TNCC Tennessee Commerce Bancorp (TN) (MM)

Use these links to rapidly review the document
TABLE OF CONTENTS
TENNESSEE COMMERCE BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2010 and 2009 and for the three-year period ended December 31, 2010

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission file number 000-51281

Tennessee Commerce Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (615) 599-2274

         Securities registered pursuant to Section 12(b) of the Act:

         Securities registered pursuant to Section 12(g) of the Act:

(Title of each class)

         Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o     No  ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o     No  ý

         Indicate by check mark whether registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý     No  o

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  ý

         The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant at June 30, 2010 was $31.75 million, based upon the average sale price on that date.

         As of March 11, 2011, there were 12,194,884 shares of the registrant's common stock outstanding.

Documents Incorporated by Reference:

         Part III information is incorporated herein by reference, pursuant to Instruction G of Form 10-K, to registrant's Definitive Proxy Statement for its 2011 annual meeting of shareholders to be held on May 19, 2011, which will be filed with the Commission no later than April 19, 2011.

---

Table of Contents

TABLE OF CONTENTS

i

---

Table of Contents

PART I

        

ITEM 1.     BUSINESS

General

        Tennessee Commerce Bancorp, Inc. (the "Corporation" or "we" or "us") is a Tennessee corporation that was formed as a bank holding company to own the shares of Tennessee Commerce Bank (the "Bank"). The Bank commenced operations as a Tennessee state chartered bank on January 14, 2000, and is a full service financial institution headquartered in Franklin, Tennessee, 15 miles south of Nashville, Tennessee. Franklin is in Williamson County, one of the most affluent and rapidly growing counties in the nation. The Bank conducts business from a single location in the Cool Springs commercial area of Franklin. The Bank had total assets at December 31, 2010 of $1.5 billion. Although the Bank offers a full range of banking services and products, it operates with a focused "Business Bank" strategy. The Business Bank strategy emphasizes banking services for small-to medium-sized businesses, entrepreneurs and professionals in the local market. The Bank competes by combining the personal service and appeal of a community bank institution with the sophistication and flexibility of a larger bank. This strategy distinguishes the Bank from its competitors in efforts to attract loans and deposits of local businesses. In addition, the Bank accesses a national market through a network of financial service companies and vendor partners that provide indirect funding opportunities for the Bank nationwide.

        The Bank does not compete based on the traditional definition of "convenience" and does not have a branch network for that purpose. Business is conducted from a single office without a teller line, drive-through window or extended banking hours. The Bank competes by providing responsive and personalized service to meet customer needs. Convenience is created by technology and by free courier service which transports deposits directly from the local business locations of customers to the Bank. The Bank provides free electronic banking and cash management tools and on-site training for business customers. The Bank competes for local consumer business by providing superior products, attractive deposit rates, free Internet banking services and access to a third party regional automated teller machine ("ATM") network. The Bank targets service, manufacturing and professional customers rather than retail businesses with high transaction volume.

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

        The Business Bank strategy is evident in differences between the financial statements of the Bank and more traditional financial institutions. The Business Bank model creates a high degree of leverage. By avoiding the investment and maintenance costs of a typical branch network, the Bank is able to maintain earning assets at a higher level than peer institutions. Management targets a minimum earning asset ratio of 90.00% compared to the average of 86.28%, as of December 31, 2010, for all banks insured by the Federal Deposit Insurance Corporation ("FDIC"). Assets of the Bank are centered in the loan portfolio which consists primarily of commercial and industrial loans. Management targets a loan mix of approximately 60% commercial loans and 40% real estate. At December 31, 2010, the composition of the $1.23 billion loan portfolio was 52.71% commercial, 37.84% secured by real estate (both commercial and consumer), 9.15% in tax leases and 0.30% in consumer and credit card loans.

1

---

Table of Contents

        In addition to lending in the local marketplace, the Bank generates assets in the national market by providing collateral-based loans to business borrowers located in other states through two types of indirect funding programs. In both programs, the transactions are originated by a third party, such as an equipment vendor or financial services company, who provides the Bank with a borrower's financial information and arranges for a borrower's execution of loan documentation. The Bank funds these transactions earning strong yields and has no servicing expense or residual risk in any transaction originated by these financial service companies and vendors. The Bank has management and personnel who are experienced in this type of transaction and are able to evaluate and partner effectively with the companies who originate these transactions. All indirect funding is secured by the business asset financed, and is subject to the Bank's minimum credit score and documentation standards. These national market transactions provide geographic and collateral diversity for the portfolio and represent 18.84% of the total loan portfolio at December 31, 2010.

        The two national market funding programs fund different-sized loans through two different networks. In the first type, the Bank uses an established network of financial service companies and vendor partners that provide the Bank funding opportunities to national middle-market and investment grade companies. At December 31, 2010, the average size of this type of loan in the loan portfolio was approximately $386,000 and earned an average yield of 6.17%. Funding under this program represents approximately 7.67% of the $1.23 billion total loan portfolio. In the second program, the Bank partners with a second network of financial service companies and vendors located in Tennessee, Alabama, Georgia, California and Michigan. This program is for smaller transactions involving loans to finance business assets that are less than $150,000 at origination. Management has installed a standardized credit approval process that delivers quick responsive service. At December 31, 2010, the average size of this type of loan in the loan portfolio was approximately $40,000, and the average yield on these loans was 5.63%. Funding under this program represents 11.17% of the $1.23 billion total loan portfolio.

        Management believes the Business Bank model is highly efficient. The Bank targets the non-retail sector of the commercial market, which is characterized by lower levels of transactions and processing costs. The commercial customer mix and the strategic outsourcing of certain administrative functions, such as data processing, allow the Bank to operate with a smaller, more highly trained staff. Management targets an average asset per employee ratio of $15.0 million compared to all banks insured by the FDIC of $6.55 million at December 31, 2010. The Bank also promotes the use of technology, both internally and externally, to maximize the efficiency of operations. Management targets an operating efficiency ratio (total operating expense divided by total revenue) of 45% to 50%.

        The Bank is subject to the regulatory authority of the Tennessee Department of Financial Institutions ("TDFI") and the FDIC.

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

        As a bank holding company, the Corporation's activities are subject to the supervision of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The Corporation's offices are the same as the principal office of the Bank. On March 29, 2005, the Corporation formed a wholly owned subsidiary, Tennessee Commerce Bank Statutory Trust I (the "Trust I"). In June 2008, the Corporation formed a wholly owned subsidiary, Tennessee Commerce Bank Statutory Trust II (the "Trust II") and in July 2008, the Corporation formed a wholly owned subsidiary, TCB Commercial Asset Services, Inc ("TCB"). As of December 31, 2010, the Bank, the Trust I, the Trust II and TCB were the only subsidiaries of the Corporation. The accompanying consolidated financial statements include the accounts of the Corporation, the Bank and TCB. The Trust I and the Trust II are not consolidated in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification (ASC) Topic 810, "Consolidation" ("FASB ASC 810"). Material intercompany accounts and transactions have been eliminated.

2

---

Table of Contents

Corporation Overview

        The Corporation, headquartered in Franklin, Tennessee, is the holding company for the Bank, and the Corporation's primary business is to operate the Bank. The Bank has a focused strategy that serves the banking needs of small to medium-sized businesses, entrepreneurs and professionals in the Nashville metropolitan statistical area, or the Nashville Metropolitan Statistical Area ("MSA"), as well as the funding needs of certain national and regional equipment vendors and financial services companies. The Corporation calls this strategy its Business Bank strategy. The Corporation and Bank primarily conduct business from a single location in the Cool Springs commercial area of Franklin, Tennessee, 15 miles south of Nashville. To concentrate on lending within Tennessee, as of January 31, 2011, the Bank closed its three loan production offices—one in each of Birmingham, Alabama, Minneapolis, Minnesota and Atlanta, Georgia.

        The Bank offers a full range of competitive retail and commercial banking services to local customers in the Nashville MSA. The Bank's deposit services include a broad offering of checking accounts, savings accounts, money market investment accounts, certificates of deposits and retirement accounts. Lending services include consumer installment loans, various types of mortgage loans, personal lines of credit, home equity loans, credit cards, real estate construction loans, commercial loans to small and medium-sized businesses and professionals, and letters of credit. The Bank issues VISA credit cards and is a merchant depository for cardholder drafts under VISA credit cards. The Bank also offers check cards and debit cards and offers its local customers free courier services, access to third-party ATMs, remote deposit and state-of-the-art electronic banking. The Bank has trust powers but does not have a trust department.

Employees

        At December 31, 2010, the Bank employed 99 people on a full-time basis. The Corporation has entered into employment agreements with two of its executive officers who are also employees of the Bank. The Bank's employees are not represented by any union or other collective bargaining agreement and management of the Bank believes its employee relations are satisfactory.

Supervision and Regulation

General

        The Corporation is regulated as a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") as such. The Corporation is required to file reports with, and otherwise comply with, the rules and regulations of the Federal Reserve Board, and of the Securities and Exchange Commission ("SEC") under federal securities laws.

        The Bank, a wholly-owned subsidiary of the Corporation, is a Tennessee state-chartered bank that is subject to regulation, examination and supervision by the TDFI, as the Bank's state regulator, and the FDIC, as the Bank's primary federal regulator and insurer of deposits placed at the Bank.

        The following discussion is intended to provide a summary of the material statutes and regulations applicable to bank holding companies and state-chartered commercial banks, and does not purport to be a comprehensive description of all such statutes and regulations.

Bank Holding Company Regulation

        The BHC Act provides a federal framework for the supervision and regulation of all U.S. bank holding companies and the subsidiaries of such companies. Among the principal purposes of the BHC Act is to protect the safety and soundness of banks controlled by a corporate entity. The BHC Act provides for all bank holding companies to be supervised on a consolidated basis by the Federal Reserve Board. Consolidated supervision of a bank holding company encompasses the parent company and its nonbank

3

---

Table of Contents

subsidiaries, and allows the Federal Reserve Board to understand the organization's structure, activities, resources, and risks, as well as to address financial, managerial, operational, or other deficiencies before they pose a danger to the holding company's subsidiary depository institution.

        To carry out these responsibilities, the BHC Act grants the Federal Reserve Board authority to inspect and obtain reports from a bank holding company and its nonbanking subsidiaries concerning, among other things, the company's financial condition, systems for monitoring and controlling financial and operational risks, and compliance with the BHC Act and other federal laws (including consumer protection laws) that the Federal Reserve Board has specific jurisdiction to enforce. In addition, federal law authorizes the Federal Reserve Board to take action against a bank holding company or nonbank subsidiary to prevent these entities from engaging in "unsafe or unsound" practices or to address violations of law that occur in connection with their own business operations even if those operations are not directly connected to the bank holding company's subsidiary depository institution. Using its authority, the Federal Reserve Board also has established consolidated capital standards for bank holding companies, which help to ensure that each bank holding company maintains adequate capital to support its enterprise-wide activities, does not become excessively leveraged, and is able to serve as a source of strength for a subsidiary depository institution.

        As a bank holding company, the Corporation is required to file with the Federal Reserve Board periodic reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also conducts periodic inspections of the Corporation and has the authority to issue enforcement actions against the Corporation.

        Capital Requirements and Source of Financial Strength.     According to Federal Reserve Board policy and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), bank holding companies are required to act as a source of financial strength to each subsidiary bank and to commit required resources to support each such subsidiary in the event of financial distress of the subsidiary. This support can include precluding the Corporation from paying any dividends or distributions on its outstanding securities, including its trust preferred securities and preferred stock. Moreover, this support obligation may be required at times when a bank holding company may not have the financial means or is otherwise unable to provide such support.

        The capital-based prompt corrective action provisions first implemented as part of the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") and implementing regulations, as discussed below, have historically applied only to FDIC-insured depository institutions rather than being directly applicable to holding companies that control such institutions. However, legislation enacted in July 2010 mandates that new minimum leverage and risk-based capital requirements be imposed on bank holding companies, and the Federal Reserve Board has indicated that, in regulating bank holding companies, it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon any subsidiary depository institution pursuant to such provisions and regulations.

