )          |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Total  comprehensive income                                                                 |       | —        |       | —     |       | —              |       | —         |       | —       |       | —                 |       | (8,148                 | )          |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| 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 |   |

 

See accompanying notes toconsolidated financial statements.

 

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TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDEDSEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

 
| ** **                                                                               | ** ** | **Nine Months Ended********September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(Dollars in thousands)**                                                     | ** ** | **2009**                                                  | ** ** | **2008** | ** ** |
|                                                                                     |       |                                                      |       |   |   |
| **Cash flows from operating activities**                                                 |       |                                                      |       |   |   |
| Net  (loss) income                                                                       |       | $                                                         | (7,229     | ) | $ | 5,107 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by operating activities |       |                                                      |       |   |   |
| Depreciation                                                                             |       | 372                                                       |       | 295 |   |
| Deferred  loan fees                                                                      |       | 204                                                       |       | (295 | ) |
| Provision  for loan losses                                                               |       | 26,889                                                    |       | 5,790 |   |
| Stock-based  compensation expense                                                        |       | 262                                                       |       | 155 |   |
| Deferred  income tax (benefit) expense                                                   |       | (5,215                                                    | )          | 1,319 |   |
| Net  amortization of investment securities                                               |       | 148                                                       |       | (45 | ) |
| (Gain)  loss on sales of securities                                                      |       | (870                                                      | )          | 67 |   |
| Change  in:                                                                              |       |                                                      |       |   |   |
| Accrued  interest receivable                                                             |       | (684                                                      | )          | (1,731 | ) |
| Accrued  interest payable                                                                |       | (778                                                      | )          | 807 |   |
| Other  assets                                                                            |       | (4,852                                                    | )          | (7,279 | ) |
| Other  liabilities                                                                       |       | (16                                                       | )          | 2,690 |   |
| Net  cash provided by operating activities                                               |       | 8,231                                                     |       | 6,880 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Cash flows from investing activities**                                                 |       |                                                      |       |   |   |
| Purchases  of securities available for sale                                              |       | (109,871                                                  | )          | (63,137 | ) |
| Proceeds  from sales of securities available for sale                                    |       | 67,100                                                    |       | 32,903 |   |
| Proceeds  from maturities, prepayments and calls of securities available for sale        |       | 57,243                                                    |       | 25,505 |   |
| Net  change in loans                                                                     |       | (143,837                                                  | )          | (207,142 | ) |
| Purchase  of BOLI investment                                                             |       | (25,472                                                   | )          | — |   |
| Purchases  of FHLB stock                                                                 |       | (484                                                      | )          | (438 | ) |
| Net  purchases of premises and equipment                                                 |       | (99                                                       | )          | (1,315 | ) |
| Net  cash used by investing activities                                                   |       | (155,420                                                  | )          | (213,624 | ) |
|                                                                                     |       |                                                      |       |   |   |
| **Cash flows from financing activities**                                                 |       |                                                      |       |   |   |
| Net  change in deposits                                                                  |       | 133,142                                                   |       | 173,611 |   |
| Net  change in federal funds purchased and repurchase agreements                         |       | —                                                    |       | 8,985 |   |
| Proceeds  from FHLB advances and other long-term debt                                    |       | —                                                    |       | 14,950 |   |
| Purchases  of capital securities of unconsolidated subsidiary                            |       | —                                                    |       | (450 | ) |
| Preferred  stock dividends expense                                                       |       | (1,171                                                    | )          | — |   |
| Warrant  accretion expense                                                               |       | 62                                                        |       | — |   |
| Proceeds  from exercise of common stock options                                          |       | —                                                    |       | 38 |   |
| Issuance  of common stock                                                                |       | 56                                                        |       | — |   |
| Excess  tax benefit from option exercises                                                |       | —                                                    |       | 52 |   |
| Net  cash provided by financing activities                                               |       | 132,089                                                   |       | 197,186 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Net change in cash and cash equivalents**                                              |       | (15,100                                                   | )          | (9,558 | ) |
|                                                                                     |       |                                                      |       |   |   |
| Cash  and cash equivalents at beginning of period                                        |       | 40,798                                                    |       | 14,809 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Cash and cash equivalents at end of period**                                           |       | $                                                         | 25,698     |   | $ | 5,251 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Supplemental cash flow information:**                                                  |       |                                                      |       |   |   |
| Cash  paid during period for interest                                                    |       | $                                                         | 29,068     |   | $ | 29,732 |   |
| Cash  paid during period for income taxes                                                |       | 72                                                        |       | 228 |   |
| Loans  charged off                                                                       |       | 21,865                                                    |       | 3,967 |   |
| Loans  foreclosed upon with repossessions, transferred to other real estate              |       | 10,430                                                    |       | 641 |   |

 

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 FinancialStatements (unaudited))

 

Note 1 — Basis ofPresentation

 

Tennessee CommerceBancorp, Inc. (the “Corporation”) is the bank holding company forTennessee Commerce Bank (the “Bank”).  In March 2005, the Corporationformed a wholly owned subsidiary, Tennessee Commerce Bank Statutory Trust I(the “Trust I”).  In June 2008, the Corporation formed a wholly ownedsubsidiary, Tennessee Commerce Bank Statutory Trust II (the “Trust II”). In July 2008,the corporation formed a wholly owned subsidiary, TCB Commercial AssetsServices, Inc. As of September 30, 2009, the Bank, the Trust I, theTrust II and TCB Commercial Assets Services were the only subsidiaries of theCorporation. The accompanying consolidated financial statements include theaccounts of the Corporation, the Bank and TCB Commercial Assets Services, Inc.The Trust I and the Trust II are not consolidated in accordance with FinancialAccounting Standards Board (“FASB”) Interpretation No. 46(R) (revisedDecember 2003), “Consolidation of Variable Interest Entities.” Materialintercompany accounts and transactions have been eliminated.

 

The unauditedconsolidated financial statements as of September 30, 2009 and for thenine- and three-month periods ended September 30, 2009 and 2008 have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and in accordance with the instructions to Form 10-Qand Article 10 of Regulation S-X as promulgated by the Securities andExchange Commission (“SEC”), and in the opinion of management, include alladjustments, consisting of normal recurring adjustments, to present fairly theinformation included therein. They do not include all the information and notesrequired by generally accepted accounting principles for complete financialstatements. Operating results for the nine- and three-month periods ended September 30,2009 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2009. For further information, refer to theconsolidated financial statements and notes thereto included in theCorporation’s Annual Report on Form 10-K for the year ended December 31,2008.

 

Note 2 — Earnings perShare of Common Stock

 

The factors used in theearnings per share computation follow:

 
| ** **                                                                      | ** ** | **Nine Months Ended********September 30,** | ** ** | **Three Months Ended********September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                                  | ** ** | **2008**                                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                            |       |                                                      |       |                                                       |       |   |   |   |   |
| Basic                                                                           |       |                                                      |       |                                                       |       |   |   |   |   |
| Net  (loss) income available to common shareholders                             |       | $                                                         | (8,400     | )                                                          | $          | 5,107 |   | $ | 1,161 |   | $ | 1,886 |   |
|                                                                            |       |                                                      |       |                                                       |       |   |   |   |   |
| Weighted  average common shares outstanding                                     |       | 4,733,882                                                 |       | 4,731,039                                                  |       | 4,736,823 |   | 4,731,696 |   |
|                                                                            |       |                                                      |       |                                                       |       |   |   |   |   |
| Basic  earnings per common share                                                |       | $                                                         | (1.77      | )                                                          | $          | 1.08 |   | $ | 0.25 |   | $ | 0.40 |   |
|                                                                            |       |                                                      |       |                                                       |       |   |   |   |   |
| Diluted                                                                         |       |                                                      |       |                                                       |       |   |   |   |   |
| Net  (loss) income available to common shareholders                             |       | $                                                         | (8,400     | )                                                          | $          | 5,107 |   | $ | 1,161 |   | $ | 1,886 |   |
|                                                                            |       |                                                      |       |                                                       |       |   |   |   |   |
| Weighted  average common shares outstanding for basic earnings per common share |       | 4,733,882                                                 |       | 4,731,039                                                  |       | 4,736,823 |   | 4,731,696 |   |
| Add:  Dilutive effects of assumed exercises of stock options (1)                |       | —                                                    |       | 147,111                                                    |       | — |   | 120,135 |   |
|                                                                            |       |                                                      |       |                                                       |       |   |   |   |   |
| Average  shares and dilutive potential common shares                            |       | 4,733,882                                                 |       | 4,878,150                                                  |       | 4,736,823 |   | 4,851,831 |   |
|                                                                            |       |                                                      |       |                                                       |       |   |   |   |   |
| Diluted  earnings per common share                                              |       | $                                                         | (1.77      | )                                                          | $          | 1.05 |   | $ | 0.25 |   | $ | 0.39 |   |

 

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(1)      All shares subject to the warrant andoutstanding options were excluded from the calculation of diluted earnings pershare in 2009 because they were anti-dilutive.

 

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Note 3 — Stock-BasedCompensation

 

FASB ASC 718,“Share-Based Payment” (“FASB ASC 718”), addresses the accounting forshare-based payment transactions in which a company receives employee servicesin exchange for equity instruments. FASB ASC 718 eliminates the ability toaccount for share-based compensation transactions, as the Corporation formerlydid, using the intrinsic value method as prescribed by Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” andgenerally requires that such transactions be accounted for using afair-value-based method and recognized as expense in the accompanyingconsolidated statement of income.

 

Stock-based compensationexpense recognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Stock-basedcompensation expense recognized in the accompanying consolidated statements ofincome for the period ended September 30, 2009 included any compensationexpense for stock-based payment awards vesting during the period based on thegrant date fair value estimated in accordance with FASB ASC 718. As stock-basedcompensation expense recognized in the accompanying statement of income for theperiod ended September 30, 2009 is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures. FASB ASC 718 requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

 

For the nine months endedSeptember 30, 2009, the Corporation granted options to purchase 200,000shares of Corporation common stock and there were 362,000 non-vested optionsoutstanding at September 30, 2009. The Corporation recognized stock-basedexpense of $262 for the nine months ended September 30, 2009.

 

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

 
| ** **                                                                      | ** ** | **Number** | ** ** | **Weighted-********Average********Exercise********Price** | ** ** | **Weighted-********Average********Contractual********Remaining********Term********(in years)** | ** ** | **Aggregate********Intrinsic********Value (1)** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Stock-based  awards outstanding at December 31, 2008                       |       | 833,070    |       | $                                                         | 13.49      |                                                                                                |       |                                                 |       |   |
| Options  granted                                                                |       | 200,000    |       | 6.01                                                      |       |                                                                                                |       |                                                 |       |
| Options  exercised                                                              |       | —     |       | —                                                    |       |                                                                                                |       |                                                 |       |
| Options  forfeited or expired                                                   |       | (17,250    | )          | 5.80                                                      |       |                                                                                                |       |                                                 |       |
| Stock-based  awards outstanding at September 30, 2009                      |       | 1,015,820  |       | $                                                         | 12.15      |                                                                                                | 5.42       |                                                 | $          | (8,279 | ) |
| Stock-based  awards outstanding and expected to vest at September 30, 2009 |       | 1,015,820  |       | $                                                         | 12.15      |                                                                                                | 5.42       |                                                 | $          | (8,279 | ) |
| Options  exercisable at September 30, 2009                                 |       | 653,820    |       | $                                                         | 11.71      |                                                                                                | 3.58       |                                                 | $          | (5,041 | ) |

 

----

(1)     The aggregate intrinsic value iscalculated as the difference between the exercise price of each option and theclosing price per share of Corporation common stock of $4.00 for theoutstanding options to purchase 1,015,820 shares of Corporation common stockand exercisable options to purchase 653,820 shares of Corporation common stockat September 30, 2009.

 
| ** **                                                                                  | ** ** | **Number** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|
| Shares  of restricted stock outstanding at December 31, 2008                           |       | 10,079     |       |
| Restrictions  lapsed and shares released                                                    |       | (2,016     | )          |
| Shares  of restricted stock issued                                                          |       | 9,232      |       |
| Shares  of restricted stock forfeited or expired                                            |       | —     |       |
| Restricted  stock-based awards outstanding at September 30, 2009                       |       | 17,295     |       |
|                                                                                        |       |       |       |
| Restricted  stock-based awards outstanding and expected to vest at September 30,  2009 |       | 17,295     |       |
| Restricted  stock unvested and outstanding at September 30, 2009                       |       | —     |       |

 

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

 
| ** **               | ** ** | **2009** | ** ** | **2008**  | ** ** |
|--------------------------|------------|----------|------------|-----------|------------|
|                     |       |     |       |      |       |
| Risk-free  interest rate |       | 0.30     | %          | 3.27      | %          |
| Expected  option life    |       | 5 years  |       | 3.5 years |       |
| Dividend  yield          |       | 0.0      | %          | 0.0       | %          |
| Volatility               |       | 45.00    | %          | 20.00     | %          |

 

The Corporation grantedoptions to purchase 200,000 shares of Corporation common stock and 9,232 sharesof restricted stock in the first nine months of 2009. The options granted in2009 had an estimated weighted average fair value of $2.13 per share and theoptions granted in 2008 had an estimated fair value of $4.45 per share.

 

Note 4 — Securities

 

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

 
| ** **                           | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** |
|--------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** |
| **(Dollars in thousands)** | ** ** | **Value**  | ** ** | **Gains**      | ** ** | **Losses**     | ** ** |
|                                 |       |       |       |           |       |           |       |
| September 30,  2009             |       |       |       |           |       |           |       |
|                                 |       |       |       |           |       |           |       |
| U.S.  Government agencies            |       | $          | 75,164     |           | $          | 216            |       | $ | (467 | ) |
| Corporate  debt securities           |       | 199        |       | 5              |       | —         |       |
| Other                                |       | 10,637     |       | —         |       | —         |       |
|                                 |       |       |       |           |       |           |       |
|                                 |       | $          | 86,000     |           | $          | 221            |       | $ | (467 | ) |
|                                 |       |       |       |           |       |           |       |
| December 31,  2008              |       |       |       |           |       |           |       |
|                                 |       |       |       |           |       |           |       |
| U.S.  Government agencies            |       | $          | 95,195     |           | $          | 1,197          |       | $ | (51 | ) |
| Corporate  debt securities           |       | 239        |       | 2              |       | —         |       |
| Corporate  bonds                     |       | 411        |       | —         |       | (82            | )          |
| Other                                |       | 5,445      |       | 228            |       | —         |       |
|                                 |       |       |       |           |       |           |       |
|                                 |       | $          | 101,290    |           | $          | 1,427          |       | $ | (133 | ) |

 

Contractual maturities ofdebt securities at September 30, 2009 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           |       | $                   | 1,500        |   |
| Due  after one through five years    |       | 194                 |         |
| Due  after five through ten years    |       | 25,166              |         |
| Due  after ten years                 |       | 59,140              |         |
|                                 |       |                |         |
|                                 |       | $                   |  86,000 |   |

 

Gross gains ofapproximately $870 and $447 on sales of securities were recognized in 2009and  2008, respectively Securitiescarried at approximately $16,536 and $74,979 at September 30, 2009 and December 31,2008, respectively, were pledged to secure deposits and for other purposes asrequired or permitted by law.

 

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Securities withunrealized losses at September 30, 2009 and December 31, 2008, andthe length of time 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** | ** ** |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| 2009                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U.S.  Government agencies            |       | $                                      | 36,176     |                                 | $          | 467       |       | $ | — |   | $ | — |   | $ | 36,176 |   | $ | 467 |   |
| Corporate  debt securities           |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
| Corporate  bonds                     |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| Total                                |       | $                                      | 36,176     |                                 | $          | 467       |       | $ | — |   | $ | — |   | $ | 36,176 |   | $ | 467 |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| 2008                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U.S.  Government agencies            |       | $                                      | —     |                                 | $          | —    |       | $ | 8,048 |   | $ | 51 |   | $ | 8,048 |   | $ | 51 |   |
| Corporate  debt securities           |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
| Corporate  bonds                     |       | —                                 |       | —                               |       | 411       |       | 82 |   | 411 |   | 82 |   |
|                                 |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| Total                                |       | $                                      | —     |                                 | $          | —    |       | $ | 8,459 |   | $ | 133 |   | $ | 8,459 |   | $ | 133 |   |

 

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

 

Note 5 — Federal HomeLoan Advances 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. TheBank’s available advance is based on 150% of eligible one-to-four family loansas collateral. The Bank is also required to maintain a minimum required capitalstock balance that is based upon its total 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 of distributionsand payments for redemptions or liquidation of the capital securities. Thefixed/floating rate capital securities qualify as “Tier I Capital” for theCorporation under current regulatory definitions, subject to certainlimitations.

 

The debentures pay afixed rate of 6.73% payable quarterly for the first five years and a floatingrate based on a three-month LIBOR rate plus 1.98% thereafter. The distributionson the 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.

 

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In June 2008, theTrust II 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 Wall Street Journal*  on the first business day of eachdistribution period plus 50 basis points (but in no event greater than 8.0% orless than 5.75%). At the same time, the Corporation issued to the Trust II$14,950 of floating rate junior subordinated deferrable interest debentures due2038. The Corporation guarantees the payment of distributions and payments forredemptions or liquidation of the capital securities. The floating rate capitalsecurities qualify as “Tier I Capital” for the Corporation under currentregulatory definitions, subject to certain limitations.

 

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 eachdistribution period plus 50 basis points (but in no event greater than 8.0% orless than 5.75%). The distributions on the capital securities are accounted foras interest expense by the Corporation. Interest payments on the debentures andthe corresponding distributions on the capital securities may be deferred atany time at the election of the Corporation for up to 20 consecutive quarterlyperiods (five years). The capital securities and debentures are redeemable atany time commencing after June 2013 at par. The Corporation reports asliabilities the subordinated debentures issued by the Corporation and held bythe Trust II.

 

Note 6 — SubsequentEvents

 

Management has evaluated eventsoccurring subsequent to the balance sheet date through November 6, 2009(the financial statement issuance date), and has determined that no eventsrequire adjustment to or additional disclosure in the consolidated financialstatements.

 

Note 7 — New AccountingStandards

 

Statement of FinancialAccounting Standards (“SFAS”) No. 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles, aReplacement of FASB Statement No. 162” (“SFAS 168”) , replaces SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” and establishes theFASB Accounting Standards Codification (the “Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynon-governmental entities in the preparation of financial statements inconformity with generally accepted accounting principles. Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative guidance for SEC registrants. All guidancecontained in the Codification carries an equal level of authority. Allnon-grandfathered, non-SEC accounting literature not included in theCodification is superseded and deemed non-authoritative. SFAS 168 iseffective for the Corporation’s financial statements for periods ending after September 15,2009 and did not have a significant impact on the Corporation’s financialstatements.

 

FASB Accounting StandardsCodification (“ASC”) 810, “Noncontrolling Interest in Consolidated FinancialStatements, an amendment of ARB Statement No. 51” (“FASB ASC 810”) amendsAccounting Research Bulletin (“ARB”) No. 51, “Consolidated FinancialStatements,” to establish accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS 160 clarifies that a non-controlling interest in asubsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as a componentof equity in the consolidated financial statements. Among other requirements,FASB ASC 810 requires consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the non-controllinginterest. It also requires disclosure, on the face of the consolidated incomestatement, of the amounts of consolidated net income attributable to the parentand to the non-controlling interest. SFAS 160 became effective for theCorporation on January 1, 2009 and did not have a significant impact onthe Corporation’s financial statements.

 

FASB ASC 855, “SubsequentEvents” (“FASB ASC 855”), establishes general standards of accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued.  defines (i) the period after the balancesheet date during which a reporting entity’s management should evaluate eventsor transactions that may occur for potential recognition or disclosure in thefinancial statements, (ii) the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements, and (iii) the disclosures an entity should makeabout events or transactions that occurred after the balance sheet date. FASBASC 855 became effective for the Corporation’s financial statements for periodsending after June 15, 2009 and did not have a significant impact on theCorporation’s financial statements. Management evaluated all events or transactionsthat occurred after September 30, 2009 through November 6, 2009, thedate the Corporation issued the accompanying financial statements.  During this period, the Corporation did nothave any material recognizable subsequent events that required recognition inits disclosures with respect to the accompanying financial statements.

 

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SFAS No. 166 (notyet reflected in FASB ASC), “Accounting for Transfers of Financial Assets, anAmendment of FASB Statement No. 140” (“SFAS 166”) amends SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” to enhance reporting about transfers of financial assets,including securitizations, and where companies have continuing exposure to therisks related to transferred financial assets. SFAS 166 eliminates theconcept of a “qualifying special-purpose entity” and changes the requirementsfor derecognizing financial assets. SFAS 166 also requires additionaldisclosures about all continuing involvements with transferred financial assetsincluding information about gains and losses resulting from transfers duringthe period. SFAS 166 will be effective January 1, 2010 and is not expectedto have a significant impact on the Corporation’s financial statements.

 

SFAS No. 167 (notyet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),”(“SFAS 167”) amends FIN 46 (Revised December 2003),“Consolidation of Variable Interest Entities,”  to change how a companydetermines when an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated. Thedetermination of whether a company is required to consolidate an entity isbased on, among other things, an entity’s purpose and design and a company’sability to direct the activities of the entity that most significantly impactthe entity’s economic performance. SFAS 167 requires additionaldisclosures about the reporting entity’s involvement with variable-interestentities and any significant changes in risk exposure due to that involvementas well as its affect on the entity’s financial statements. SFAS 167 will beeffective January 1, 2010 and is not expected to have a significant impacton the Corporation’s financial statements.

 

FASB ASC 820-10-65-4,“Fair Value Measurements and Disclosures” (“FASB ASC 820”), requires an entityto provide disclosures about the fair value of financial instruments in interimfinancial information and requires those disclosures in summarized financialinformation at interim reporting periods. The new interim disclosures requiredby FASB ASC 820 are included herein in Note 8, Fair Value Measurement.