        Payment of Dividends.     The Corporation is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of cash flow to the Corporation, including cash flow to pay dividends to holders of trust preferred securities of the Corporation's trusts, holders of the Fixed Rate Cumulative Perpetual Preferred Stock of the Corporation Series A ("Series A Preferred Stock") and to the holders of the Corporation's common stock, is derived from dividends that the Bank pays to the Corporation as its sole shareholder. Under Tennessee law, the Corporation is not permitted to pay dividends if, after giving effect to such payment, the Corporation would not be able to pay the Corporation's debts as they become due in the usual course of business or the Corporation's total assets would be less than the sum of the Corporation's total liabilities plus any amounts needed to satisfy any preferential rights if the Corporation were dissolving. In addition, in deciding whether or not to declare a dividend of

4

---

Table of Contents

any particular size, the Corporation's board of directors must consider the Corporation's current and prospective capital, liquidity, and other needs.

        In addition to the limitations on the Corporation's ability to pay dividends under Tennessee law, the Corporation's ability to pay dividends on the Corporation's common stock is also limited by the Corporation's participation in the Troubled Asset Relief Program ("TARP") Capital Purchase Program ("CPP") and by certain statutory or regulatory limitations. See " Emergency Economic Stabilization Act of 2008." The terms of the Series A Preferred Stock issued to the U.S. Department of the Treasury ("Treasury") under the TARP-CPP include a restriction against increasing the Corporation's common stock dividends from levels at the time of the initial investment by Treasury and prevent the Corporation from redeeming, purchasing or otherwise acquiring its common stock other than pursuant to certain stated exceptions. Historically, the Corporation has paid no dividends on its common stock. Therefore, the Corporation would have to seek Treasury's consent to pay any dividends on shares of Corporation common stock. These restrictions will terminate on the earlier of the third anniversary of the date of issuance of the Series A Preferred Stock to Treasury (which is December 19, 2011) and the date on which the Series A Preferred Stock issued to Treasury is redeemed in whole or Treasury has transferred all of its Series A Preferred Stock to third parties. In addition, the Corporation will be unable to declare or pay dividends or make distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of its common stock or other stock ranking junior to, or in parity with, the Series A Preferred Stock if the Corporation fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the Series A Preferred Stock. A failure to pay dividends on our Series A Preferred Stock for six quarters (whether or not consecutive) would permit the Treasury to appoint up to two directors to the Corporation's board of directors.

        The payment of dividends by the Corporation and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines and debt covenants. In addition to the foregoing restrictions, the Federal Reserve Board has the power to prohibit the payment of dividends by bank holding companies if such payment would constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board's view that a bank holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or that could only be funded in ways that weaken the bank holding company's financial health, such as increasing indebtedness by borrowing. Furthermore, the TDFI and the FDIC also each have authority to restrict or prohibit the payment of dividends by a bank when either regulator determines that such payment constitutes an unsafe or unsound banking practice. See " Bank Regulation—Limitation on Capital Distributions ."

        Transactions with Affiliates Restrictions.     Transactions between the Bank and the Corporation and its subsidiaries are subject to various conditions and limitations under federal laws, as described in " Bank Regulation—Transactions with Affiliates ." Specifically, the Bank is subject to restrictions under federal laws which limit the transfer of funds by the Bank to the Corporation or its subsidiaries, whether in the form of loans, extensions of credit, investments or asset purchases. Such transfers by the Bank to the Corporation or its subsidiaries are limited in amount to 10% of the Bank's capital and surplus and, with respect to the Corporation and the Bank, to an aggregate of 20% of the Bank's capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. See " Bank Regulation—Transactions with Affiliates ."

        Activities Restrictions.     In approving acquisitions by bank holding companies of banks and companies engaged in the banking-related activities described above, the Federal Reserve Board considers a number of factors, including the expected benefits to the public such as greater convenience, increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking

5

---

Table of Contents

practices. The Federal Reserve Board is also empowered to differentiate between new activities and activities commenced through the acquisition of a going concern.

        The United States Department of Justice may, within 30 days after approval by the Federal Reserve Board of an acquisition, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Failure of the Attorney General to challenge an acquisition does not, however, exempt the holding company from complying with both federal and applicable state antitrust laws after the acquisition is consummated or immunize the acquisition from future challenge under the anti-monopolization provisions of the Sherman Act.

        Change of Control.     The BHC Act and Change in Bank Control Act require, with few exceptions, Federal Reserve Board approval (or, in some cases, notice and effective clearance) prior to any acquisition of control of the Corporation. Among other criteria, under the BHC Act, Change in Bank Control Act, and Federal Reserve Board regulations thereunder, "control" is conclusively presumed to exist if a person or company acquires, directly or indirectly, more than 25% of any class of voting stock of a bank or its holding company. Under Federal Reserve Board regulations, control is presumed to exist, subject to rebuttal, if a person or company acquires, directly or indirectly, more than 10% of any class of voting stock of a bank or its holding company if (i) the bank or holding company has registered securities under section 12 of the Securities Exchange Act of 1934, or (ii) no other person will own, control, or hold the power to vote a greater percentage of that class of voting stock immediately after the transaction.

Bank Regulation

        The Bank is a Tennessee state-chartered bank and is subject to the regulations of and supervision by the FDIC as well as the Commissioner of the TDFI (the "Commissioner"), Tennessee's state banking authority. Given that the Bank is not a member of the Federal Reserve System, its primary federal regulator is the FDIC. The Bank is also subject to various requirements and restrictions under federal and state law, including without limitation, restrictions on permitted activities, requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank.

        Although the Bank is not a member of the Federal Reserve System, it is nevertheless subject to certain regulations of the Federal Reserve Board. In addition to such regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board, which attempts to control the money supply and credit availability in order to influence the economy.

        The FDIC and the Commissioner periodically conduct examinations of the Bank. If, as a result of an examination of the Bank, the FDIC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the Bank could be subjected to various remedial actions including enforcement actions to:

•

enjoin the Bank from engaging in "unsafe or unsound" practices;



•

require affirmative action to correct any conditions resulting from any violation or practice;



•

issue an administrative order that can be judicially enforced;



•

direct an increase in capital, loan loss allowances, or take additional write-downs on asset valuations;



•

restrict our lending operations and the growth of the Bank;

6

---

Table of Contents

•

assess civil monetary penalties;



•

remove officers and directors; and ultimately



•

terminate the Bank's deposit insurance and commence receivership proceedings.

        Violation of a formal enforcement order also would be grounds for the assessment of civil money penalties against the Bank, the Corporation and/or any or all of their respective officers or directors contributing to the violation. The Commissioner has many of the same remedial powers, including the power to appoint the FDIC as receiver of any insured state bank that has been closed on account of the bank's inability to meet the demands of its depositors, or otherwise is operating in an unlawful, unsafe, or unsound manner, which includes operating with impaired capital. On March 17, 2011, the Commissioner and the FDIC advised the Bank that each agency will be seeking enforcement orders against the Bank. Management is currently in discussions with the FDIC and TDFI and any consent enforcement agreements would be subject to negotiation before issuance. For more information regarding the potential scope and terms of the enforcement actions, see the discussion under "Enforcement" below.

        Moreover, as of March 17, 2011, the Bank has been deemed to be in troubled condition. As a result, the Bank is now required to seek prior FDIC written approval for the appointment of a new director or senior executive officer, or any change in a current senior executive officer's responsibilities. Moreover, the Bank and the Corporation are subject to restrictions under the FDIC's Golden Parachute and Indemnification Regulation, which generally precludes entering into and paying certain severance payments to directors and senior executive officers, without prior FDIC approval in the case of the Bank and Federal Reserve Board, and FDIC approval in the case of the Corporation. In addition, the Bank would be unable to bid on any failed banks from the FDIC.

        The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays an assessment. See the discussion on " Insurance of Deposit Accounts " below.

        Capital Requirements and Prompt Corrective Action Regulations.     The FDIC evaluates capital, as an essential component, in determining the safety and soundness of state nonmember banks it supervises and/or insures the deposits of. Accordingly, the FDIC has established certain criteria and standards for calculating the minimum leverage capital requirement applicable to banks and in determining a bank's capital adequacy. The FDIC also must evaluate an institution's capital for purposes of determining whether the institution is subject to the prompt corrective action ("PCA") provisions set forth in section 38 of the FDIA.

        Section 38 of the FDIA, as amended by FDICIA, requires regulators to classify depository institutions into one of five capital categories based on their level of capital and take increasingly severe actions, known as "prompt corrective action," as an institution's capital deteriorates. Under the FDIC's "prompt corrective action" regulations, the FDIC is required to take certain, and is authorized to take other,

7

---

Table of Contents

supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of the following five categories based on the bank's capital level under three measures:

        Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

        Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders from its regulator to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator generally within 90 days of the date on which they became critically undercapitalized.

        As a banking institution's capital position deteriorates, it is subject to varying and increasingly restorative enforcement actions. These sanctions may include compliance with a capital plan or agreement with the regulator, limitations on activities and, ultimately, a termination of deposit insurance. As implemented by the FDIC, where it determines that the financial history or condition, managerial resources and/or the future earnings prospects of a bank are inadequate, or where a bank has sizable off-balance sheet or funding risks, significant risks from concentrations of credit or nontraditional activities, excessive interest rate risk exposure, or a significant volume of assets classified substandard, doubtful or loss or otherwise criticized, the FDIC will take these other factors into account in analyzing the bank's capital adequacy and may determine that the minimum amount of capital for that bank is greater than the generally-imposed minimum standards for all banks.

        Moreover, under the rules and regulations of the FDIC, as a Bank deemed to be in troubled condition, the Bank is required to seek prior FDIC written approval for the appointment of a new director or senior executive officer, or any change in a current senior executive officer's responsibilities. Moreover, the Bank and the Corporation would be subject to restrictions under the FDIC's Golden Parachute and Indemnification Regulation, which generally precludes entering into and paying certain severance payments to directors and senior executive officers, without prior FDIC approval in the case of the Bank and Federal Reserve Board, and FDIC approval in the case of the Corporation. In addition, the Bank would be unable to bid on any failed banks from the FDIC.

8

---

Table of Contents

        Limitation on Capital Distributions.     Federal and state statutory and regulatory requirements can restrict the payment of dividends by the Bank to the Corporation, as well as by the Corporation to its shareholders. Under the FDIA, the Bank may not make any capital distributions (including the payment of dividends) or pay any management fees to its holding company or pay any dividend if it is undercapitalized or if such payment would cause it to become undercapitalized. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if the bank is in default in the payment of any assessments due the FDIC. The Bank is also subject to the minimum capital requirements of the FDIC, which impact the Bank's ability to pay dividends. If the Bank fails to meet these standards, it may not be able to pay dividends or accept additional deposits pursuant to regulatory requirements.

        If, in the opinion of the FDIC or the Federal Reserve Board, a depository institution or a holding company is engaged in or is about to engage in an unsafe or unsound, such authority may require that the institution or holding company cease and desist from such practice. The FDIC and the Federal Reserve Board have each indicated that paying dividends that deplete a depository institutions or holding company's capital base to an inadequate level would be such an unsafe and unsound banking practice. Moreover, the Federal Reserve Board and the FDIC have issued policy statements which provide that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings. The Bank is also restricted from paying dividends under certain circumstances by the Tennessee Banking Act and implementing regulations, under which the board of directors of a state bank may not declare dividends in any calendar year that exceeds the total of its retained net income of the preceding two years without the prior approval of the TDFI.

        Liquidity.     The Bank is required to maintain a sufficient amount of liquidity to ensure its safe and sound operation. The FDIC expects institutions to use liquidity measurement tools that match their funds management strategies and that provide a comprehensive view of an institution's liquidity risk. The guidance further provides that risk limits should be approved by an institution's Board of Directors and should be consistent with the measurement tools used.

        Insurance of Deposit Accounts.     The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank is required to pay deposit insurance assessments into the FDIC's Deposit Insurance Fund ("DIF"). The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the DIF. The FDIC uses a risk-based premium system that assesses higher rates on those institutions that pose greater risks to the DIF. As a result of increased bank failures and a decrease in the DIF, in December 2009, the FDIC required all insured depository institutions to prepay three years' worth of insurance premiums with the prepayment including an assumed 5% annual growth rate in the projected assessment base and a three basis point increase in the annual assessment rate for 2011 and 2012. The FDIC has stated that its requirement for prepaid assessments does not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system in future years, pursuant to notice-and-comment rulemaking procedures provided by statute. Therefore, continued actions by the FDIC could significantly increase the Bank's noninterest expense in fiscal 2011 and for the foreseeable future.