 

In April 2009, theFASB issued FSP FAS 115-2 and FAS 124-2, “Recognitionand Presentation of Other-Than-Temporary Impairments” (FSPFAS 115-2/ASC 320-10-65-1), amends current other-than-temporary impairmentguidance in GAAP for debt securities to make the guidance more operational andto improve the presentation and disclosure of other-than-temporary impairmentson debt and equity securities in the financial statements.  This FSP doesnot amend existing recognition and measurement guidance related toother-than-temporary impairments of equity securities.  The provisions ofASC 320 and FAS 124-2 are effective for the Company’s interim period ending on September 30,2009.    There was no impact fromthe adoption of ASC 320 and FAS 124-2 on the Corporation’s financial position,results of operations or cash flows.

 

Note 8 — Fair ValueMeasurement

 

The Bank has anestablished process for determining fair values in accordance with FASB ASC820. Fair value is based upon quoted market prices, where available. If listedprices or quotes are not available, fair value is based upon internallydeveloped models or processes that use primarily market-based orindependently-sourced market data, including interest rate yield curves, optionvolatilities and third party information. Valuation adjustments may be made toensure that financial instruments are recorded at fair value. These adjustmentsinclude amounts to reflect counterparty credit quality (for financial assetsreflected at fair value), the Bank’s creditworthiness (for financialliabilities reflected at fair value), liquidity and other unobservableparameters that are applied consistently over time as follows:

 

·     Credit valuation adjustments arenecessary when the market price (or parameter) is not indicative of the creditquality of the counterparty.

 

·     Debit valuation adjustments are necessaryto reflect the credit quality of the Bank in the valuation of liabilitiesmeasured at fair value.

 

·     Liquidity valuation adjustments arenecessary when the Bank may not be able to observe a recent market price for afinancial instrument that trades in inactive (or less active) markets or toreflect the cost of exiting larger-than-normal market-size risk positions.

 

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·     Unobservable parameter valuationadjustments are necessary when positions are valued using internally developedmodels that use as their basis unobservable parameters — that is, parametersthat must be estimated and are, therefore, subject to management judgment tosubstantiate the model valuation. These financial instruments are normallytraded less actively.

 

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

 

**ValuationHierarchy**

 

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

 

·     Level 1 — inputs to the valuation methodologyare quoted prices (unadjusted) for identical assets or liabilities inactive markets.

 

·     Level 2 — inputs to the valuationmethodology include quoted prices for similar assets and liabilities in activemarkets, and inputs that are observable for the asset or liability, eitherdirectly or indirectly, for substantially the full term of the financialinstrument.

 

·     Level 3 — inputs to the valuationmethodology are unobservable and significant to the fair 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**

 

*FederalFunds Sold*- Thecarrying value of federal funds sold approximates fair value and, therefore,these assets are classified within level 1 of the valuation hierarchy.

 

*SecuritiesAvailable for Sale -*Available-for-sale securities are recorded at fair value on a recurringbasis.  Where quoted prices are available in an active market, securitiesare classified within level 1 of the valuation hierarchy.  Level 1 securitiesinclude highly liquid government bonds, federal funds sold and certain otherproducts.  Fair value measurement is based upon quoted prices, ifavailable.  If quoted prices are not available, securities would generallybe classified within level 2, and fair value would be determined by matrixpricing, which is a mathematical technique widely used in the industry to valuedebt securities without relying exclusively on quoted prices for the specificsecurities but relying on the securities’ relationship to other benchmarkquoted securities. In certain cases where there is limited activity or lesstransparency around inputs to the valuation, securities are classified withinlevel 3 of the valuation hierarchy. For the nine months ended September 30,2009, the entire Bank’s available-for-sale securities were valued using matrixpricing and were classified within level 2 of the valuation hierarchy.  AtSeptember 30, 2009, the Bank had no available-for-sale securitiesclassified within level 3.

 

*ServicingAssets -* Allseparately recognized servicing assets and servicing liabilities are initiallymeasured at fair value. Subsequent measurement methods include the amortizationmethod, whereby servicing assets or servicing liabilities are amortized overthe period of estimated net servicing income or net servicing loss, or the fairvalue method, whereby servicing assets or servicing liabilities are measured atfair value at each reporting date and changes in fair value are reported inearnings in the period in which they occur. Because of the unique nature of theBank’s servicing assets, quoted market prices may not be available. If noquoted market prices are available, the amortization method is used. The Bankassesses servicing assets or servicing liabilities for impairment or increasedobligation based on the fair value at each reporting date.  At September 30,2009, the Bank had servicing assets measured at fair value on a recurringbasis classified within level 3 of the valuation hierarchy.

 

*Interest-OnlyStrips -* When theBank sells loans to others, it may hold interest-only strips, which is aninterest that continues to be held by the transferor in the securitizedreceivable. It may also obtain servicing assets or assume servicing liabilitiesthat are initially measured at fair value. Gain or loss on sale of thereceivables depends in part on both (a) the previous carrying amount ofthe financial assets involved in the transfer, allocated between the assetssold and the interests that continue to be held by the transferor based ontheir relative fair value at the date of transfer, and (b) the proceedsreceived. To obtain fair values, quoted market prices are used if available.However, quotes are generally not available for interests that continue to beheld by the transferor, so the Bank generally estimates fair value based on thefuture expected cash flows estimated using management’s best estimates of thekey assumptions — credit losses and discount rates commensurate with the risksinvolved. At September 30, 2009, the Bank had interest-only stripsmeasured at fair value on a recurring basis classified within level 3 of thevaluation hierarchy.

 

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*ImpairedLoans —* A loan isconsidered to be impaired when it is probable the Bank will be unable tocollect all principal and interest payments due in accordance with thecontractual terms of the loan agreement. Individually identified impaired loansare measured based on the present value of expected payments using the loan’soriginal effective rate as the discount rate, the loan’s observable marketprice, or the fair value of the collateral if the loan is collateral dependent.If the recorded investment in the impaired loan exceeds the measure of fairvalue, a valuation allowance may be established as a component of the allowancefor loan losses. At September 30, 2009, the Bank had impaired loansmeasured on a nonrecurring basis classified within level 3 of the valuationhierarchy.

 

*OtherAssets —* Includedin other assets are certain assets carried at fair value, includingrepossessions and other real estate owned (“OREO”). The carrying amount isbased on an observable market price or appraisal value. The Bank reflects theseassets within level 3 of the valuation hierarchy. At September 30,2009, the Bank had repossessions and OREO measured at fair value on anonrecurring basis classified within level 3 of the valuation hierarchy. TheBank also includes bank owned life insurance (“BOLI”) within other assets,carried at a cash surrender value. At September 30, 2009, the Bankhad BOLI measured at fair value on a recurring basis classified within level 3of the valuation hierarchy.

 

*Inventory—* Repossessedassets are resold at retail prices as soon as practicable.  If arepossession of the Bank is not resold within the six month holding periodallowed by Tennessee law, it is purchased by a subsidiary of the Corporation,held as inventory and carried at fair market value.  The sole purpose ofthe subsidiary is the resale of assets repossessed by the Bank. At September 30,2009, the subsidiary had inventory measured at fair value on anonrecurring basis classified within level 3 of the valuation hierarchy.

 

**Liabilities**

 

*RecourseObligations**—* The maximum extent of the Bank’srecourse obligations on loans transferred is 10% of the amount transferredadjusted for any early payoffs or terminations, based on the Bank’s paymenthistory on loans of the type transferred. At September 30, 2009, theBank had recourse obligations measured at fair value on a recurring basisclassified within level 3 of the valuation hierarchy.

 

The following tablepresents the financial instruments carried at fair value as of September 30,2009, by caption on the consolidated balance sheets and by FASB ASC 820valuation hierarchy (as described above):

 

**Assetsand liabilities measured at fair value on a recurring basis as of****September ****30, 2009**

 
| ** **                          | ** ** | **Total********carrying********value in the********consolidated********balance  sheet** | ** ** | **Quoted********market********prices in an********active********market  (Level 1)** | ** ** | **Internal********models with********significant********observable********market********parameters  (Level 2)** | ** ** | **Internal********models with********significant********unobservable********market********parameters  (Level 3)** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| Federal  funds sold                 |       | $                                                                                                 | 8,660      |                                                                                               | $          | 8,660                                                                                                                     |       | $                                                                                                                           | —     |   | $ | — |   |
| Securities  available for sale      |       | 86,000                                                                                            |       | —                                                                                             |       | 86,000                                                                                                                    |       | —                                                                                                                      |       |
| Servicing  assets                   |       | 161                                                                                               |       | —                                                                                             |       | —                                                                                                                    |       | 161                                                                                                                         |       |
| Interest-only  strips               |       | 3,301                                                                                             |       | —                                                                                             |       | —                                                                                                                    |       | 3,301                                                                                                                       |       |
| Other  Assets                       |       | 25,472                                                                                            |       | —                                                                                             |       | —                                                                                                                    |       | 25,472                                                                                                                      |       |
| **Total assets at fair value**      |       | $                                                                                                 | 123,594    |                                                                                               | $          | 8,660                                                                                                                     |       | $                                                                                                                           | 86,000     |   | $ | 28,934 |   |
|                                |       |                                                                                              |       |                                                                                               |       |                                                                                                                      |       |                                                                                                                        |       |
| Recourse  obligations               |       | $                                                                                                 | 339        |                                                                                               | $          | —                                                                                                                    |       | $                                                                                                                           | —     |   | $ | 339 |   |
| **Total liabilities at fair value** |       | $                                                                                                 | 339        |                                                                                               | $          | —                                                                                                                    |       | $                                                                                                                           | —     |   | $ | 339 |   |

 

The Corporation may berequired, from time to time, to measure certain assets at fair value on anonrecurring basis in accordance with generally accepted accounting principles.These include assets that are measured at the lower of cost or market that wererecognized at fair value below the cost at the end of the period. The followingtable presents the financial instruments carried at fair value as of September 30,2009, by caption on the consolidated balance sheets and by FASB ASC 820valuation hierarchy (as described above):

 

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**Assetsmeasured at fair value on a nonrecurring basis as of****September ****30, 2009**

 
| ** **                     | ** ** | **Total********carrying********value in the********consolidated********balance  sheet** | ** ** | **Quoted********market********prices in an********active********market  (Level 1)** | ** ** | **Internal********models with********significant********observable********market********parameters  (Level 2)** | ** ** | **Internal********models with********significant********unobservable********market********parameters  (Level 3)** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| Impaired  loans                |       | $                                                                                                 | 48,776     |                                                                                               | $          | —                                                                                                                    |       | $                                                                                                                           | —     |   | $ | 48,776 |   |
| Inventory                      |       | 5,314                                                                                             |       | —                                                                                             |       | —                                                                                                                    |       | 5,314                                                                                                                       |       |
| Other  Assets                  |       | 23,388                                                                                            |       | —                                                                                             |       | —                                                                                                                    |       | 23,388                                                                                                                      |       |
| **Total assets at fair value** |       | $                                                                                                 | 77,478     |                                                                                               | $          | —                                                                                                                    |       | $                                                                                                                           | —     |   | $ | 77,478 |   |

 

**Changesin level 3 fair value measurements**

 

The table below includesa roll-forward of the balance sheet amounts for the first nine months of 2009(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, 2009**                                                                                   | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| Fair  value, January 1, 2009                                                                                                                           |       | $          | 5,460      |            | $          | 444 |   |
| Total  realized and unrealized gains/losses included in income                                                                                              |       | (3,065     | )          | 94              |       |
| Purchases,  issuances and settlements, net                                                                                                                  |       | 26,539     |       | (199            | )          |
| Transfers  in and/or out of level 3                                                                                                                         |       | —     |       | —          |       |
| Fair  value, September 30, 2009                                                                                                                        |       | $          | 28,934     |            | $          | 339 |   |
| Total  unrealized gains included in income related to financial assets and  liabilities still on the consolidated balance sheet at September 30,  2009 |       | $          | —     |            | $          | — |   |

 

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.A detailed description of the valuation methodologies used in estimating thefair value of financial instruments is set forth in the Corporation’s AnnualReport on Form 10-K for the year ended December 31, 2008.

 

The estimated fair valuesof financial instruments were as follows:

 
| ** **                                        | ** ** | **Nine Months Ended********September ****30, 2009** | ** ** | **Twelve Months Ended********December 31, 2008** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Carrying********Amount**                                         | ** ** | **Estimated Fair********Value**                            | ** ** | **Carrying********Amount** | ** ** | **Estimated Fair********Value** | ** ** |
| Financial  assets:                                |       |                                                               |       |                                                            |       |   |   |   |   |
| Cash  and due from banks                          |       | $                                                                  | 17,038     |                                                            | $          | 17,038 |   | $ | 5,260 |   | $ | 5,260 |   |
| Federal  funds sold                               |       | 8,660                                                              |       | 8,660                                                           |       | 35,538 |   | 35,538 |   |
| Securities                                        |       | 86,000                                                             |       | 86,000                                                          |       | 101,290 |   | 101,290 |   |
| Loans,  net                                       |       | 1,140,015                                                          |       | 1,223,603                                                       |       | 1,023,271 |   | 1,114,151 |   |
| Accrued  interest receivable                      |       | 8,799                                                              |       | 8,799                                                           |       | 8,115 |   | 8,115 |   |
| Income  tax receivable                            |       | 2,037                                                              |       | 2,037                                                           |       | 4,430 |   | 4,430 |   |
| Bank-owned  life insurance                        |       | 25,472                                                             |       | 24,980                                                          |       | — |   | — |   |
| Financial  liabilities:                           |       |                                                               |       |                                                            |       |   |   |   |   |
| Deposits                                          |       | 1,202,285                                                          |       | 1,231,301                                                       |       | 1,069,143 |   | 1,106,907 |   |
| Accrued  interest payable                         |       | 2,537                                                              |       | 2,537                                                           |       | 3,315 |   | 3,315 |   |
| Accrued  dividend payable                         |       | 188                                                                |       | 188                                                             |       | — |   | — |   |
| Deferred  tax liability                           |       | 3,190                                                              |       | 3,190                                                           |       | 8,896 |   | 8,896 |   |
| Long-term  subordinated debt and other borrowings |       | 33,198                                                             |       | 37,126                                                          |       | 33,198 |   | 34,897 |   |
|                                                   |            |                                                                    |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

**Forward-LookingStatements**

 

Certain statementscontained in this report may not be based on historical facts and are“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward-looking statements may beidentified by reference to a future period or by the use of forward-lookingterminology, such as “expect,” “anticipate,” “believe,” “estimate,” “may,”“will,” “could,” “should,” “would” or future or conditional verb tenses andvariations or negatives of such terms. These forward-looking statementsinclude, without limitation, those relating to our operating results, financialcondition, vesting of stock-based awards, recently adopted accountingstandards, fair value measurements, allowance for loan losses, business bankstrategy, management’s review of the loan portfolio, loan classifications, loancommitments, interest rate risk, economic value of equity model, net interestmargin, net interest income, inflation, loan sale transactions, tax rates,non-accrual loans, liquidity, capital resources, internal control overfinancial reporting and our future growth and profitability. We caution you notto place undue reliance on the forward-looking statements contained in thisreport because actual results could differ materially from those indicated insuch forward-looking statements as a result of a variety of factors. Thesefactors include, but are not limited to, changes in economic conditions,competition for loans, mortgages and other financial services and products,changes in interest rates, concentrations within our loan portfolio, ourability to maintain credit quality, the effectiveness of our risk monitoringsystems, changes in consumer preferences, the ability of our borrowers to repayloans, the availability of and costs associated with maintaining and/orobtaining adequate and timely sources of liquidity, changes in our operatingstrategy, our ability to meet regulatory capital adequacy requirements, ourability to collect amounts due under loan agreements and to attract deposits,our ability to attract, train and retain qualified personnel, the geographicconcentration of our assets, our ability to operate and integrate newtechnology, our ability to provide market competitive products and services,our ability to diversify revenue, our ability to fund growth with lower costliabilities, laws and regulations affecting financial institutions in generaland other factors detailed from time to time in our press releases and filingswith the Securities and Exchange Commission. We undertake no obligation toupdate these forward-looking statements to reflect the occurrence of changes orunanticipated events, circumstances or results that occur after the date ofthis report.

 

**Overview**

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

 

The results ofoperations, before charges for preferred dividends, for the nine months ended September 30,2009 compared to the nine months ended September 30, 2008 reflected a241.55% decrease in net income and a 268.57% decrease in diluted earnings pershare. The decrease in earnings resulted partially from an increased provisionfor loan losses as well as an additional accrual for an FDIC specialassessment.  For the nine months ended September 30, 2009, net losswas $8,400, a decrease of $13,507 or 264.48% compared to net income of $5,107for the same period in 2008. Diluted earnings per share decreased $2.82 pershare or 268.57% for the nine months ended September 30, 2009 compared tothe same period in 2008. The nine months ended September 30, 2009reflected the reduction of our bank’s rate of asset growth, as assets increasedby $117,667 or 9.66% from $1,218,084 at December 31, 2008 to $1,335,751 atSeptember 30, 2009. Net loans increased by 11.41% or $116,744 from December 31,2008 to September 30, 2009, while total deposits increased by 12.45% or$133,142 during that same period. 

 

**CorporationOverview**

 

Tennessee CommerceBancorp, Inc., headquartered in Franklin, Tennessee, is the bank holdingcompany for Tennessee Commerce Bank (the “Bank”).  Organized in January 2000,the Bank has a focused strategy that serves the banking needs of small tomedium-sized businesses, entrepreneurs and professionals in the Nashvillemetropolitan statistical area, or the Nashville MSA, as well as the fundingneeds of certain national and regional equipment vendors and financial servicescompanies.  We call this strategy our “business bank” strategy. Weprimarily conduct business from a single location in the Cool Springscommercial area of Franklin, Tennessee, 15 miles south of Nashville.  Wealso operate three loan production offices in Birmingham, Alabama; Minneapolis,Minnesota and Atlanta, Georgia.

 

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 consumer installmentloans, various types of mortgage loans, personal lines of credit, home equityloans, credit cards, real estate construction loans, commercial loans to smalland medium-sized businesses and professionals, and letters of credit. We issueVISA credit cards and are a merchant depository for cardholder drafts underVISA credit cards.  We also offer check cards and debit cards.  Weoffer our local customers free courier services, access to third-partyautomated teller machines, or ATMs, and state-of-the-art electronic banking. Wehave trust powers but do not have a trust department.

 

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**OurBusiness Strategy**

 

We execute our businessbank strategy by combining the personal service and appeal of a communitybanking institution with the sophistication of a larger bank.  We believethis strategy distinguishes us from our competitors in efforts to attract loansand deposits of local small to medium-sized businesses and national andregional equipment vendors and financial services companies.  Further, therapid growth within the Nashville MSA has left many business owners withoutsignificant banking relationships. We seek to take advantage of thisopportunity.

 

We do not compete basedon the traditional definition of “convenience” and currently have no plans todevelop a comprehensive branch bank network.  For us, convenience iscreated by technology and by a free courier service for local customers. We compete by providing responsive and personalized service to meet customerneeds.  We provide free electronic banking, cash management tools andon-site training for business customers.  We compete for consumer businessby providing superior products, attractive deposit rates, free internet bankingservices and access to a third-party regional ATM network.

 

The business bankstrategy is highlighted by differences between the financial statements of ourbank and more traditional financial institutions. The business bank modelcreates a high degree of leverage.  By avoiding the investment andmaintenance costs of a typical branch network, we are able to maintain earningassets at a higher level than peer institutions.  Management targets aminimum earning asset ratio of 95%**.**  At September 30, 2009, we had an earningasset ratio of 92.43%.

 

The business bank modelis also highly efficient.  We primarily target the non-retail (service,manufacturing and professional) sector of the commercial market, which ischaracterized by lower levels of transactions and processing costs.  Thecommercial customer mix and the strategic outsourcing of non-customerfunctions, such as data processing, information technology and internal audit, allowus to operate with a small, highly-trained staff.  Management targets aminimum asset per employee ratio of $10,000 compared to the average ratio of$3,728 assets per employee for Tennessee commercial banks at the end of thefirst six months of 2009. At September 30, 2009, our assets per employeewere $15,353.

 

In addition to ourNashville MSA focus, we have developed expertise in indirect lending thatallows us to access a national market. Our indirect lending transactions arefixed-rate monthly installment loans originated through a third-party equipmentvendor or financial services company. Our national market lending is dividedinto two programs based on loan size. In the first program, through anestablished network of vendors and financial services companies, we haveopportunities to finance business asset secured loan transactions nationallyfor middle-market and investment grade companies. In the second program, adifferent network of vendors and financial services companies located inTennessee, Alabama, Georgia, California**,**  Minnesota and Michigan partner with us infinancing smaller transactions (generally $150 or less per transaction). Bothnational market programs provide geographic and collateral diversity for ourportfolio.