        On February 7, 2011, the FDIC Board approved a final rule that implements a revised deposit insurance assessment system mandated by the Dodd-Frank Act, including a new pricing structure for institutions with more than $10 billion in assets. The new assessment structure modifies an institution's current deposit insurance assessment base from adjusted domestic deposits to an institution's average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. Under the new system, Tier 1 capital is used as the measure for tangible equity. Depository institutions with less than $1 billion in assets will report average weekly balances during the calendar quarter, unless they elect to report daily averages. Since the new assessment base would be larger than the current base, the new assessment structure includes revisions to the total base assessment rate schedule by lowering assessment

9

---

Table of Contents

rates, after adjustments, to a range between 2.5 and 9 basis points for depository institutions in the lowest risk category, and 30 to 45 basis points for institutions in the highest risk category. The various adjustments incorporated into the schedule take into account the heightened risk with respect to certain types of funding such as unsecured debt and brokered deposits. The new system eliminates the secured liability adjustment and includes a new adjustment requirement for long-term debt held by an insured depository institution where the debt is issued by another insured depository institution. Furthermore, the new system calls for the indefinite suspension of dividends whenever the fund reserve ratio exceeds 1.50%. In lieu of dividends, however, the new system permits additional rate schedules with progressively lower rates that would go into effect without further action by the FDIC Board when the fund reserve ratio reaches certain milestones. Importantly, the final rule retains the FDIC Board's flexibility to adopt actual rates that are higher or lower than total base assessment rates without requiring further notice-and-comment rulemaking, but provides that: (1) the FDIC Board cannot increase or decrease rates from one quarter to the next by more than two basis points; and (2) cumulative increases and decreases cannot be more than two basis points higher or lower than the total base assessment rates.

        The changes will generally take effect as of April 1, 2011 and would be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011. The Corporation and Bank are currently evaluating the impact that the new assessment base final rule will have on our financial position and results of operations. While the new system is expected to have a positive effect on small institutions (those with less than $10 billion in assets) such as the Bank given that, in the aggregate, the large bulk of such institutions are expected to see a decrease in assessments, the impact of the final rule, and/or additional FDIC special assessments or other regulatory changes affecting the financial services industry could negatively affect the Bank's and, therefore, the Corporation's liquidity and financial results in future periods.

        Brokered Deposits and Pass-Through Insurance.     The FDIC has adopted regulations governing the receipt of brokered deposits and pass-through insurance. Under the regulations, a bank cannot accept or rollover or renew brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over the prevailing national or local (if approved) average market rate, as specified by regulation. There are no such restrictions on a bank that is well capitalized. The Dodd-Frank Act requires that the FDIC submit a study to Congress by July 21, 2011, recommending statutory changes to the brokered deposit restrictions, which could impact the Bank's future ability to accept deposits deemed to be brokered as well as any related deposit insurance premiums on such deposits.

        Loans to One Borrower.     Under Tennessee banking law, state banks are generally prohibited from lending to any one person, firm or corporation (including loans to a firm or loans to the several members thereof) more than 15% of the bank's capital, surplus and undivided profits. However, the loans may be in excess of that percent, but generally not above 25%, if each specific loan in excess of 15% is first submitted to and approved in advance in writing by the bank's board of directors or a committee thereof, and a record is kept of the written approval. For any situation or circumstance in which no loan limit is applicable to a national bank, Tennessee law offers the same treatment for state-chartered banks, and therefore no loan limit would be applicable to any state bank in such situations or circumstances to the same extent as a national bank.

        Transactions with Affiliates.     The Bank's authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and Regulation W adopted thereunder by the Federal Reserve Board, as made applicable to state-chartered nonmember banks by the FDIA. In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions, referred to as "covered transactions," are

10

---

Table of Contents

subject to quantitative limits based on a percentage of the Bank's capital, thereby restricting the total dollar amount of transactions the Bank may engage in with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from the Bank.

        Loans to Insiders.     The Bank's authority to extend credit to "insiders," which include the Bank's directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board, as made applicable to the Bank under Tennessee banking law. Among other things, these provisions require that extensions of credit to insiders:

•

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with third parties and that do not involve more than the normal risk of repayment or present other features that are unfavorable to the Bank; and



•

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank's capital.

        In addition, extensions of credit in excess of certain limits must be approved by the Bank's board of directors.

        Consumer Protection and Other Laws and Regulations.     The Bank is subject to various laws and regulations dealing generally with consumer protection matters, and may be subject to potential liability under these laws and regulations for material violations. The Bank's lending operations are also subject to federal laws applicable to consumer credit transactions, such as the:

•

Federal Truth in Lending Act, governing disclosures of credit terms for open-end and closed-end loan products to consumer borrowers;



•

Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;



•

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;



•

Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act ("FACT Act"), governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;



•

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;



•

Servicemembers' Civil Relief Act, providing certain protections to members of the armed forces while in active military service;



•

Real Estate Settlement Procedures Act, governing disclosures of fee estimates that would be incurred by a borrower during the mortgage process; and



•

Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

The Bank's deposit operations are subject to federal laws applicable to deposit transactions, such as the:

•

Truth in Savings Act, which imposes disclosure obligations to enable consumers to make informed decisions about their deposit accounts at depository institutions;

11

---

Table of Contents

•

Electronic Funds Transfer Act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services;



•

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and



•

Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

        Community Reinvestment Act.     Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank, nor does it limit the Bank's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. Rather, the CRA requires the FDIC, in connection with its periodic examinations of the Bank, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the Bank. In particular, CRA regulations rate an institution based on its actual performance in meeting community needs by means of an assessment system that focuses on three tests:

•

a lending test, to evaluate the institution's record of making loans in its assessment area(s);



•

an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses in its assessment area, or a broader area that includes its assessment areas; and



•

a service test, to evaluate the institution's delivery of services through its retail banking channels and the extent and innovativeness of its community development services.

        The CRA also requires all institutions to publicly disclose their CRA ratings. The Bank received a rating of "Satisfactory" at its most recent CRA examination.

        Prohibitions Against Tying Arrangements.     The Bank and Corporation are subject to prohibitions on certain tying arrangements involving products or services offered by its holding company affiliates. The Bank, as well as the Corporation and its subsidiaries, is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional product or service from the institution or its affiliates rather than from a competitor of the institution or its affiliates.

        Privacy Provisions.     The Bank has a privacy policy in place and is required to disclose its privacy policy, which includes identifying parties with whom it shares a customer's "non-public personal information," to customers at the time of establishing the customer relationship and annually thereafter. The Bank is required to provide its customers with the ability to "opt-out" of having their personal information shared with unaffiliated third parties except under limited circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

        Identity Theft Prevention.     The federal banking agencies, including the FDIC, issued a joint rule implementing Section 315 of the FACT Act, requiring each financial institution or creditor to develop and implement a written Identity Theft Prevention Program (a "Program") to detect, prevent, and mitigate

12

---

Table of Contents

identity theft in connection with the opening of certain accounts or certain existing accounts. Among the requirements under the rule, the Bank is required to adopt "reasonable policies and procedures" to:

•

identify relevant Red Flags for covered accounts and incorporate those Red Flags into the Program;



•

detect Red Flags that have been incorporated into the Program;



•

respond appropriately to any Red Flags that are detected to prevent and mitigate identity theft; and



•

ensure the Program is updated periodically, to reflect changes in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft.

        Anti-Money Laundering/Combating Terrorist Financing Requirements.     The Corporation and the Bank are subject to the Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act ("USA PATRIOT Act"), which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. By way of example, the Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious.

        Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the USA PATRIOT Act imposes the following obligations on financial institutions:

•

financial institutions must establish an anti-money laundering program that, at a minimum, includes: (i) internal policies, procedures, and controls designed to detect and prevent money laundering activities, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program;



•

financial institutions must establish and meet minimum standards for customer due diligence, identification and verification;



•

financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls to detect and report instances of money laundering through those accounts;



•

financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country) and are subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks; and



•

bank regulators are directed to consider a bank's or holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

        The Office of Foreign Assets Control ("OFAC"), which is a division of Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with "enemies" of the United States, as defined by various Executive Orders and Acts of Congress. The Bank and the Company, like all United States companies and individuals, are prohibited from transacting business with the individuals and entities named on OFAC's list of Specially Designated Nationals and Blocked Persons. If the Bank finds a name on any transaction account or wire transfer that is on an OFAC list, the Bank is required to

13

---

Table of Contents

investigate, and if the match is confirmed, the Bank must take additional actions including freezing such account, filing a suspicious activity report and notifying the FBI. Failure to comply may result in fines and other penalties. OFAC has issued guidance directed at financial institutions in which it asserted that it may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts to comply with these prohibitions.

        Enforcement.     The TDFI and FDIC have primary enforcement responsibility over the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations, or other unsafe or unsound practices. Moreover, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency. On March 17, 2011, the Bank was notified that both the TDFI and FDIC would be seeking enforcement actions against the Bank as a result of their recently completed joint examination. Management is currently in discussions with the FDIC and TDFI and any consent enforcement agreements would be subject to negotiation before issuance. Based on the joint examination and these discussions to date, any enforcement action to which the Bank may become subject could include, but would not be limited to, a varying degree of requirements, including, among other things, a requirement that the Bank increase its capital ratios, improve asset quality, increase earnings, improve liquidity, improve sensitivity to market risk, alter our capital adequacy category, increase the level of our loan and lease loss allowance, dispose certain assets and liabilities within a prescribed period of time or both, develop a strategic plan governing the Bank's future operations, address potential regulatory violations as well as management's performance in addressing the foregoing perceived deficiencies. Moreover, the FDIC and TDFI have advised the Bank because of perceived inadequacies in its allowance for loan and lease losses, and loan impairment methodologies, the Bank may also need to restate its allowance for loan losses in one or more prior periods and restate prior regulatory reports. FDIC and TDFI have proposed an increase in our allowance for loan and lease losses of up to approximately $16 million, an amount not recognized in the financial statements to this annual report. We do not concur with this amount and our regulators have not provided us with their methodology. Accordingly, if ultimately required, the increase to our allowance for loan and lease losses may differ from the amount our regulators are requiring.

        Depositor Preference.     The Omnibus Budget Reconciliation Act of 1993 sets forth a national depositor preference framework that provides that if an insured depository institution is placed into receivership by the FDIC, all receivership claimants are subject to the following general preference scheme:

•

administrative expenses of the receiver;



•

secured claims;



•

domestic deposits, both insured and uninsured;



•

foreign deposits and other general creditor claims;



•

subordinated creditor claims; and



•

shareholders.

This means that, in the event that an insured depository institution is placed into receivership, claims of the FDIC for administrative expenses, secured creditors, and domestic depositors, would be afforded payment priority from the assets of the failed institution over general unsecured claims, including federal funds and letters of credit, as well as claims of subordinated creditors and shareholders, in the "liquidation or other resolution" of such an institution by the FDIC as receiver.

14

---

Table of Contents

        Actions taken by Congress and bank regulatory agencies in response to recent market instability.     In response to volatility in the U.S. financial system in recent years, Congress as well as the federal banking agencies, have taken various actions as part of a comprehensive strategy to stabilize the financial system and housing markets, and to strengthen U.S. financial institutions. The following discussion is intended to provide a general summary of major governmental actions initiated in recent years that have affected the Corporation and Bank and are likely to continue.

        Emergency Economic Stabilization Act of 2008.     The Emergency Economic Stabilization Act of 2008 ("EESA"), enacted on October 3, 2008, provided the Secretary of the Treasury with authority to, among other things, establish the Troubled Asset Relief Program ("TARP") to purchase from financial institutions up to $700 billion of troubled assets, including residential or commercial mortgages and related securities, obligations, or other instruments. As a component of the TARP program, on October 14, 2008, the Treasury announced the Capital Purchase Program ("CPP") under EESA, pursuant to which the Treasury would purchase up to $250 billion of senior preferred shares from qualifying financial institutions on standardized terms. The Corporation applied for, and Treasury approved, a capital purchase in the amount of $30 million under the TARP-CPP. The TARP-CPP transaction closed on December 19, 2008, on which date the Corporation entered into a Letter Agreement with Treasury, pursuant to which the Corporation issued and sold to Treasury, for an aggregate purchase price of $30 million in cash, (i) 30,000 shares of Series A Preferred Stock having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to purchase up to 461,538 shares of common stock, at an exercise price of $9.75 per share, subject to certain anti-dilution and other adjustments. The Series A Preferred Stock will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. As a participant in the TARP-CPP, the Corporation is required to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends and can be subject to the appointment of new directors to our board if we miss six dividend payments on such securities.

        American Recovery and Reinvestment Act of 2009.     On February 17, 2009, the President signed the American Recovery and Reinvestment Act of 2009 ("ARRA") into law as a $787 billion dollar economic stimulus. The stimulus includes discretionary spending for among other things, infrastructure projects, increased unemployment benefits and food stamps, as well as tax relief for individuals and businesses. Among other things, the ARRA amended certain provisions of EESA, including replacing Section 111 of EESA in its entirety. The new Section 111 allows a TARP recipient, subject to consultation with the appropriate federal banking agency, to repay any assistance previously received pursuant to the program without regard to the source of replacement funds or any waiting period. Under Section 111 of EESA, as amended, and the implementing regulations of the SEC and Treasury, the Corporation and its subsidiaries must comply with certain standards and requirements regarding executive compensation and corporate governance, including a requirement to permit at each annual or other meeting of the Company's shareholders, a separate shareholder vote to approve, on a non-binding advisory basis, the executive compensation paid by the Corporation for as long as TARP funds remain outstanding.

        Legislative and Agency Programs Being Phased Out.     Various recovery programs implemented in connection with legislative and agency efforts described above in response to deteriorating economic conditions during 2007-2009 have either been phased out in 2010 or are in the course of being phased out. For example, the FDIC established the Temporary Liquidity Guarantee Program ("TLGP") in October 2008 to (i) guarantee certain debt issued by FDIC-insured institutions and certain holding companies on or after October 14, 2008 through June 30, 2009, which was extended to October 31, 2009; and (ii) provide unlimited insurance coverage for non-interest bearing transaction accounts through December 31, 2009, which was extended to December 31, 2010. The Debt Guarantee Program ("DGP") component of the TLGP was intended to provide liquidity to the inter-bank lending market and promote stability in the unsecured funding market. Entities issuing guaranteed debt under the DGP were bound by the program's requirements, which included the payment of assessments that are determined by multiplying the amount

15

---

Table of Contents

of FDIC-guaranteed debt times the term of the debt (expressed in years) times an annualized assessment rate.

        Under the Transaction Account Guarantee Program ("TAGP") component of the TLGP, non-interest bearing transaction accounts were fully insured through December 31, 2010. Non-interest bearing transaction accounts are generally defined as any deposit accounts with respect to which interest is neither accrued nor paid and on which the insured depository institution does not reserve the right to require advance notice of an intended withdrawal, including traditional demand deposit checking accounts that allow for an unlimited number of deposits and withdrawals at any time. However, for purposes of the TAGP, the FDIC included in the definition of noninterest-bearing transaction account: (i) accounts commonly known as Interest on Lawyers Trust Accounts ("IOLTAs") and functionally equivalent accounts; and (ii) NOW accounts with interest rates no higher than 0.50 percent through June 30, 2010 and 0.25 percent after June 30, 2010 for which the insured depository institution at which the account is held has committed to maintain the interest rate at or below 0.50 percent through June 30, 2010 and 0.25 percent after June 30, 2010. As a participant in the TAGP, the Bank was bound by the requirements of the program, including the quarterly payment of an annualized assessment, depending on its risk category, on any deposit amounts exceeding the deposit insurance limit of $250,000. For a discussion on deposit insurance assessment requirements applicable to the Bank, see " Bank Regulation—Insurance of Deposit Accounts ."

        Effective January 1, 2011, and as a result of the Dodd-Frank Act (discussed below), the FDIC offers a temporary modified program that provides full deposit insurance coverage for noninterest-bearing transaction accounts for a two-year period ending December 31, 2012. The new law applies to all insured depository institutions and, unlike the TAGP, no opt outs are permitted and neither low-interest NOW accounts nor IOLTAs are covered. There is no separate assessment applicable on these covered accounts but all institutions are required to report qualifying accounts beginning on December 31, 2010, for purposes of quantifying the FDIC's exposure under this program.

        Dodd-Frank Act.     On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). This new law significantly changes the current bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.

        The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for months or years.

        Certain provisions of the Dodd-Frank Act are expected to have a near term impact on the Company. For example, effective July 21, 2011, a provision of the Dodd-Frank Act eliminates the federal prohibitions on paying interest on corporate demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on the Company's interest expense.

        Bank holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, can continue to include as Tier 1 capital certain trust preferred securities that were issued before May 19, 2010. However, trust preferred securities issued after May 19, 2010 by a holding company with assets of $500 million or more, will no longer count as Tier 1 capital, but will be entitled to treatment as Tier 2 capital.

        The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called "golden parachute" payments, and allow greater access by shareholders to the Company's proxy material by authorizing the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company's proxy materials. The legislation

16

---

Table of Contents

also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded. The Dodd-Frank Act creates a new Consumer Financial Protection Bureau ("CFPB") with broad powers to supervise and enforce consumer protection laws. The new bureau would have broad rule-making authority for a wide range of consumer protection laws that apply to all providers of consumer financial products or services, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, while depository institutions with $10 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet-to-be-written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

        Small Business Act of 2010.     As part of the Small Business Act of 2010, the Small Business Lending Fund (the "SBLF") was created within the Treasury Department. Under the program, the SBLF will buy preferred shares from banks, with the rate of return on these shares directly tied to the increase in small business lending undertaken at the bank. To date, the Bank has not elected to participate in the SBLF.

        Federal Securities Laws.     The Corporation's common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result, the Corporation is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

        Listing on Nasdaq.     The Corporation's common stock is listed on the Nasdaq Global Market. In order to maintain such listing, the Corporation is subject to certain corporate governance requirements, including:

•

a majority of its board must be composed of independent directors;



•

a requirement to have an audit committee composed of at least three directors, each of whom is an independent director, as such term is defined by both the rules of the Financial Industry Regulatory Authority and by Exchange Act regulations;



•

requirements for its nominating committee and compensation committee to also be composed of independent directors, except under exceptional and limited circumstances; and



•

a requirement for each of its audit committee and nominating committee to have a publicly available written charter.

        Sarbanes-Oxley Act of 2002.     As a public company, the Corporation is subject to the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing including:

•

auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients;



•

additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements;



•

a requirement that companies establish and maintain a system of internal control over financial reporting and that a company's management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company's regulator and the FDIC; the Corporation's assessment of internal control over financial reports is included in Part II, Item 9A of this 10-K;

17

---

Table of Contents

•

a requirement that an independent accountant for a large accelerated filer or accelerated filer must provide an attestation report with respect to management's assessment of the effectiveness of the company's internal control over financial reporting; pursuant to a permanent exemption granted under the Dodd-Frank Act for smaller reporting companies, the Corporation is not subject to the independent accountant attestation requirement;



•

an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies, including how they interact with the company's independent auditors; and



•

a range of enhanced disclosure requirements as well as penalties for fraud and other violations.

        Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal loans to directors and executive officers of issuers. The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act.

Effect of Governmental Policies

        The Corporation and the Bank are affected by the policies of regulatory authorities, including the Federal Reserve Board. An important function of the Federal Reserve System is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve Board are: (i) purchases and sales of U.S. Government securities in the marketplace; (ii) changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve System; (iii) and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels and inflation.

        The monetary policies of the Federal Reserve Board and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national economy and in the money market, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank or whether the changing economic conditions will have a positive or negative effect on operations and earnings. Bills are pending before the United States Congress and the Tennessee General Assembly and proposed regulations are pending before the various state and federal regulatory agencies that could affect the business of the Corporation and the Bank. It cannot be predicted whether or in what form any of these or future proposals will be adopted or the extent to which the business of the Corporation and the Bank may be affected thereby.

Availability of Information

        The Corporation files periodic reports with the SEC, which maintains an Internet website, www.sec.gov that contains reports, proxy and information statements, and other information regarding the Corporation that it files electronically with the SEC. The Corporation makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on the Bank's website at www.tncommercebank.com under the "Investor Relations" heading.

18

---

Table of Contents

ITEM 1A.     RISK FACTORS

The Bank is subject to periodic joint examinations by the FDIC and TDFI and the Corporation is subject to periodic inspections by the Federal Reserve Bank. The Bank's regulators have proposed certain enforcement actions and are seeking the restatement of certain regulatory financial statements, which could result in the restatement of the Corporation's financial statements for the same periods. These enforcement actions and requested restatements could have a material adverse effect on our business, operations, financial condition, results of operations and the value of our common stock.

        A joint examination of the Bank by the FDIC and TDFI occurred from August 2, 2010 to September 3, 2010 and the Federal Reserve Bank of Atlanta has recently commenced a regular inspection of the Bank. As a result, the of the Bank examination, the Bank was been deemed to be in troubled condition on March 17, 2011. Accordingly, the Bank and Corporation are now subject to certain restrictions and limitations, which include seeking prior regulatory written approval for the appointment of a new director or senior executive officer, or any change in a current senior executive officer's responsibilities. Moreover, the Bank and the Corporation are subject to restrictions under the FDIC's Golden Parachute and Indemnification Regulation, which generally preclude entering into and paying certain severance payments to directors and senior executive officers, without prior FDIC approval in the case of the Bank and Federal Reserve Board, and FDIC approval in the case of the Corporation. In addition, the Bank is unable to bid on any failed banks from the FDIC.

        Based upon the Bank examination, we have been advised that the FDIC and TDFI will be seeking formal enforcement actions. Management is currently in discussions with the FDIC and TDFI and any consent enforcement agreements would be subject to negotiation before issuance. Based on the joint examination and these discussions to date, any enforcement action to which the Bank may become subject could include, but would not be limited to, a varying degree of requirements, including, among other things, a requirement that the Bank increase its capital ratios, improve asset quality, increase earnings, improve liquidity, improve sensitivity to market risk, alter our capital adequacy category, increase the level of our loan and lease loss allowance, dispose certain assets and liabilities within a prescribed period of time or both, develop a strategic plan governing the Bank's future operations, address potential regulatory violations as well as management's performance in addressing the foregoing perceived deficiencies. Moreover, the FDIC and TDFI have advised the Bank because of inadequacies in its allowance for loan and lease losses, and loan impairment methodologies, a restatement of the Bank's allowance for loan and lease losses in its periodic reports to the regulators for the quarters ended December 31, 2009, March 31, 2010 and June 30, 2010 should be restated. Although the FDIC and TDFI focused on these three reporting periods in the examination, we anticipate that any restatement could also include financial statements for the period ending September 30, 2010. Restatement of the Bank's regulatory periodic reports likely will result in the restatement of the Corporation's financial statements for the same periods and included in this annual report. We strongly disagree with many of the findings in the report of examination, especially the factors giving rise to the need to restate our prior financial statements, primarily due to differences in our loan and lease loss impairment analysis. However, the changes that may be made in the restatement may be material in the quarter made and may be material to the full year period in which the quarterly results are included. FDIC and TDFI have proposed an increase in our allowance for loan and lease losses of up to approximately $16 million, an amount not recognized in the financial statements to this annual report. We do not concur with this amount and our regulators have not provided us with their methodology. Accordingly, if ultimately required, the increase to our allowance for loan and lease losses may differ from the amount our regulators are requiring. In accordance with established procedures of the FDIC and TDFI we plan to vigorously appeal what we believe to be the various inaccuracies contained in the report of examination, including the required impairment charges. While we have 60-days to file an appeal after the receipt of a material supervisory determination, we cannot predict the timing of a final regulatory determination or whether we will prevail. Moreover, based on the ongoing inspection of the Corporation by the Federal Reserve Bank, it is possible that the Federal Reserve Bank would seek an enforcement action involving the Corporation with respect to similar issues. The terms of any enforcement actions, or

19

---

Table of Contents

the amount of any restatement could have a material adverse effect on our business, operations, financial condition, results of operations and the value of our common stock.