 

**Comparisonof Operating Results for the Three Months Ended****September ****30, 2009 and****September ****30, 2008**

 

**NetIncome** - Netincome for the three months ended September 30, 2009 was $1,161, adecrease of $725 or 38.44% compared to net income of $1,886 for the threemonths ended September 30, 2008.  The decrease is attributable to anincrease in the provision for loan losses of 183.78% from $1,850 for the threemonths ended September 30, 2008 to $5,250 for the same period in2009.  We experienced an increase of $573 in operating expense which wasthe result of our overall growth, including a $247 increase in FDIC expenses atSeptember 30, 2009 compared to the same date in 2008, as well as anadditional accrual expense for the FDIC special assessment fee of $300 paid inthe third quarter of 2009. Further, during the quarter ended September 30,2009, we made a dividend payment to the U.S. Department of Treasury in anamount equal to $375 with respect to shares of our Fixed Rate CumulativePerpetual Preferred Stock, Series A.

 
| ** **                                    | ** ** | **Three Months Ended********September ****30,** | ** ** | ** ** | ** ** |              |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|-------------------|
| ** **                                    | ** ** | **2009**                                                       | ** ** | **2008**   | ** ** | **% Change** | ** ** |
|                                          |       |                                                           |       |       |       |              |   |
| Interest  income                              |       | $                                                              | 20,642     |       | $          | 19,756            |   | 4.48 | % |
| Interest  expense                             |       | 9,218                                                          |       | 10,482     |       | (12.06            | ) |
| Net  interest income                          |       | 11,424                                                         |       | 9,274      |       | 23.18             |   |
| Provision  for loan losses                    |       | 5,250                                                          |       | 1,850      |       | 183.78            |   |
| Net  interest after provision for loan losses |       | 6,174                                                          |       | 7,424      |       | (16.84            | ) |
| Non-interest  income                          |       | 1,353                                                          |       | 98         |       | 1,280.61          |   |
| Non-interest  expense                         |       | 5,019                                                          |       | 4,446      |       | 12.89             |   |
| Net  income before taxes                      |       | 2,508                                                          |       | 3,076      |       | (18.47            | ) |
| Income  tax expense                           |       | 972                                                            |       | 1,190      |       | (18.32            | ) |
| Net  income                                   |       | 1,536                                                          |       | 1,886      |       | (18.56            | ) |
| Preferred  dividends                          |       | (375                                                           | )          | —     |       | —            |   |
| Net  income available to common shareholders  |       | $                                                              | 1,161      |       | $          | 1,886             |   | (38.44 | )% |

 

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**Provisionfor Loan Losses**- The provision for loan losses for the three months ended September 30,2009 was $5,250, an increase of $3,400, or 183.78%, above the provision of$1,850 expensed in the same period in 2008.  This increase was primarily aresult of the increase of our loan loss reserve. At September 30, 2009,the loan loss reserve of $19,690 was 1.70% of gross loans of $1,159,705compared with a loan loss reserve of $12,191 at September 30, 2008, whichwas 1.22% of gross loans of $997,839.

 

**Non-interestIncome** -Non-interest income increased by 1,280.61%, or $1,255, from $98 in the quarterended September 30, 2008 to $1,353 for the same period in 2009. Theincrease was primarily a result of gains on sales of securities, reposessionsand loans.  The gain on sales of securities was $532 for the three-monthperiod ended September 30, 2009 compared to a loss of $97 for the sameperiod in 2008.  The gain on the sale of repossessions for the three-monthperiod ended September 30, 2009 was $202 compared to $95 for the sameperiod in 2008.  The gain on loan saleswas $340 and $28 for the three-month periods ended September 30, 2009 and2008, respectively.  Management willcontinue to consider loan sale transactions if the opportunity for a reasonablereturn is available. We earned $2 in mortgage origination fees during the threemonths ended September 30, 2009 compared to $4 during the same period in2008, a decrease of $2 or 50%, primarily as a result of a slower market.

 

**Non-interestExpense** -Non-interest expense for the three months ended September 30, 2009 was$5,019, an increase of $573 or 12.89%, over the $4,446 expensed in the sameperiod in 2008.  Approximately 95.46% of the increase was a result ofincreases in FDIC premiums and the FDIC special assessment. 

 

**NetInterest Income**- Net interest income for the three months ended September 30, 2009 was$11,424 compared to $9,274 for the same period in 2008, a gain of $2,150 or23.18%.  The increase in net interest income was largely attributable to areduction in the cost of funds. The cost of funds decreased by 119 basis pointsfrom 4.13% for the three months ended September 30, 2008 to 2.94% for thesame period in 2009. The average net loan balance for the three months ended September 30,2009 increased by 16.81% or $164,023 from $975,487 for that period in 2008 to$1,139,510 for the same period in 2009. Loan growth was accompanied by anincrease in average interest-bearing deposits from $961,777 for the threemonths ended September 30, 2008 to $1,184,337 for the same period in 2009,an increase of $222,560 or 23.14%.

 

**NetInterest Margin**- The net interest margin increased from 3.46% for the three months ended September 30,2008 to 3.61% for the same period in 2009 because of a decrease in our cost fordeposits.  Interest income increased by $886 or 4.48%, from $19,756 duringthe three months ended September 30, 2008 to $20,642 during the sameperiod in 2009. The increase was primarily a result of increased loanvolume.  Average earning assets increased from $1,064,396 in the threemonths ended September 30, 2008 to $1,252,195 in the same period in 2009,an increase of $187,799 or 17.64%, primarily as a result of loan growth.Average loan balances increased by $164,023 or 16.81% for the three monthsended September 30, 2009, from the same period in 2008.  The averageyield on earning assets decreased from 7.37% in the three months ended September 30,2008 to 6.53% in the same period in 2009. The decrease in the cost of funds, asa percentage of average balances, was primarily a result of the re-pricing ofmaturing liabilities and shifts in the deposit mix. Between September 30,2008 and September 30, 2009, the Federal Reserve Open Market Committee, orFOMC, lowered the federal funds rate by 196 basis points from 2.03% at September 30,2008 to 0.07% at September 30, 2009.

 

**InterestExpense** —Interest expense decreased from $10,482 in the three months ended September 30,2008 to $9,218 in the three months ended September 30, 2009. The $1,264,or 12.06%, decrease in expense was a result of a decrease in the cost offunds. Average interest earning liabilities increased by $209,046 or20.70%.  The cost of funds decreased from 4.13% for the three months endedSeptember 30, 2008 to 2.94% for the same three months in 2009, a decreaseof 119 basis points. The decrease was largely attributed to the maturation andre-pricing of time deposits.

 

**IncomeTaxes** - Oureffective tax rate for the three months ended September 30, 2009 was38.76% compared to 38.69% for the three months ended September 30, 2008.Management anticipates that tax rates in future periods will approximate therates paid in 2009.

 

**EfficiencyRatio** - Ourefficiency ratio for the three months ended September 30, 2009 and 2008was 39.28% and 47.44%, respectively, a decrease of 816 basis points. Thefollowing table reflects the calculation of the efficiency ratio:

 

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| ** **            | ** ** | **Three Months Ended********September ****30,** | ** ** |
|-----------------------|------------|----------------------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                                       | ** ** | **2008** | ** ** |
| Non-interest  expense |       | $                                                              | 5,019      |   | $ | 4,446 |   |
|                  |       |                                                           |       |   |   |
| Net  interest income  |       | 11,424                                                         |       | 9,274 |   |
| Non-interest  income  |       | 1,353                                                          |       | 98 |   |
| Net  revenues         |       | $                                                              | 12,777     |   | $ | 9,372 |   |
|                  |       |                                                           |       |   |   |
| Efficiency  ratio     |       | 39.28                                                          | %          | 47.44 | % |

 

**Comparisonof Operating Results for the Nine Months Ended September 30, 2009 and September 30,2008**

 

**NetIncome** - Netloss for the nine months ended September 30, 2009 was $8,400, a decreaseof $13,507 or 264.48% compared to net income of $5,107 for the nine monthsended September 30, 2008.  The decrease was attributable to a 364.40%increase in the provision for loan loss from $5,790 for the nine months ended September 30,2008 to $26,889 for the same period in 2009. We experienced an increase of $3,897in operating expense for the nine months ended September 30, 2009 comparedto the same period in 2008, which was the result of our overall growth,including a $1,382 increase in FDIC assessments during the nine months ended September 30,2009 compared to the same period in 2008, as well as an increase in personneland general operating expenses attributable to our growth. 

 
| ** **                                          | ** ** | **Nine Months Ended********September ****30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2009**                                                      | ** ** | **2008**   | ** ** | **% Change** | ** ** |
|                                                |       |                                                          |       |       |       |   |   |
| Interest  income                                    |       | $                                                             | 60,005     |       | $          | 55,671 |   | 7.79 | % |
| Interest  expense                                   |       | 28,290                                                        |       | 30,539     |       | (7.36 | ) |
| Net  interest income                                |       | 31,715                                                        |       | 25,132     |       | 26.19 |   |
| Provision  for loan losses                          |       | 26,889                                                        |       | 5,790      |       | 364.40 |   |
| Net  interest after provision for loan losses       |       | 4,826                                                         |       | 19,342     |       | (75.05 | ) |
| Non-interest  (loss) income                         |       | (181                                                          | )          | 1,428      |       | (112.68 | ) |
| Non-interest  expense                               |       | 16,337                                                        |       | 12,440     |       | 31.33 |   |
| Net  (loss) income before taxes                     |       | (11,692                                                       | )          | 8,330      |       | (240.36 | ) |
| Income  tax (benefit) expense                       |       | (4,463                                                        | )          | 3,223      |       | (238.47 | ) |
| Net  (loss) income                                  |       | (7,229                                                        | )          | 5,107      |       | (241.55 | ) |
| Preferred  dividends                                |       | (1,171                                                        | )          | —     |       | — |   |
| Net  (loss) income available to common shareholders |       | $                                                             | (8,400     | )          | $          | 5,107 |   | (264.48 | )% |

 

**Provisionfor Loan Losses**- The provision for loan losses for the nine months ended September 30,2009 was $26,889, an increase of $21,099, or 364.40%, above the provisionof $5,790 expensed in the same period in 2008.  This increase wasprimarily a result of loan growth, increasing the loan loss reserve from 1.22%to 1.70% and a charge-off of $3,000 on an $8,500 loan involving apparent fraud.We have additionally defined an impairment of $1,500 under FASB ASC 310,“Receivables,” for this loan and we are in the process of recovering thebalance through corporate and personal bankruptcy proceedings. We are currentlyunable to quantify the amount of potential recovery for this loan. At September 30,2009, the loan loss reserve of $19,690 was 1.70% of gross loans of $1,159,705.

 

**Non-interestIncome** -Non-interest income decreased by 112.68% or $1,609, from $1,428 in the ninemonths ended September 30, 2008 to a loss of $181 for the same period in2009. The decrease was primarily a result of losses on sales of loans andrepossessed assets in the transportation sector.   The loss on loansales was $649 for the nine-month period ended September 30, 2009 comparedto a gain of $1,419 for the same period in 2008. The decrease in loan sales wasa result of the lack of gains on loan sales in 2009. We lost $649 on loan saletransactions in the nine months ended September 30, 2009, a 145.74%decrease compared to $1,419 earned during the same period in 2008. Thisdecrease was primarily a result of timing differences. Management will continueto consider loan sale transactions if the opportunity for a reasonable returnis available.

 

We earned $22 in mortgageorigination fees during the nine months ended September 30, 2009 comparedto $28 during the same period in 2008, a decrease of $6 or 21.43%, primarily asa result of a slower market.  We recognized $870 on the sale of securitiesin the nine months ended September 30, 2009 compared with a $67 loss forthe same period in 2008. The gain on sale of securities in 2009 was a result offavorable market variations.

 

**Non-interestExpense** -Non-interest expense for the nine months ended September 30, 2009 was$16,337, an increase of $3,897 or 31.33%, over the $12,440 expensed in the sameperiod in 2008. Approximately 35.46% of the increase was a result ofincreases in FDIC assessments, 32.77% of the increase was a result ofincreases in personnel and 17.40% of the increase was a result of increasedcollections expenses. At September 30, 2009, the Bank had 87 full-timeemployees compared with 80 employees at September 30, 2008.

 

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**NetInterest Income**— Net interest income for the nine months ended September 30, 2009 was$31,715 compared to $25,132 for the same period in 2008, an increase of $6,583or 26.19%.  The increase in net interest income was largely attributableto a lower cost of funds and increased loan fees.  The average net loanbalance for the nine months ended September 30, 2009 increased by 23.12%or $207,222 to $1,103,463 from $896,241 for that period in 2008. Loan growthwas accompanied by an increase in average interest-bearing deposits from$895,780 for the nine months ended September 30, 2008, to $1,118,552 forthe same period in 2009, an increase of $222,772 or 24.87%.