In the future we may be subject to regulatory actions that restrict our ability to satisfy our obligations under our Series A Preferred Stock and outstanding trust preferred securities, which could result in defaults that could have a material adverse effect on our business, operations, financial condition, or results of operations.

        In August 2010, pursuant to a request from the Federal Reserve Bank as a result of its 2009 inspection of us, our board of directors adopted resolutions whereby we agreed to obtain the written approval of the Federal Reserve Bank prior to:

•

incurring additional indebtedness at the parent level, including indebtedness associated with trust preferred securities;



•

taking any action that would cause a change in debt instruments relating to indebtedness incurred at the parent level;



•

declaring or paying dividends to common or preferred shareholders;



•

reducing our capital position by purchasing or redeeming treasury stock; and



•

making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities.

        As of February 9, 2011 and March 1, 2011, we were approved by the Federal Reserve Bank to make dividend payments on our Series A Preferred Stock that were due on February 15, 2011 and distributions for our outstanding trust preferred securities that were due on March 15, 2011 and March 31, 2011. However, the Federal Reserve Bank advised the Corporation that approval of future payments will be dependent upon noticeable improvement in the Corporation's consolidated financial condition and performance as determined by the Bank's primary regulators and the Federal Reserve Bank. Based upon the Bank's recent examination findings, we can provide no assurance, however, that the Federal Reserve Bank will approve future dividend and distribution payments on these securities.

        If we are prohibited by the Federal Reserve Bank from making future dividend and distribution payments, we may experience a default under our Series A Preferred Stock or outstanding trust preferred securities, which could give the holders of such stock and securities the right to enforce remedies available to them under the terms of the Series A Preferred Stock or trust preferred securities, including, for the trust preferred securities, the right to institute a legal proceeding against the Company to enforce the full and unconditional guarantee of the Company for payment of distributions due to the holders of such securities on specified dates. Any such actions could have a material adverse effect on our business, operations, financial condition or results of operations. As noted above, if the Corporation fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the Series A Preferred Stock, it will be unable to declare or pay dividends or make distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of its common stock or other stock ranking junior to, or in parity with, the Series A Preferred Stock. Moreover, if we are unable to pay dividends on our Series A Preferred Stock for six quarters (whether or not consecutive), the Treasury is authorized to appoint up to two directors to our board of directors.

Our concentration of commercial and industrial loans expose us to credit risks.

        At December 31, 2010, our portfolio of commercial and industrial loans totaled $648.2 million, or 52.7% of total loans. This type of loans generally exposes us to a greater risk of nonpayment and loss than other non-commercial loans because repayment of such loans often depends on the successful operations and income stream of the borrowers. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to other non-commercial loans and many of our borrowers have more than one such loan outstanding. Consequently, an adverse development with respect

20

---

Table of Contents

to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to other non-commercial loans. Further, we could sustain losses if we incorrectly assess the creditworthiness of such borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality could cause our interest income and net interest margin to decrease and our provision for loan losses to increase, which could adversely affect our results of operations and financial condition.

        Commercial and industrial loans are generally secured by a variety of forms of collateral related to the underlying business, such as equipment, accounts receivable and inventory. Should a loan require us to foreclose on the underlying collateral, the foreclosure expense may be significant if the collateral is of a unique nature. The collateral may be difficult to liquidate, and weak market conditions may depress the value of such collateral, increasing the risk to us of recovering the principal amount of the loan. Accordingly, our financial condition may be adversely affected by defaults in this portfolio.

We have a concentration of credit exposure to borrowers in the transportation industry.

        At December 31, 2010, we had total credit exposure to borrowers in the transportation industry of $127.9 million, or 10.4% of our total loans. Our borrowers in this industry are primarily small businesses and owner-operators. This industry is experiencing adversity in the current economic environment and, as a result, some borrowers in this industry have been unable to perform their obligations under their loan agreements with us, which has negatively impacted our results of operations. When any of these borrowers default on the corresponding loans, we typically repossess the transportation-related collateral, primarily over-the-road tractors, and endeavor to sell the asset at retail value through selected dealers. During fiscal year 2010, we repossessed approximately 865 trucks in connection with defaulted loans in this industry and resold approximately 375 trucks we had repossessed. If the current recessionary environment continues, additional borrowers in this industry may be unable to meet their obligations under existing loan agreements, which could cause our earnings to be negatively impacted. Further, we may not be able to sell repossessed assets in this industry at favorable prices, which could have an adverse effect on our net income. Any of our large credit exposures in this industry that deteriorate unexpectedly could cause us to have to make significant additional loan loss provisions, negatively impacting our earnings.

Our current sources of funds might not be sufficient to meet our future liquidity needs.

        Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. The primary sources of our funds are loan repayments and customer deposits. Scheduled loan repayments are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in general economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, rising fuel prices, inclement weather, natural disasters and international instability. Customer deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. We also rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. These sources include brokered deposits, internet deposits, Federal Home Loan Bank advances and federal funds lines of credit from correspondent banks. There can be no assurance that these sources will be sufficient to meet future liquidity demands. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should these sources not be adequate.

        Our liquidity, at the parent level, would be adversely affected by regulatory restrictions on the ability of the Bank to pay dividends to us.

21

---

Table of Contents

Our use of internet and brokered deposits could adversely affect our liquidity and results of operations.

        Over the last eight consecutive quarters, our loan demand has exceeded the rate at which we have been able to increase our deposits and, as a result, internet and brokered deposits have been a source of funds with which to make loans and provide liquidity. We post rates to an internet-based program that retail and institutional investors nationwide subscribe to in order to invest funds. As of December 31, 2010, internet and brokered deposits amounted to $395.8 million and $103.0 million, respectively, totaling $498.8 million, or 38.4% of total deposits.

        Generally, brokered deposits may not be as stable as other types of deposits and, in the future, those depositors may not renew their time deposits when they mature, or we may have to pay a higher rate of interest to keep those deposits or to replace them with other deposits or with funds from other sources. Additionally, if the Bank ceases to be deemed to be well capitalized for bank regulatory purposes or if an enforcement action imposes capital requirements, we may not be able to accept, renew or rollover brokered deposits without a waiver from the FDIC, or may be restricted completely from accepting, renewing or rolling over brokered deposits if the Bank becomes undercapitalized. Moreover, if the Bank is no longer deemed to be well-capitalized, interest rates the Bank is authorized to pay on all of its deposit products are limited to 75 basis points above the prevailing national average rates (local rate may be used, if approved by the FDIC). An inability to maintain or replace these brokered deposits as they mature or pay market rates in lieu of national interest rates could adversely affect our liquidity. Further, paying higher interest rates to maintain or replace these deposits could adversely affect our net interest margin and our results of operations.

        The availability of noncore funding sources is subject to broad economic conditions and, therefore, the cost of funds may fluctuate significantly, impacting our net interest income, our immediate liquidity and our access to additional liquidity.

Capital constraints may affect our pace of growth and our ability to raise additional capital when needed is dependent on conditions outside our control.

        Notwithstanding our recent capital raise in 2010, our pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed. We are required by federal and state regulatory authorities to maintain specific levels of capital to support our operations, so we may at some point need to raise additional capital to support any continued growth.

        Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and other factors, including investor perceptions regarding the banking industry and market conditions and government activities. These factors are outside our control. Accordingly, we cannot provide any assurance that we will be able to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, we might not be able to meet capital and other regulatory requirements. Further, our ability to continue our growth could be materially impaired.

An inadequate allowance for loan losses would reduce our earnings.

        The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. The credit quality of our borrowers has deteriorated as a result of the economic downturn in our markets. If the credit quality of our customer base or the risk profile of a market, industry or group of our customers declines further, consumer debt service behavior changes in a manner adverse to us, weaknesses in the real estate markets and other economics persist or worsen or our allowance for loan losses is not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be significantly and adversely affected.

22

---

Table of Contents

        Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio, provides an allowance for loan losses based upon a percentage of the outstanding balances and takes a charge against earnings with respect to specific loans when their ultimate collectability is considered questionable. If management's assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if the bank regulatory authorities require us to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.

Nonperforming assets adversely affect our results of operations and financial condition.

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

We rely on the services of key personnel.

        We depend substantially on the strategies and management services of certain of our officers—Michael R. Sapp, Chairman, Chief Executive Officer and President; Frank Perez, Chief Financial Officer; and H. Lamar Cox, Chief Operating Officer. The loss of the services of any of these officers could have a material adverse effect on our business, results of operations and financial condition. We are also dependent on certain other key officers who have important customer relationships or are instrumental to our operations. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. Management believes that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management, as well as sales and marketing personnel. We compete with a large number of other financial institutions in the Nashville MSA for such personnel, and we cannot assure you that we will be successful in attracting or retaining such personnel.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

        Market developments have significantly depleted the DIF and reduced the ratio of reserves to insured deposits. The FDIC Board recently approved a final rule that implements a new deposit insurance assessment system for insured depository institutions. Among other things, the new assessment structure modifies an institution's current deposit insurance assessment base from adjusted domestic deposits to an institution's average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. The new assessment base would be larger than the current base, however the new assessment structure includes revisions to the total base assessment rate schedule by lowering assessments rates, after adjustments, to a range between 2.5 and 45 basis points depending on an institution's risk category, subject to progressively lower rates as the DIF reserve ratio reaches certain milestones. Importantly, the final rule retains flexibility for the FDIC Board to adopt actual rates that are higher or lower than total base assessment rates without requiring further notice-and-comment rulemaking, subject to limitations providing that: (1) the FDIC Board cannot increase or decrease rates from one quarter to the next by more than 2 basis points; and (2) cumulative increases and decreases cannot be more than 2 basis points higher or lower than the total base assessment rates. The impact of the final rule, and/or additional FDIC special assessments or other regulatory changes affecting the financial services industry could negatively affect the Corporation's liquidity and financial results in future periods.

23

---

Table of Contents

Our business is subject to the financial health of certain local economies.

        Our success significantly depends upon the growth in population, income levels, deposits and new businesses in the Nashville MSA and the other markets in which we have significant loan production efforts. If the communities in which we operate do not grow or if prevailing local or national economic conditions are unfavorable, our business may not succeed. Adverse economic conditions in our market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our market areas if they do occur.

National market funding outside of the Nashville MSA has unique risks related to the potential disposition of collateral upon foreclosure.

        At December 31, 2010, approximately 21.2% of our loan portfolio was composed of national market funding loans to businesses located outside of the Nashville MSA that were made through a small network of equipment vendors and financial service companies with which we have had historical relationships. This lending creates somewhat different risks from those typical for community banks. The geographic diversity of our loan portfolio as well as the collateral securing loans within that portfolio may result in longer time periods to locate collateral and higher costs to dispose of collateral in the event that the collateral is used to satisfy the loan obligation.

Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if our business strategies are not effectively executed.

        We intend to continue pursuing a growth strategy for our business through organic growth of the loan portfolio. Our prospects must be considered in light of the risks, expenses and difficulties that can be encountered by financial service companies in rapid growth stages, which include the risks associated with the following:

•

maintaining loan quality;



•

maintaining adequate management personnel and information systems to oversee such growth;



•

maintaining adequate control and compliance functions; and



•

securing capital and liquidity needed to support our anticipated growth.

        There can be no assurance that we will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth will cause growth in overhead expenses as we add staff. As a result, historical results may not be indicative of future results. Failure to successfully address these issues identified above could have a material adverse effect on our business, future prospects, financial condition or results of operations.

Competition from financial institutions and other financial service providers may adversely affect our profitability by reducing our ability to attract and retain deposits and originate loans.

        The banking business is highly competitive and we experience competition in our markets from many other financial institutions. We compete with other commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate in the Nashville MSA and elsewhere. We not only compete with these companies in the Nashville MSA, but also in the regional and national markets in which we engage in our indirect funding programs.

        We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability

24

---

Table of Contents

depends upon our continued ability to successfully compete with an array of financial institutions in the Nashville MSA, and regionally and nationally with respect to our indirect funding programs.

Changes in interest rates could adversely affect our results of operations and financial condition.

        Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. Accordingly, changes in interest rates could decrease our net interest income. Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

We may experience significant fluctuations in non-interest income from period to period.

        Historically, a substantial portion of our non-interest income has been derived from the sale of loans. We sell loans from time to time, particularly loans generated for our national market funding portfolio. The timing and extent of these loan sales may not be predictable, and could cause material variation in our non-interest income on a period-to-period basis.

Our results of operation may be affected by seasonal factors.

        Certain of our commercial customers operate in industries that are seasonal in nature, most notably the transportation industry. Operating results in the transportation industry have been historically weakest during the first quarter because of reduced shipping demand after the holiday season and inclement weather, which reduces demand and impedes the ability to transport freight. As a result, both the demand for new loans by customers in seasonal industries, including the transportation industry, and the ability of existing customers in these industries to service loans may be reduced during the first quarter, which may in turn have an adverse effect on our interest income, loan losses and results of operation during that quarter.

        In addition, our ability to realize gain on repossessed collateral, including transportation-sensitive assets, may be subject to the seasonality of demand for consumer goods and transportation services, which is typically lowest during the first quarter. Accordingly, we may obtain less favorable prices for such repossessed collateral that we sell during the first quarter or we may extend the holding period of such collateral to enhance the recovery value, which may in turn have an adverse effect on our non-interest income and results of operation during that quarter.

Difficult market conditions have adversely affected and may continue to affect our industry.

        We are exposed to downturns in the U.S. economy, and particularly the local markets in which we operate. Declines in the housing markets over the past several years, including falling home prices and sales volumes, and increasing foreclosures, have negatively affected the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Many lenders and institutional investors have reduced or ceased providing funding to borrowers, including other financial institutions. This market turmoil and the tightening of credit have led to increased levels of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and reductions in business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial

25

---

Table of Contents

condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and other financial institutions. In particular:

•

We expect to face increased regulation of our industry, particularly as a result of the Dodd-Frank Act enacted in July 2010, which requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for months or years. Compliance with such regulations may increase our non-interest expenses and limit our ability to pursue business opportunities;



•

Market developments, government programs and the winding down of various government programs may continue to adversely affect consumer confidence levels and may cause adverse changes in borrower behaviors and payment rates, resulting in further increases in delinquencies and default rates, which could adversely affect our loan charge-offs and our provisions for credit losses;



•

Our ability to assess the creditworthiness of our customers or to estimate the values of our assets and collateral for loans will be reduced if the models and approaches we use become less predictive of future behaviors, valuations, assumptions or estimates. We estimate losses inherent in our credit exposure, the adequacy of our allowance for loan losses and the values of certain assets by using estimates based on difficult, subjective and complex judgments, including estimates as to the effects of economic conditions and how these economic conditions might affect the ability of our borrowers to repay their loans or the value of assets; and



•

Our ability to borrow from other financial institutions on favorable terms or at all, or to raise capital, could be adversely affected by further disruptions in the capital markets or other events, including, among other things, deterioration in investor expectations and changes in the FDIC's resolution authority or practices.

Failures of other depository institutions in our markets and increasing consolidation of financial services companies as a result of current market conditions could increase our deposits and assets, necessitating additional capital, and may have unexpected adverse effects upon our ability to compete effectively.

We are subject to extensive regulation that could limit or restrict our activities.

        We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies including the Federal Reserve Board, the FDIC and the TDFI. Ensuring regulatory compliance is costly and serves to restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and interest rates paid on deposits. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Most recently, the Dodd-Frank Act enacted in July 2010 calls for sweeping reforms to the financial services industry. A number of provisions of the Dodd-Frank Act remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict what the final form of these rules will be when implemented by the respective agencies, but management believes that certain aspects of the new legislation, including without limitations, the additional cost of higher deposit insurance and the costs of compliance with disclosure and reporting requirements and examinations by the new Bureau of Consumer Financial Protection, could have a significant impact on our business, financial condition and results of operations.

        It is possible that there will be continued changes to the banking and financial institutions regulatory regimes in the future. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services

26

---

Table of Contents

and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. We cannot predict the extent to which the government and governmental organizations may change any of these laws or controls. We also cannot predict how such changes would adversely affect our business and prospects.

Our issuance of securities to Treasury may be dilutive to the holders of our common stock and may result in other restrictions to our operations.

        Pursuant to the CPP under TARP, we issued and sold to Treasury, for an aggregate purchase price of $30 million in cash, (i) 30,000 shares of our Series A Preferred Stock, having a liquidation preference of $1,000, and (ii) a ten-year warrant to purchase up to 461,538 shares of common stock, at an exercise price of $9.75 per share, subject to certain anti-dilution and other adjustments. The dilutive impact of the warrant may have a negative effect on the market price of our common stock and may be dilutive of our earnings per share. In addition, we are required to pay cumulative dividends at a rate of 5% per annum for the first five years, and thereafter at a rate of 9% per annum on the Series A Preferred Stock. Depending on our financial condition at the time, these dividends could have a negative effect on our liquidity. The shares of Series A Preferred Stock will receive preferential treatment in the event of our liquidation, dissolution or winding up.

        The rules and policies applicable to recipients of capital under the TARP CPP continue to evolve, and their scope, timing and effect cannot be accurately predicted. Any redemption of the securities sold to Treasury to avoid these restrictions would require prior approval by the Federal Reserve Board and Treasury.

The TARP CPP and the American Recovery and Reinvestment Act of 2009, or the ARRA, impose, and other proposed rules may impose additional, executive compensation and corporate governance requirements that may adversely affect us and our business, including our ability to recruit and retain qualified employees.

        The agreements that we entered into in connection with our participation in the TARP CPP required us to adopt Treasury's standards for executive compensation and corporate governance while Treasury holds the equity issued pursuant to the TARP CPP. These standards generally apply to our chief executive officer, chief financial officer and the three next most highly compensated senior executive officers. The standards include:

•

ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;



•

requiring the clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate;



•

prohibiting the making of golden parachute payments to senior executives; and



•

prohibiting the deduction for tax purposes of executive compensation in excess of $500,000 for each senior executive.

        In particular, the change to the deductibility limit on executive compensation may increase the overall cost of our compensation programs in future periods.

        The ARRA imposed further limitations on compensation during the period in which Treasury holds the equity issued pursuant to the TARP CPP, including:

•

a prohibition on making any golden parachute payment to a senior executive officer or any of our next five most highly compensated employees;



•

a prohibition on any compensation plan that would encourage manipulation of the reported earnings to enhance the compensation of any of our employees; and

27

---

Table of Contents

•

a prohibition of the five highest paid executives from receiving or accruing any bonus, retention award or incentive compensation, except for long-term restricted stock with a value not greater than one-third of the total amount of annual compensation of the employee receiving the stock.

        The compensation and corporate governance standards and requirements of Section 111 of EESA, as amended by the ARRA, are set forth in the implementing regulations of the Treasury and SEC, which further expand the limitations and restrictions imposed on executive compensation and corporate governance by the TARP CPP and the ARRA. These rules also prohibit any tax gross-up payments to senior executive officers and the next 20 highest paid executives; require a "say on pay" vote at annual shareholders' meetings; and restrict stock or stock units granted to executives that may vest or become transferable.

        Moreover, the Board of Directors of the FDIC recently approved a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses for the financial institution. The proposed rule covers banks with total consolidated assets of $1 billion or more, and contains heightened standards for institutions with $50 billion or more in total consolidated assets.

        These provisions and any future rules issued by Treasury, the Federal Reserve Board, the FDIC or any other regulatory agencies could adversely affect our ability to attract and retain management sufficiently capable and motivated to manage and operate our business through difficult economic and market conditions. If we are unable to attract and retain qualified employees to manage and operate our business, we may not be able to successfully execute our business strategy.

Lending goals of the TARP CPP may not be attainable.

        The Corporation participates in the TARP CPP. Congress and the bank regulators have encouraged recipients of capital under the TARP CPP to use such capital to make loans and it may not be possible to safely, soundly and profitably make sufficient loans to creditworthy persons in the current economy to satisfy such goals. Recipients of TARP CPP capital are subject to Congressional and regulatory demands for additional lending and requirements that they demonstrate and report such lending. Specific lending requirements are unclear and uncertain, and the Bank could be forced to make loans that involve risks or terms that we would not otherwise find acceptable or in our shareholders' best interest. Such loans could adversely affect our results of operation and financial condition, and may be in conflict with bank regulations and requirements as to liquidity and capital. The profitability of funding such loans using deposits may be adversely affected by increased FDIC insurance premiums.

Changes to the TARP CPP program and future rules applicable to TARP CPP recipients could adversely affect our operations, financial condition and results of operations.

        The rules and policies applicable to recipients of capital under the TARP CPP continue to evolve and their scope, timing and effect cannot be predicted. Any redemption of the securities sold to Treasury to avoid these restrictions would require prior approval of the Federal Reserve Board and Treasury. Therefore, it is uncertain if we will be able to redeem such securities even if we have sufficient financial resources to do so.

        In addition, the government is contemplating potential new programs under the TARP CPP and other governmental initiatives, including programs to promote small business lending, among others. It is uncertain whether we will qualify for those new programs and whether those new programs may impose additional restrictions on our operation and affect our financial condition in the future.

28

---

Table of Contents

The soundness of other financial institutions could adversely affect us.

        Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of other banks' difficulties or failure, which would increase the capital we need to support such growth.

Changes to accounting and tax rules applicable to us could adversely affect our financial conditions and results of operations.

        From time to time, the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.

Our ability to utilize certain net operating losses ("NOLs") may be limited under Section 382 of the Internal Revenue Code and certain state and federal law provisions.

        As of December 31, 2010, we had NOLs of $52.0 million for U.S. federal income tax purposes and $13.6 million for state income tax purposes. State NOLs exist in the jurisdictions of Tennessee, Alabama, Georgia and Minnesota. These NOLs will expire at various dates beginning in 2017 if not previously utilized. Utilization of U.S. federal and certain state NOLs may be subject to a substantial annual limitation if the ownership change thresholds under Section 382 of the Internal Revenue Code are triggered by changes in the ownership of our capital stock. Such an annual limitation could result in the expiration of our NOLs before utilization. In the event we merge into another company, certain of the state NOLs remaining at such time may be lost. As a TARP CPP participant, we are not permitted to make the special election for one taxable year ending after December 31, 2007 and beginning before January 1, 2010 to carry-back losses for five years for federal income tax purposes as otherwise permitted generally under the Worker, Homeownership, and Business Assistance Act of 2009.

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

        While our common stock is listed on the NASDAQ Global Market, the trading volume of our common stock is relatively low and we cannot be certain if or when a more active and liquid trading market for our common stock will develop or whether such a market could be sustained. Because of this, our shareholders may not be able to sell their shares at the volumes, prices or times that they desire.

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

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

29

---

Table of Contents

Holders of the Series A Preferred Stock may, under certain circumstances, have the right to elect two directors to our board of directors.

        In the event that we fail to pay dividends on the Series A Preferred Stock for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. Holders of the Series A Preferred Stock, together with the holders of any outstanding parity stock with like voting rights voting as a single class, will then be entitled to elect the two additional members of our board of directors at the next annual meeting (or at a special meeting called for the purpose of electing such directors prior to the next annual meeting) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.

Holders of our subordinated debentures have rights that are senior to those of our common shareholders.

        In 2005 and 2008, we issued trust preferred securities from two affiliated special purpose trusts and accompanying subordinated debentures. At December 31, 2010, we had outstanding trust preferred securities and accompanying subordinated debentures totaling $23.2 million. Subject to the receipt of any required regulatory approval, our board of directors may decide to issue additional tranches of trust preferred securities in the future if markets for these securities are favorable. We conditionally guarantee payments of the principal and interest on the trust preferred securities. Further, the accompanying subordinated debentures we issued to the trust are senior to our shares of common stock. As a result, we must make payments on the subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our subordinated debentures (and the related trust preferred securities) for a period not to exceed 20 consecutive quarters, during which time we may not pay dividends on our common stock.