 

The following tableoutlines the components of net interest income for the nine-month periods endedSeptember 30, 2009 and 2008 and identifies the impact of changes in volumeand rate:

 
| ** **                    | ** ** | **September ****30, 2009 change from********September ****30, 2008 due to:** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Volume**                                                                                                           | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                                                                                                 |       |   |   |   |   |
| Interest  income              |       |                                                                                                                 |       |   |   |   |   |
| Loans                         |       | $                                                                                                                    | 11,054     |   | $ | (7,275 | ) | $ | 3,779 |   |
| Securities  (taxable) (1)     |       | 872                                                                                                                  |       | (181 | ) | 691 |   |
| Federal  funds sold           |       | (8                                                                                                                   | )          | (128 | ) | (136 | ) |
| Total  interest income        |       | 11,918                                                                                                               |       | (7,584 | ) | 4,334 |   |
|                          |       |                                                                                                                 |       |   |   |   |   |
| Interest  expense             |       |                                                                                                                 |       |   |   |   |   |
| Deposits  (other than demand) |       | 6,355                                                                                                                |       | (8,888 | ) | (2,533 | ) |
| Federal  funds purchased      |       | 99                                                                                                                   |       | (230 | ) | (131 | ) |
| Subordinated  debt            |       | 450                                                                                                                  |       | (35 | ) | 415 |   |
| Total  interest expense       |       | 6,904                                                                                                                |       | (9,153 | ) | (2,249 | ) |
|                          |       |                                                                                                                 |       |   |   |   |   |
| Net  interest income          |       | $                                                                                                                    | 5,014      |   | $ | 1,569 |   | $ | 6,583 |   |

 

----

(1)   Unrealized gain of $843 and $31 isexcluded from yield calculation for the nine months ended September 30,2009 and 2008, respectively.

 

**NetInterest Margin**- The net interest margin increased from 3.40% for the nine months ended September 30,2008 to 3.49% for the same period in 2009 because of a decrease in our cost fordeposits.  Interest income increased by $4,334 or 7.79%, from $55,671during the nine months ended September 30, 2008 to $60,005 during the sameperiod in 2009. The increase was primarily a result of increased loan  fees.  Average earning assets increasedfrom $986,080 in the nine months ended September 30, 2008 to $1,215,020 inthe same period in 2009, an increase of $228,940 or 23.22%, primarily as aresult of loan growth. Average loan balances increased by $207,222 or 23.12%for the nine months ended September 30, 2009, from the same period in2008.  The average yield on earning assets decreased from 7.54% in thenine months ended September 30, 2008 to 6.60% in the same period in 2009.The decrease in the cost of funds, as a percentage of average balances, wasprimarily a result of decreases in short-term interest rates paid on depositswhich fund our assets. Between September 30, 2008 and September 30,2009, the FOMC lowered the federal funds rate by 196 basis points.

 

**InterestExpense** —Interest expense decreased from $30,539 in the nine months ended September 30,2008 to $28,290 in the nine months ended September 30, 2009. While averageinterest earning liabilities decreased by $240,757 or 25.96%, the cost offunds decreased from 4.29% in the nine months ended September 30, 2008 to 3.17%during the same period in 2009, a decrease of 112 basis points.

 

**IncomeTaxes** — Oureffective tax rate for the nine months ended September 30, 2009 was 38.17%compared to 38.69% for the nine months ended September 30, 2008.Management anticipates that tax rates in future periods will approximate therates paid in 2009.

 

**EfficiencyRatio** — Ourefficiency ratio for the nine months ended September 30, 2009 and 2008 was51.81% and 46.84%, respectively, an increase of 497 basis points. The followingtable reflects the calculation of the efficiency ratio:

 
| ** **                  | ** ** | **Nine Months Ended********September ****30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                                      | ** ** | **2008** | ** ** |
| Non-interest  expense       |       | $                                                             | 16,337     |   | $ | 12,440 |   |
|                        |       |                                                          |       |   |   |
| Net  interest income        |       | 31,715                                                        |       | 25,132 |   |
| Non-interest  (loss) income |       | (181                                                          | )          | 1,428 |   |
| Net  revenues               |       | $                                                             | 31,534     |   | $ | 26,560 |   |
|                        |       |                                                          |       |   |   |
| Efficiency  ratio           |       | 51.81                                                         | %          | 46.84 | % |

 

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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, 2009 and 2008. The table is presented on a taxequivalent basis, as applicable.

 
| ** **                                       | ** ** | **Nine Months Ended September 30,********2009** | ** ** | **Nine Months Ended September 30,********2008** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                                         | ** ** | ** **                                                          | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Balance**                                                         | ** ** | **Interest**                                                        | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest  earning assets                         |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Securities  (taxable) (1)                        |       | $                                                                   | 104,123    |                                                                | $          | 4,089 |   | 5.21 | % | $ | 81,985 |   | $ | 3,398 |   | 5.53 | % |
| Loans  (2) (3)                              |       | 1,103,463                                                           |       | 55,904                                                              |       | 6.77 | % | 896,241 |   | 52,125 |   | 7.77 | % |
| Federal  funds sold                              |       | 7,434                                                               |       | 12                                                                  |       | 0.22 | % | 7,854 |   | 148 |   | 2.52 | % |
| Total  interest earning assets                   |       | 1,215,020                                                           |       | 60,005                                                              |       | 6.60 | % | 986,080 |   | 55,671 |   | 7.54 | % |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  earning assets                     |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Cash  and due from banks                         |       | 8,905                                                               |       |                                                                |       |   |   | 3,612 |   |   |   |   |   |
| Net  fixed assets and equipment                  |       | 2,205                                                               |       |                                                                |       |   |   | 1,760 |   |   |   |   |   |
| Accrued  interest and other assets               |       | 68,587                                                              |       |                                                                |       |   |   | 28,826 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total  assets                                    |       | $                                                                   | 1,294,717  |                                                                |       |   |   |   | $ | 1,020,278 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**    |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                    |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Deposits  (other than demand)                    |       | $                                                                   | 1,118,552  |                                                                | $          | 26,807 |   | 3.20 | % | $ | 895,780 |   | $ | 29,340 |   | 4.38 | % |
| Federal  funds purchased                         |       | 16,596                                                              |       | 75                                                                  |       | 0.60 | % | 9,204 |   | 206 |   | 2.99 | % |
| Subordinated  debt                               |       | 33,198                                                              |       | 1,408                                                               |       | 5.67 | % | 22,605 |   | 993 |   | 5.87 | % |
| Total  interest-bearing liabilities              |       | 1,168,346                                                           |       | 28,290                                                              |       | 3.24 | % | 927,589 |   | 30,539 |   | 4.40 | % |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing demand deposits            |       | 23,855                                                              |       |                                                                |       |   |   | 23,870 |   |   |   |   |   |
| Other  liabilities                               |       | 6,873                                                               |       |                                                                |       |   |   | 3,749 |   |   |   |   |   |
| Shareholders’  equity                       |       | 95,643                                                              |       |                                                                |       |   |   | 65,070 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                                   | 1,294,717  |                                                                |       |   |   |   | $ | 1,020,278 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net  interest spread                             |       | 3.36                                                                | %          |                                                                |       |   |   | 3.14 | % |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net  interest margin                             |       | 3.49                                                                | %          |                                                                |       |   |   | 3.40 | % |   |   |   |   |

 

----

(1) ** **Unrealized gain of $843 and $31 areexcluded from yield calculation for the nine months ended September 30,2009 and 2008, respectively.

(2)  Non-accrual loans are included in averageloan balances, and loan fees of $3,951 and $3,698 are included in interestincome for the nine months ended September 30, 2009 and 2008,respectively.

(3)  Loans are presented net of allowance forloan loss.

 

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**Comparisonof Financial Condition at****September ****30, 2009 and December 31, 2008**

 

**Assets****—** Total assets at September 30, 2009were $1,335,751, an increase of $117,667, or 9.66%, over total assets of$1,218,084 at December 31, 2008. Loan growth was the primary driver of theincrease.  At September 30, 2009, net loans equaled $1,140,015, up$116,744, or 11.41%, over the December 31, 2008 total net loans of$1,023,271. The cash and cash equivalents balance decreased by $15,100 between December 31,2008 and September 30, 2009, as funds were used to fund loans made in thefirst three quarters of 2009.

 

Our business bank modelof operation generally results in a higher level of earning assets than ourpeer banks.  Earning assets are defined as assets that earn interestincome and include short-term investments, the investment portfolio and netloans.  We generally maintain a higher level of earning assets than ourpeer banks because fewer assets are allocated to facilities, cash and “duefrom” bank accounts used for transaction processing.  Earning assets at September 30,2009 were $1,234,675 or 92.43% of total assets of $1,335,751.  Earningassets at December 31, 2008 were $1,160,099, or 95.24% of total assets of$1,218,084.

 

**Loans** — We had total net loans of $1,140,015at September 30, 2009. The following table sets forth the composition ofour loan portfolio at September 30, 2009 and December 31, 2008:

 
| ** **                              | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Real  estate                            |       |                               |       |                              |       |
| Construction                            |       | $                                  | 206,512    |                              | $          | 181,638 |   |
| 1 to  4 family residential              |       | 40,033                             |       | 37,822                            |       |
| Other                                   |       | 198,653                            |       | 171,150                           |       |
| Commercial,  financial and agricultural |       | 637,016                            |       | 589,518                           |       |
| Consumer                                |       | 3,421                              |       | 3,572                             |       |
| Other                                   |       | 74,070                             |       | 53,025                            |       |
|                                    |       |                               |       |                              |       |
| Total  loans                            |       | 1,159,705                          |       | 1,036,725                         |       |
| Less:  allowance for loan losses        |       | (19,690                            | )          | (13,454                           | )          |
|                                    |       |                               |       |                              |       |
| Net  loans                              |       | $                                  | 1,140,015  |                              | $          | 1,023,271 |   |

 

The following table setsforth the percentage composition of our loan portfolio by type at September 30,2009 and December 31, 2008:

 
| ** **                              | ** ** | **September ****30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| Real  estate:                           |       |                                   |       |                              |       |
| Construction                            |       | 17.81                                  | %          | 17.52                             | %          |
| 1 to  4 family residential              |       | 3.45                                   |       | 3.65                              |       |
| Other                                   |       | 17.13                                  |       | 16.51                             |       |
| Commercial,  financial and agricultural |       | 54.93                                  |       | 56.86                             |       |
| Consumer                                |       | 0.29                                   |       | 0.34                              |       |
| Other                                   |       | 6.39                                   |       | 5.12                              |       |
|                                    |       |                                   |       |                              |       |
| Total                                   |       | 100.00                                 | %          | 100.00                            | %          |

 

The following table setsforth the composition of our commercial loan portfolio by source at September 30,2009 and December 31, 2008:

 
| ** **         | ** ** | **September ****30,********2009** | ** ** | **December 31,********2008** | ** ** |
|--------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **Amount**                             | ** ** | **%**                             | ** ** | **Amount** | ** ** | **%** | ** ** |
|               |       |                                   |       |                              |       |   |   |   |   |
| Direct  funding    |       | $                                      | 317,368    |                              | 49.82      | % | $ | 267,542 |   | 45.38 | % |
| Indirect  funding: |       |                                   |       |                              |       |   |   |   |   |
| Large              |       | 143,493                                |       | 22.53                             |       | 148,538 |   | 25.20 |   |
| Small              |       | 176,155                                |       | 27.65                             |       | 173,438 |   | 29.42 |   |
| Total              |       | $                                      | 637,016    |                              | 100.00     | % | $ | 589,518 |   | 100.00 | % |

 

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.