We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.

        We are currently authorized to issue 20,000,000 shares of common stock, of which 12,194,884 shares were issued and outstanding as of December 31, 2010, and 1,000,000 shares of preferred stock, of which 30,000 shares of Series A Preferred Stock were issued and outstanding as of December 31, 2010. To maintain our capital at desired levels or required regulatory levels, or to fund future growth, our board of directors may decide from time to time, without any action by or a vote of our shareholders, to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of our common stock. In addition, the sale of securities issued under our 2007 Equity Plan may dilute our shareholders' ownership interest as a shareholder and the market price of our common stock. New investors in other equity securities issued by us in the future may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.

We do not expect to pay dividends on our common stock in the foreseeable future.

        We have never declared or paid dividends on our common stock. We currently intend to retain earnings and increase capital in furtherance of our overall business objectives. In addition, the CPP under TARP imposes certain limitations on our ability to pay dividends. Until the earlier of December 19, 2011 or when Treasury no longer holds any shares of the Series A Preferred Stock, we will not be able to pay dividends without the approval of Treasury, with limited exceptions. We are restricted from paying any dividends on our common stock unless we are current on our dividend payments on the Series A Preferred Stock.

30

---

Table of Contents

        Further, we derive our income solely from dividends on the shares of common stock of the Bank, and the Bank's ability to declare and pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to banks that are regulated by the FDIC and the TDFI. Accordingly, no assurances can be given that we will declare any dividend or, if declared, what the amount of such dividend would be or whether such dividends would continue in the future. Any future determination as to the payment of dividends on our common stock will be made by our board of directors in its discretion, subject to applicable regulatory and contractual limitations, and will depend upon our earnings, financial condition, capital requirements and other relevant factors. Investors in shares of our common stock must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a gain on their investment.

Anti-takeover provisions in our organizational documents could discourage, delay or prevent a change of control of our company and diminish the value of our common stock.

        Some of the provisions of our charter and bylaws could make it difficult for our shareholders to change the composition of our board of directors, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that our shareholders may consider favorable. These provisions include:

•

authorizing our board of directors to issue preferred shares without shareholder approval;



•

the presence of a classified board of directors;



•

any merger, consolidation, share exchange or similar transaction involving us will require a two-thirds vote of shareholders; and



•

certain amendments to our charter require approval of the holders of at least two-thirds of the outstanding shares of our common stock.

        These anti-takeover provisions could impede the ability of our common shareholders to benefit from a change of control and, as a result, could have a material adverse effect on the market price of our common stock and your ability to realize any potential change-in-control premium.

ITEM 1B.     UNRESOLVED STAFF COMMENTS

        Not applicable.

ITEM 2.     PROPERTIES

        The Corporation's main office is located in Williamson County at 381 Mallory Station Road, Suite 207, Franklin, Tennessee 37067, which is also the main office of the Bank. This location is centrally located and in a high traffic/exposure area. The Bank leases 66,167 square feet at a competitive rate and the term of the lease expires in December 2017. The Bank provides services throughout the community by use of a network of couriers, third party ATMs and state-of-the-art electronic banking. As of January 31, 2011, the Corporation closed its three loan production offices located at One Chase Corporate Center, Suite 400, Birmingham, Alabama 35244, at 7900 International Drive, Suite 200, Bloomington, Minnesota 55425 and at 125 TownPark Drive, Suite 300, Kennesaw, Georgia 30144. All three loan production office facilities were leased.

ITEM 3.     LEGAL PROCEEDINGS

        The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions with numerous customers. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, litigation presents an ongoing risk.

31

---

Table of Contents

        The Company and its subsidiaries are defendants in various lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of such matters should not have a material adverse effect on the Company's consolidated financial position or results of operations. Litigation is, however, inherently uncertain, and the Company cannot make assurances that it will prevail in any of these actions, nor can it estimate with reasonable certainty the amount of damages that it might incur.

PART II

        

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The Corporation's common stock has been listed on The NASDAQ Global Market since June 2006. The number of shareholders of record at March 1, 2011, was 365. The table below shows the quarterly range of high and low sale prices for the Corporation's common stock during the fiscal years 2010 and 2009.

Dividends

        The Corporation has never declared or paid dividends on its common stock. The payment of cash dividends is subject to the discretion of the Board of Directors, the Bank's ability to pay dividends and the priority of holders of the Corporation's subordinated debentures and Series A Preferred Stock. The Bank's ability to pay dividends is also restricted by applicable regulatory requirements. For more information on these restrictions, see ITEM 1 "BUSINESS—Supervision and Regulation—Payment of Dividends" of this Annual Report on Form 10-K. No assurances can be given that any dividend will be declared or, if declared, what the amount of such dividend would be or whether such dividends would continue in the future.

Recent Sales of Unregistered Securities

        During 2010, Corporation did not sell any of its securities which were not registered under the Securities Act of 1933.

Purchases of Equity Securities by the Registrant and Affiliated Purchasers

        The Corporation made no repurchases of its equity securities, and no Affiliated Purchasers (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) purchased any shares of the Corporation's equity securities during the fourth quarter of the fiscal year ended December 31, 2010.

32

---

Table of Contents

ITEM 6.     SELECTED FINANCIAL DATA

        The following selected financial data for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 should be read in conjunction with the financial statements included in Item 8 of this Annual Report on Form 10-K:

33

---

Table of Contents

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Statements

        Certain statements contained in this report may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period or by the use of forward-looking terminology, such as "expect," "anticipate," "believe," "estimate," "foresee," "may," "might," "will," "intend," "could," "would," "plan," "target," "predict," "should," or future or conditional verb tenses and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to our operating results and financial condition, the impact of recent developments in the financial services industry, and recently adopted accounting standards, fair value measurements, allowance for loan losses, Business Bank strategy, dividends, management's review of the loan portfolio, loan classifications, interest rate risk, economic value of equity model, loan sale transactions, liquidity, legislation and regulations affecting banks or bank holding companies, rate sensitivity gap analysis, maturities of debt securities, growth of our market area, the impact of the economic environment, competition for loans, hiring of employees, ratio of assets per employee, accessing the wholesale deposit market by means of an electronic bulletin board, engagement of deposit brokers, cost of funds, loan loss reserve, capital adequacy, informal corrective actions, interest-only strips receivable, servicing assets and liabilities, available-for-sale securities, maturities of time deposits, commitments to extend credit, tax benefits and credits, net operating loss carry-forward, and our future growth and profitability. We caution you not to place undue reliance on the forward-looking statements contained in this report because actual results could differ materially from those indicated in such forward-looking statements as a result of a variety of factors. These factors include, but are not limited to, our concentration of commercial and industrial loans, our concentration of credit exposure to borrowers in the transportation industry, the sufficiency of our current sources of funds, our reliance on internet and brokered deposits, the effect of capital constraints on our pace of growth and our ability to raise additional capital when needed, the adequacy of our allowance for loan losses, the impact of our non-performing assets, informal or formal enforcement actions to which we may become subject, the prepayment of FDIC insurance premiums and higher FDIC assessment rates, the success of the local economies in which we do business, the potential disposition of collateral upon foreclosure with respect to our national market funding outside of the Nashville MSA, the execution of our business strategies, competition from financial institutions and other financial service providers, changes in interest rates, the impact of seasonal factors, the impact of market conditions, the limitation or restriction of our activities as a result of the extensive regulation to which we are subject, our ability to satisfy lending goals of the TARP CPP, changes to the TARP CPP program and rules applicable to TARP recipients, enforcement actions by our regulators, the soundness of other financial institutions, our ability to utilize certain net operating losses, and other factors detailed from time to time in our press releases and filings with the SEC. We undertake no obligation to update these forward-looking statements to reflect the occurrence of changes or unanticipated events, circumstances or results that occur after the date of this report.

Overview

(Dollars in thousands except share data in this Item 7.)

        The results of operations for the year 2010 compared to 2009 reflected a 127.29% increase in net income (loss) available to shareholders and a 116.0% increase in diluted earnings per share. The increase in earnings resulted primarily from a decreased provision for loan losses as well as a reduction of interest expense. The net interest margin for 2010 was 4.05% compared to 3.66% for 2009. The year 2010 reflected the Bank's management of asset growth, increasing by $69,734 or 5.04% from $1,383,432 at December 31, 2009 to $1,453,166 at December 31, 2010. Net loans increased by 4.95% or $56,960 from December 31, 2009 to December 31, 2010, while total deposits increased by 4.55% or $56,509 during that same period.

34

---

Table of Contents

        The Corporation's growth in assets was a result of growth in the market area and effective marketing. The improvement in results including net income available to common shareholders and earnings per share was a result of the business focus of the Bank. From 2000 to 2010, the Bank's market area experienced explosive growth. In Williamson County, demographic information shows a 44.86% growth in the number of households from 2000 to 2010. Estimates from SNL Financial LC show that by 2015 the number of households in this county will have grown by another 17.83%. Although estimates of growth are not guaranteed and actual growth may be affected by factors beyond the Corporation's control, management believes that the projected growth of the Bank's market area will positively impact the Bank's future growth.

        The Bank has also grown by marketing to business owners that have been left without a long standing banking relationship. The Middle Tennessee area has experienced several bank mergers or acquisitions in the last ten years resulting in the termination of many long standing relationships. These acquisitions also resulted in loan funding decisions being made out-of-state, creating unpredictability for local lending personnel and uncertainty for local businesses. The Bank has taken advantage of this uncertainty by offering loans at a fair rate and funded locally in a timely manner. Management believes the competitive advantage created by this environment will continue to positively impact results from operations.

        The Business Bank operating strategy has enabled management to focus on managing results. Rather than focusing on building a multi-branch infrastructure including hiring and construction of buildings, management focuses on managing net interest margin aggressively and controlling non-interest expense. This has resulted in a 0.07 basis point or a 1.76% increase in the net interest margin from 2006 to 2010. Non-interest expense is controlled by efficiently staffing the Bank's operations. In 2010, that resulted in $14,678 in assets per employee at year end. Management believes that the Business Bank operating strategy will continue to be an effective model in the future.

Changes in Results of Operations

        Net Income —Net income available to common shareholders for 2010 was $1,944, an increase of $9,068, or 127.29%, compared to net loss available to common shareholders of $7,124 for 2009. The increase was primarily attributable to a 35.53% decrease in the provision for loan losses from $31,039 in 2009 to $20,011 in 2010. The decrease of $11,028 in the provision for loan losses was the result of lower charge-offs and repossessions. Non-interest income increased by $3,940, or 253.05%, from a loss of $1,557 to a gain of $2,383, primarily a result of increased income associated with leveraged leases. The increase in non-interest expense was primarily a result of the increase in salaries and collections expense. In 2010, salaries and employee benefits and collections expense increased $2,222, or 22.56%, and $1,174, or 70.22%, respectively, from the 12 months ended December 31, 2009.

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

        Net Interest Income —The primary source of earnings for the Bank is net interest income, which is the difference between the interest earned on interest earning assets and the interest paid on interest bearing

35

---

Table of Contents

liabilities. The major factors which affect net interest income are changes in volumes and yield on earning assets as well as the volumes and the cost of interest bearing liabilities. Management's ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Bank's primary source of earnings.

        During 2010, the Federal Reserve Open Market Committee ("FOMC") maintained the federal funds target rate, which is the interest rate at which depository institutions lend balances to each other overnight, at zero to twenty-five basis points. During 2010, $48,186 of the Corporation's net loan growth occurred in real estate loans, which are comprised of non-owner occupied, owner occupied and multi-family. Management expects to continue its practice of competing for loans based on providing superior service rather than the lowest price.

        Net interest income for 2010 was $52,505 compared to $44,916 for 2009, a gain of $7,589 or 16.90%. The increase in net interest income was largely attributable to a reduction in interest expense. Interest expense on deposits decreased from $34,213 at December 31, 2009 to $27,162 for the 12 months ended December 31, 2010, a decrease of $7,051 or 20.61% while total deposits increased $56,509 or 4.55% for the same period. Net interest income was also impacted by a 17.72% decrease in the Bank's indirect funding program for small transactions. These loans, which are purchased at a minimum rate of 8%, decreased from $166,969 at year-end 2009 to $137,376 at the end of 2010.