 

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The following tablepresents information regarding non-accrual, past due and restructured loans at September 30,2009 and December 31, 2008:

 
| ** **                                                                                               | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Non-accrual  loans:                                                                                      |       |                         |       |                        |       |
| Number                                                                                                   |       | 260                          |       | 186                         |       |
| Amount                                                                                                   |       | $                            | 28,854     |                        | $          | 11,603 |   |
|                                                                                                     |       |                         |       |                        |       |
| Accruing  loans which are contractually past due 90 days or more as to principal and  interest payments: |       |                         |       |                        |       |
| Number                                                                                                   |       | 22                           |       | 51                          |       |
| Amount                                                                                                   |       | $                            | 1,332      |                        | $          | 18,788 |   |
|                                                                                                     |       |                         |       |                        |       |
| Loans  defined as “troubled debt restructurings”:                                              |       |                         |       |                        |       |
| Number                                                                                                   |       | 1                            |       | 3                           |       |
| Amount                                                                                                   |       | $                            | 114        |                        | $          | 668 |   |

 

As of September 30,2009 and December 31, 2008, there were no loans classified for regulatorypurposes as doubtful or substandard that are not disclosed in the above table,which (i) represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity or capital resources, or (ii) represent material credits aboutwhich management is aware of any information that causes management to haveserious doubts as to the ability of such borrowers to comply with the loanrepayment terms. During the nine months ended September 30, 2009, troubleddebt restructurings decreased to only one credit in a total amount of $114. At September 30,2009, total impaired loans including non-accruals totaled $77,630.

 

**Allowancefor Loan Losses**— The maintenance of an adequate allowance for loan losses, or ALL, is one ofthe fundamental concepts of risk management for every financial institution.Management is responsible for ensuring that controls are in place to ensure theadequacy of the loan loss reserve in accordance with generally acceptedaccounting principles, our stated policies and procedures, and regulatoryguidance.

 

It is management’s intentto maintain an ALL that is adequate to absorb current and estimated losseswhich are inherent in a loan portfolio.  The historical loss ratio (netcharge-offs as a percentage of average loans) was 1.85% for the nine monthsended September 30, 2009, which included a single write-down of $3,000 ona loan that involved apparent customer fraud, and 0.43% for the nine months ended September 30, 2008. The ALL asa percentage of the outstanding loans at the end of the period was 1.70% at September 30,2009, and 1.22% at September 30, 2008.

 

An analysis of our ALLand net charge-offs is furnished in the following table for the nine monthsended September 30, 2009 and the same period ended September 30,2008:

 
| ** **                                                                                         | ** ** | **September ****30,********2009** | ** ** | **September ****30,********2008** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Allowance  for loan losses at beginning of period                                                  |       | $                                      | 13,454     |                                   | $          | 10,321 |   |
| Charge-offs:                                                                                       |       |                                   |       |                                   |       |
| Real  estate:                                                                                      |       |                                   |       |                                   |       |
| Construction                                                                                       |       | 2,918                                  |       | 205                                    |       |
| 1 to  4 family residential                                                                         |       | 346                                    |       | —                                 |       |
| Other                                                                                              |       | 346                                    |       | —                                 |       |
| Commercial,  financial and agricultural                                                            |       | 18,242                                 |       | 3,685                                  |       |
| Consumer                                                                                           |       | 13                                     |       | 77                                     |       |
| Total  Charge-offs                                                                                 |       | 21,865                                 |       | 3,967                                  |       |
|                                                                                               |       |                                   |       |                                   |       |
| Recoveries:                                                                                        |       |                                   |       |                                   |       |
| Real  estate:                                                                                      |       |                                   |       |                                   |       |
| Construction                                                                                       |       | —                                 |       | —                                 |       |
| 1 to  4 family residential                                                                         |       | —                                 |       | —                                 |       |
| Other                                                                                              |       | —                                 |       | —                                 |       |
| Commercial,  financial and agricultural                                                            |       | 1,211                                  |       | 44                                     |       |
| Consumer                                                                                           |       | 1                                      |       | 3                                      |       |
| Total  Recoveries                                                                                  |       | 1,212                                  |       | 47                                     |       |
|                                                                                               |       |                                   |       |                                   |       |
| Net  Charge-offs                                                                                   |       | 20,653                                 |       | 3,920                                  |       |
|                                                                                               |       |                                   |       |                                   |       |
| Provision  for loans charged to expense                                                            |       | 26,889                                 |       | 5,790                                  |       |
| Allowance  for loan losses at end of period                                                        |       | $                                      | 19,690     |                                   | $          | 12,191 |   |
| ** **                                                                                         | ** ** | ** **                             | ** ** | ** **                             | ** ** |
| ** **                                                                                         | ** ** | **September ****30,  2009**       | ** ** | **September ****30,  2008**       | ** ** |
| Net  charge-offs as a percentage of average total loans outstanding during the  period             |       | 1.85                                   | %          | 0.43                                   | %          |
|                                                                                               |       |                                   |       |                                   |       |
| Ending  allowance for loan losses as a percentage of total loans outstanding at end  of the period |       | 1.70                                   | %          | 1.22                                   | %          |

 

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.

 

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**Securities** — The securities portfolio at September 30,2009 was $86,000 compared to $101,290 at December 31, 2008.  We viewthe securities portfolio as a source of income and liquidity.  Thesecurities portfolio was 6.44% of total assets at September 30, 2009 and8.32% of total assets at December 31, 2008.

 

**Liabilities****—** We depend on a growing deposit base tofund loan and other asset growth. We compete for local deposits by offeringattractive products with premium rates.  We also obtain funding in thewholesale deposit 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. Wholesale deposits are categorized as “Purchased timedeposits” on the detail of deposits shown in the table below.

 

**Depositsand Funding** —Total deposits at September 30, 2009 were $1,202,285, up $133,142 or12.45% over the December 31, 2008 total deposits of $1,069,143. Totalaverage deposits during the nine months ended September 30, 2009 were$1,142,407, an increase of $222,757, or 24.22% over the total average depositsof $919,650 during the nine months ended September 30, 2008. Averagenon-interest bearing demand deposits decreased by $15, or 0.06%, from $23,870in the nine months ended September 30, 2008, to $23,855 in the nine monthsended September 30, 2009.

 

Utilizing a combinationof funding sources from the pledging of investment securities and the FederalHome Loan Bank, this funding portfolio had a weighted average maturity of onemonth and a weighted average rate of 0.26, as there was no balance at September 30,2009. This strategy was primarily executed to reduce overnight liquidity riskand to mitigate interest rate sensitivity on the balance sheet. At September 30,2009, the maximum available advance was $17,654 with no outstanding principalbalance and at December 31, 2008, there was no outstanding principalbalance. At September 30, 2009, the total capital stock balance was 2,169shares with a value of $2,169.

 

The following table setsforth average deposit balances for the nine months ended September 30,2009 and 2008 and the average rates paid on those balances:

 
| ** **                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **Average********Balance**                              | ** ** | **Average********Rate********Paid (1)** | ** ** | **Average********Balance** | ** ** | **Average********Rate********Paid (1)** | ** ** |
| Types  of Deposits:                   |       |                                                    |       |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                                       | 23,855     |   | — | % | $ | 23,870 |   | — | % |
| Interest-bearing  demand deposits     |       | 6,991                                                   |       | 0.14 |   | 6,704 |   | 0.92 |   |
| Money  market accounts                |       | 42,851                                                  |       | 0.77 |   | 69,502 |   | 2.30 |   |
| Savings  accounts                     |       | 48,942                                                  |       | 2.22 |   | 6,412 |   | 2.72 |   |
| IRA  accounts                         |       | 37,279                                                  |       | 3.82 |   | 23,972 |   | 4.80 |   |
| Purchased  time deposits              |       | 550,128                                                 |       | 3.54 |   | 428,489 |   | 4.62 |   |
| Time  deposits                        |       | 432,361                                                 |       | 3.13 |   | 360,701 |   | 4.55 |   |
| Total  deposits                       |       | $                                                       | 1,142,407  |   |   |   | $ | 919,650 |   |   |   |

 

----

(1)    Rate is annualized

 

**Short-TermDebt** — As of May 4,2009, we obtained a $10,000 line of credit with a qualified investor. Thebalance on this line of credit was $10,000 at September 30, 2009. The lineof credit matures on April 30, 2010.

 

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**SubordinatedDebt** — In March 2005,we formed a financing subsidiary, Tennessee Commerce Statutory Trust I, aDelaware statutory trust, or the Trust I. In March 2005, the Trust Iissued and sold 8,000 of the Trust I’s fixed/floating rate capital securities,with a liquidation 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 8.0% or less than 5.75%).

 

In accordance with FASBInterpretation No. 46 (revised December 2003) “Consolidation ofVariable Interest Entities,” neither the Trust I nor the Trust II is consolidated.We report as liabilities the subordinated debentures issued by us and held bythe Trust I and Trust II.

 

**Off-BalanceSheet Arrangements**

 

We are a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of our customers. At September 30,2009, we had unfunded loan commitments outstanding of $94,317 and standbyletters of credit and financial guarantees of $8,938. Those instrumentsinvolve, to varying degrees, elements of credit risk in excess of the amountrecognized in the balance sheet.  The contract or notional amounts ofthose instruments reflect the extent of our involvement in those particularfinancial instruments. We use the same credit policies in making commitmentsand conditional 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 30,2009 totaling $38,700.

 

**Liquidity/Capital Resources**

 

**Liquidity** — Of primary importance to depositors,creditors and regulators is the ability to have readily available fundssufficient to repay fully maturing liabilities.  We are subject to generalFDIC guidelines, which do not require a minimum level of liquidity. Liquidityrequirements can be met through short-term borrowings or the disposition ofshort-term assets which are generally matched to correspond to the maturity ofliabilities. Management believes our liquidity ratios meet the general FDIC guidelinesand we have assets and borrowing capacity to provide adequate liquidity.Management does not know of any trends or demands that are reasonably likely toresult in our liquidity increasing or decreasing in any material manner.

 

**CapitalResources****—** Our objective is to maintain alevel of capitalization that is sufficient to take advantage of profitablegrowth opportunities while meeting regulatory requirements. To continue togrow, we must increase capital by generating earnings, issuing equities,borrowing funds or a combination of those activities.

 

The Federal Reserve Boardhas adopted capital guidelines governing the activities of bank holdingcompanies.  These guidelines require the maintenance of an amount ofcapital based on risk-adjusted assets so that categories of assets withpotentially higher credit risk will require more capital backing than assetswith lower risk.  In addition, banks and bank holding companies arerequired to maintain capital to support, on a risk-adjusted basis, certainoff-balance sheet activities such as loan commitments.

 

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% to 100%, 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 the regulators.The framework for calculating risk-based capital requires banks and bankholding companies to meet the regulatory minimums of 4% Tier I and 8%total risk-based capital. In 1990, regulators added a leverage computation tothe capital requirements, comparing Tier I capital to total average assetsless 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 I capital,total risk-based capital, Tier I leverage ratios and its supervisoryratings.

 

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At September 30,2009 and December 31, 2008, the Bank’s and our risk-based capital ratiosand the minimums for both capital adequacy and to be consideredwell-capitalized under the Federal Reserve Board’s prompt corrective actionguidelines were as follows:

 
| ** **                                               | ** ** | ** **             | ** ** | ** **            | ** ** | ** **           | ** ** | **Minimum to**    | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                               | ** ** | ** **             | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **be considered** | ** ** |
| ** **                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **well-**              | ** ** |
| ** **                                               | ** ** | **2009**               | ** ** | **2008**              | ** ** | **adequacy**         | ** ** | **capitalized**        | ** ** |
|                                                     |       |                   |       |                  |       |                 |       |                   |       |
| Tier  1 leverage ratio                                   |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 8.66                   | %          | 9.26                  | %          | 4.00                 | %          | 5.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 8.59                   | %          | 10.62                 | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |                   |       |                  |       |                 |       |                   |       |
| Tier  1 “core” capital to risk-weighted assets |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 9.43                   | %          | 9.79                  | %          | 4.00                 | %          | 6.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 9.36                   | %          | 11.20                 | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |                   |       |                  |       |                 |       |                   |       |
| Total  capital to risk-weighted assets                   |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 10.68                  | %          | 11.01                 | %          | 8.00                 | %          | 10.00                  | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 10.62                  | %          | 12.42                 | %          | 8.00                 | %          | n/a                    |       |

 

Based solely on ouranalysis of federal banking regulatory categories, on September 30, 2009and December 31, 2008, we and the Bank met the minimum requirements forcapital adequacy and the Bank was within the “well capitalized” categoriesunder the regulations.

 

**Impactof Inflation and Changing Prices** — The financial statements and related financial datapresented herein have been prepared in accordance with U.S. generally acceptedaccounting principles which require the measurement of financial position andoperating results in terms of historical dollars without considering thechanges in the relative purchasing power of money over time and resulting frominflation. The impact of inflation on operations of the Bank is reflected inincreased operating costs. Unlike most industrial companies, almost all of theassets and liabilities of the Bank are monetary in nature. As a result,interest rates have a more significant impact on the Bank’s performance thanthe effects of general levels of inflation. Interest rates do not necessarilymove in the same direction or in the same magnitude as the price of goods andservices.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET 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 measuresscheduled maturities in periods of one to three months, four to 12 months, oneto five years and over five years. The chart below illustrates our ratesensitive position at September 30, 2009. Management uses the one-year gapas the appropriate 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                                              |       | $            | 8,660      |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 8,660 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |             |       |       |       |
| U.S.  government agencies                                        |       | —       |       | 38,421     |       | —     |       | —    |       | 47,379           |       | 85,800     |       |
| Mortgage-backed  securities                                      |       | —       |       | 25         |       | 75         |       | 100       |       | —           |       | 200        |       |
| Total  securities                                                |       | —       |       | 38,446     |       | 75         |       | 100       |       | 47,379           |       | 86,000     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  loans                                                     |       | 228,715      |       | 205,476    |       | 383,585    |       | 296,999   |       | 44,930           |       | 1,159,705  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  interest-earning assets                                   |       | 237,375      |       | 243,922    |       | 383,660    |       | 297,099   |       | 92,309           |       | 1,254,365  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  assets                                                    |       | —       |       | —     |       | —     |       | —    |       | 81,386           |       | 81,386     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  assets                                                    |       | $            | 237,375    |       | $          | 243,922    |       | $         | 383,660    |             | $          | 297,099    |       | $ | 173,695 |   | $ | 1,335,751 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest-bearing  liabilities                                    |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest  checking                                               |       | $            | 2,097      |       | $          | —     |       | $         | —     |             | $          | 3,280      |       | $ | — |   | $ | 5,377 |   |
| Money  market and savings                                        |       | 166,747      |       | —     |       | —     |       | 74,916    |       | —           |       | 241,663    |       |
| Time  deposits                                                   |       | —       |       | 232,435    |       | 347,518    |       | 349,578   |       | —           |       | 929,531    |       |
| Total  deposits                                                  |       | 168,844      |       | 232,435    |       | 347,518    |       | 427,774   |       | —           |       | 1,176,571  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Federal  funds purchased                                         |       | —       |       | —     |       | —     |       | —    |       | —           |       | —     |       |
| Short-term  debt                                                 |       | —       |       | —     |       | 10,000     |       | —    |       | —           |       | 10,000     |       |
| Subordinated  debt                                               |       | —       |       | —     |       | —     |       | —    |       | 23,198           |       | 23,198     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  interest-bearing liabilities                              |       | 168,844      |       | 232,435    |       | 357,518    |       | 427,774   |       | 23,198           |       | 1,209,769  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 33,210           |       | 33,210     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Shareholders’  equity                                       |       | —       |       | —     |       | —     |       | —    |       | 92,772           |       | 92,772     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  liabilities and shareholders’ equity                 |       | $            | 168,844    |       | $          | 232,435    |       | $         | 357,518    |             | $          | 427,774    |       | $ | 149,200 |   | $ | 1,335,751 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate  sensitive gap by period                                    |       | $            | 68,531     |       | $          | 11,487     |       | $         | 26,142     |             | $          | (130,675   | )          | $ | 69,111 |   |   |   |
| Cumulative  gap                                                  |       |         |       | $          | 80,018     |       | $          | 106,160   |       | $                | (24,515    | )          | $          | 44,596 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Cumulative  gap as a percentage of total assets                  |       |         |       | 5.99       | %          | 7.95       | %          | (1.84     | )%         | 3.34             | %          |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate  sensitive assets / rate sensitive liabilities (cumulative) |       | 1.41         |       | 1.20       |       | 1.14       |       | 0.98      |       | 1.04             |       |       |       |

 

From September 30,2008 to September 30, 2009, the FOMC decreased interest rates by 196 basispoints. Management has positioned the balance sheet to be essentially neutralfor asset and liability sensitivity. At September 30, 2009, our one-yeargap was 1.14.

 

The interest rate riskmodel that defines the gap position also performs a “rate shock” test of thebalance sheet using an earnings simulation model and an economic value ofequity model. The rate shock test measures the impact on the net interestmargin and the economic value of equity of an immediate shift in interest ratesin either direction.

 

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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. At September 30,2009, we were in compliance with this guideline.

 

Our economic value ofequity model 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 interest rates,the economic value of equity will not decrease by more than 10% from the basecase. At September 30, 2009, we were in compliance with this guideline.

 

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

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

**InternalControl Over Financial Reporting**

 

There were no changes inour internal control over financial reporting during the quarter ended September 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II: OTHER INFORMATION**

 

**ITEM1A. RISK FACTORS.**

 

There were no materialchanges to our risk factors included in Part I, Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2008, asfiled with the Securities and Exchange Commission on March 16, 2009.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

We held a special meetingof shareholders on July 30, 2009, at which the shareholders considered aproposal to amend our charter to increase the number of authorized shares ofour common stock to 20,000,000. The shareholders approved this proposal inaccordance with the following vote:

 

| **Votes Cast** | ** ** | ** **  | ** ** | **Broker**  | ** ** |
|----------------|------------|-------------|------------|-------------|------------|
| **For**        | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 2,695,460      |       | 423,240     |       | 310,535     |       | — |   |

 

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**ITEM6. EXHIBITS.**

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
|                 |       |            |
| 3.1                  |       |            | Charter of Tennessee  Commerce Bancorp, Inc., as amended |
| 3.2                  |       |            | Bylaws of Tennessee  Commerce Bancorp, Inc.(1) |
| 3.3                  |       |            | Amendment to Bylaws of  Tennessee Commerce Bancorp, Inc.(2) |
| 4.1                  |       |            | Shareholders’  Agreement(1) |
| 4.2                  |       |            | Form of Stock  Certificate(3) |
| 4.3                  |       |            | Indenture, dated as of  June 20, 2008, between Tennessee Commerce Bancorp, Inc. and  Wilmington Trust Company, as trustee(4) |
| 4.4                  |       |            | Amended and Restated  Declaration of Trust, dated as of June 20, 2008, among Tennessee  Commerce Bancorp, Inc., as sponsor, Wilmington Trust Company, as  institutional and Delaware trustee, and Arthur F. Helf, H. Lamar Cox and  Michael R. Sapp, as administrators(5) |
| 4.5                  |       |            | Guarantee Agreement,  dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.  and Wilmington Trust Company(4) |
| 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 |

 

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| (1)    |   | 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.                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| (2)    |   | 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.                                              |
|   |   |                                                                                                                                                                                                                                                                                 |
| (3)    |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                 |
| (4)    |   | 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.                                                      |
|   |   |                                                                                                                                                                                                                                                                                 |
| (5)    |   | 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.                                                    |
|   |   |                                                                                                                                                                                                                                                                                 |

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                   |   | Tennessee Commerce  Bancorp, Inc. |
|------------------------|--------|----------------------------------------|
|                   |   | (Registrant)                           |
|                   |   |                                   |
|                   |   |                                   |
| November 06, 2009 |   | /s/ Frank Perez                        |
| (Date)                 |   | Frank Perez                            |
|                   |   | Chief Financial Officer                |

 

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**INDEXTO EXHIBITS**

** **
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
|                 |       |            |
| 3.1                  |       |            | Charter of Tennessee  Commerce Bancorp, Inc., as amended |
| 3.2                  |       |            | Bylaws of Tennessee  Commerce Bancorp, Inc.(1) |
| 3.3                  |       |            | Amendment to Bylaws of  Tennessee Commerce Bancorp, Inc.(2) |
| 4.1                  |       |            | Shareholders’  Agreement(1) |
| 4.2                  |       |            | Form of Stock  Certificate(3) |
| 4.3                  |       |            | Indenture, dated as of  June 20, 2008, between Tennessee Commerce Bancorp, Inc. and  Wilmington Trust Company, as trustee(4) |
| 4.4                  |       |            | Amended and Restated  Declaration of Trust, dated as of June 20, 2008, among Tennessee Commerce  Bancorp, Inc., as sponsor, Wilmington Trust Company, as institutional  and Delaware trustee, and Arthur F. Helf, H. Lamar Cox and Michael R. Sapp,  as administrators(5) |
| 4.5                  |       |            | Guarantee Agreement,  dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.  and Wilmington Trust Company(4) |
| 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 |

 

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| (1)    |   | 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.                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| (2)    |   | 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.                                              |
|   |   |                                                                                                                                                                                                                                                                                 |
| (3)    |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                 |
| (4)    |   | 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.                                                      |
|   |   |                                                                                                                                                                                                                                                                                 |
| (5)    |   | 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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