        Net interest income for 2009 was $44,916 compared to $34,951 for 2008, a gain of $9,965 or 28.51%. The increase in net interest income was largely attributable to strong loan growth. Net loans increased from $1,023,271 at December 31, 2008 to $1,151,388 at December 31, 2009, an increase of $128,117 or 12.52%. Net interest income was favorably impacted by a 3.87% decrease in the Bank's indirect funding program for small transactions. These loans, which are purchased at a minimum rate of 8%, decreased from $173,438 at year-end 2008 to $166,969 at the end of 2009. The loan growth was matched by an increase in deposits from $1,069,143 at December 31, 2008 to $1,242,542 at December 31, 2009, an increase of $173,399 or 16.22%.

        Investments —The Bank views the investment portfolio as a source of income and liquidity. Management's investment strategy is to accept a lower immediate yield in the investment portfolio by targeting shorter term investments. The Bank's investment policy requires a minimum portfolio level equal to 7% of total assets and a maximum portfolio level of 20% of total assets. Management has maintained the portfolio at the lower end of the policy guidelines with the portfolio at 8.78%, 6.77% and 8.32% of total assets at year-end in 2010, 2009 and 2008, respectively.

        The investment portfolio at December 31, 2010 was $127,650 compared to $93,668 at year-end 2009. The interest earned on investments declined from $5,325 in 2009 to $3,387 in 2010, as a result of higher average portfolio balances in 2009. The average yield on the investment portfolio investments fell from 5.14% in 2009 to 3.65% in 2010, or 149 basis points.

        The investment portfolio at December 31, 2009 was $93,668, compared to $101,290 at year-end 2008. The average yield on the investment portfolio was 5.14% in 2009 compared to 5.59% in 2008.

        Net Interest Margin Analysis —The net interest margin is impacted by the average volumes of interest sensitive assets and interest sensitive liabilities and by the difference between the yield on interest sensitive assets and the cost of interest sensitive liabilities (spread). Loan fees collected at origination represent an additional adjustment to the yield on loans. The Bank's spread can be affected by economic conditions, the competitive environment, loan demand and deposit flows. The net yield on earning assets is an indicator of the effectiveness of a bank's ability to manage the net interest margin by managing the overall yield on assets and the cost of funding those assets.

        The two factors that make up the spread are the interest rates received on loans and the interest rates paid on deposits. The Bank has been disciplined in raising interest rates on deposits only as the market demands and thereby managing the cost of funds. Also, the Bank has not competed for new loans on

36

---

Table of Contents

interest rate alone but has relied on effective marketing to business customers. Business customers are not influenced by interest rates alone but are influenced by other factors such as timely funding.

        The net interest margin increased from 3.66% in 2009 to 4.05% in 2010 because the yield on earning assets decreased less than the cost of funds. Interest income increased by $270, or 0.33%, from $81,108 in 2009 to $81,378 in 2010. Average earning assets increased from $1,224,775 in 2009 to $1,297,316 in 2010, an increase of $72,541 or 5.92%. The increase in earning assets was a result of loan growth. Average loans increased $69,586 or 6.24% from 2009 to 2010. The average yield on earning assets decreased from 6.62% in 2009 to 6.27% in 2010, or 35 basis points. The decrease in the Bank's average securities portfolio unfavorably impacted the average yield on earning assets. The average yield on this type of asset in 2010 was 3.65%. The average federal funds sold increased 226.06% from $5,955 at year-end 2009 to $19,417 in 2010. Interest expense decreased from $36,192 in 2009 to $28,873 in 2010. The decrease of $7,319, or 20.22%, in interest expense was a result of a lower cost of funds. Average deposits increased from $1,157,759 in 2009 to $1,251,656 in 2010, an increase of $93,897 or 8.11%. The cost of funds decreased from 3.00% in 2009 to 2.24% in 2010, or 76 basis points.

        The net interest margin increased from 3.43% in 2008 to 3.66% in 2009 because the yield on earning assets decreased less than the cost of funds. Interest income increased by $5,130, or 6.75%, from $75,978 in 2008 to $81,108 in 2009. The increase was primarily a result of increased loan volume. Average earning assets increased from $1,019,887 in 2008 to $1,224,775 in 2009, an increase of $204,888 or 20.09%. The increase in earning assets was a result of loan growth. Average loans increased $187,485 or 20.19% from 2008 to 2009. The average yield on earning assets decreased from 7.45% in 2008 to 6.62% in 2009, or 83 basis points. The decrease in the Bank's federal funds sold unfavorably impacted the average yield on earning assets. The average yield on this type of asset in 2009 was 0.22%. The federal funds sold decreased 19.24% from $7,374 at year-end 2008 to $5,955 in 2009. Interest expense decreased from $41,027 in 2008 to $36,192 in 2009. The decrease of $4,835, or 11.78%, in interest expense was a result of a lower cost of funds. Average deposits increased from $949,005 in 2008 to $1,157,759 in 2009, an increase of $208,754 or 22.00%. The cost of funds decreased from 4.17% in 2008 to 3.00% in 2009, or 117 basis points.

        Allowance for Loan Losses and Provision for Loan Losses —The allowance for loan losses represents the Corporation's estimate of probable losses inherent in the loan portfolio, the largest asset category on the consolidated balance sheet. Determining the amount of the allowance for loan losses is considered a critical accounting policy because it requires significant judgment and the evaluation of several factors: the ongoing review and grading of the loan portfolio; consideration of the Corporation's and relevant banking industry's past loan loss experience; trends in past-due and nonperforming loans; risk characteristics of the various classifications of loans; existing economic conditions; the fair value of underlying collateral; the size and diversity of individual large credits; and other qualitative and quantitative factors that could affect probable credit losses. Other considerations include the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on the Corporation's historical loss experience and additional qualitative factors for various issues. Additionally, an allocation of reserves is established for special situations that are unique to the measurement period with consideration of current economic trends and conditions. Because economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly.

        The Corporation's allowance for loan loss methodology is based on generally accepted accounting principles ("GAAP"). Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporation's control, including the performance of the Corporation's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The allowance for loan losses is currently being reviewed by our regulators, who may disagree with our allowance and require us to increase the amount. The additions to

37

---

Table of Contents

our allowance for loans losses would be made through increased provisions for loan losses and would negatively affect our results of operations.

        The Corporation's allowance for loan losses consists of three elements: (i) specific allocated allowances based on probable losses on specific commercial or commercial real estate loans or restructured residential mortgage or consumer loans; (ii) risk allocated allowance, which is comprised of several loan pool valuation allowances, based on the Corporation's historical quantitative loan loss experience for similar loans with similar risk characteristics, including additional qualitative risks; and (iii) general valuation allowances based on existing regional and local economic factors, including deterioration in commercial and residential real estate values, a macroeconomic adjustment factor used to calibrate for the current economic cycle the Corporation is experiencing, and other subjective factors supported by qualitative documentation.

        Specific allocated allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan. The specific credit allocations are based on a regular analysis of all commercial and commercial real estate loans over a fixed dollar amount where the internal credit rating is at or below a predetermined classification and on all restructured residential mortgage and consumer loans over a fixed dollar amount.

        The Corporation's risk allocated allowance, which is comprised of several loan pool valuation allowances is calculated based on historical data with additional qualitative risk determined by the judgment of management. Qualitative factors, both internal and external to the Corporation, considered by management include: (i) the experience, ability and effectiveness of the Corporation's lending management and staff; (ii) the effectiveness of the Corporation's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on the portfolio; (ix) the impact of rising interest rates on the portfolio; and (x) the impact of loan modification programs. The Corporation evaluates the degree of risk that these components have on the quality of the loan portfolio on a quarterly basis. Based upon the Corporation's analysis, appropriate estimates for qualitative risks are established. Included in the qualitative valuations are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits. Concentration risk guidelines have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships, and loans originated with policy exceptions. Qualitative allowances may also include estimates of inherent but undetected losses within the portfolio because of uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. The historical losses used may not be representative of actual losses inherent in the portfolio that have not yet been realized.

        The general valuation allowance is based on management's estimate of the effect of current general economic conditions on current loan pools and the inherent imprecision in loan loss projection models. The uncertainty surrounding the strength and timing of economic cycles, including concerns over the effects of the prolonged economic downturn for the Corporation's market area in the current cycle, also affects the estimates of loss.

        Continuous credit monitoring processes and the analysis of loss components are the principal methods relied upon by management to ensure that changes in estimated credit loss levels are reflected in the Corporation's allowance for loan losses on a timely basis. The Corporation utilizes regulatory guidance and its own experience in this analysis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require additions to the allowance, or require an adjustment to a previously allocated allowance through a restatement of financial statements for prior reporting periods, or restatements of regulatory reports from

38

---

Table of Contents

prior periods based on their judgment on information available to them at the time of their examination. Based upon the most recent completed examination, the FDIC and TDFI have proposed an increase in our allowance for loan and lease losses of up to approximately $16 million, an amount not recognized in the financial statements to this annual report. We do not concur with this amount and our regulators have not provided us with their methodology. Accordingly, if ultimately required, the increase to our allowance for loan and lease losses may differ from the amount our regulators are requiring.

        Actual loss ratios experienced in the future may vary from those projected. In the event that management overestimates future cash flows or underestimates losses on loan pools, the Corporation may be required to increase the allowance for loan losses through the provision for loan losses, which would have a negative impact on the results of operations in the period in which the increase occurred. Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K describes the methodology used to determine the allowance for loan losses.

        The provision for loan losses in 2010 was $20,011, a decrease of $11,028, or 35.53%, below the provision of $31,039 expensed in 2009. Of this provision, $1,550, or 7.75%, was attributable to loan growth recorded during 2010. The remainder of the loan loss provision in 2010 funded net charge-offs of $18,461.

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

        The Bank targets small and medium sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic pressures than larger borrowers in periods of economic weakness. If loan losses occur to a level where the loan loss reserve is not sufficient to cover actual loan losses, the Bank's earnings will decrease. The Bank uses an independent accounting firm to review its loans semi-annually for quality in addition to the reviews that may be conducted by bank regulatory agencies as part of their usual examination process.

        The following table presents information regarding non-accrual, past due and restructured loans at December 31, 2010, 2009, 2008, 2007 and 2006:

        As of December 31, 2010, there were no loans which represent trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity, or capital resources that

39

---

Table of Contents

have not been disclosed in the above table and classified for regulatory purposes as doubtful or substandard.

        The Bank had no tax-exempt loans during the years ended December 31, 2010 and December 31, 2009. The Bank had no loans outstanding to foreign borrowers at December 31, 2010 and December 31, 2009.

        An analysis of the Bank's loss experience is furnished in the following table for December 31, 2010, 2009, 2008, 2007 and 2006, and the years then ended:

        The allowance for loan losses is established by charges to operations based on management's evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level. Management believes that the allowance was adequate at December 31, 2010.

40

---

Table of Contents

        At December 31, 2010, 2009, 2008, 2007 and 2006, the allowance for loan losses was allocated as follows:

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

        The Bank earned $31 in mortgage origination fees in 2009 and none in 2010, primarily as a result of management's decision to cease mortgage loan originations for sale in the secondary market.

        The Bank gained $917 in 2010 on a series of loan sale transactions, compared to a loss of $1,928 in 2009. In addition to lending in the local marketplace, the Bank provides collateral-based loans to business borrowers in other states through two types of indirect funding programs. Management has identified a network of community banks eager to purchase quality assets. Management has installed appropriate systems and a process to sell assets to other banks located in slower growing markets and believes that loan sales will be a recurring source of revenue. The Bank's gains on sales of securities decreased by $231, or 20.66% from $1,118 in 2009 to $887 in 2010.

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

        Non-interest Expense —Non-interest expense includes salaries and benefits expense, occupancy costs and other operating expenses including data processing, professional fees, supplies, postage, telephone and other items. Management views the control of operating expense as a critical element in the success of the Business Bank strategy. The Bank operates more efficiently than most peer banks because it conducts business from a single location and does not provide banking services for many retail customers with high transaction volume.

        Management targets $10,000 in assets per full-time employee as a measure of staffing efficiency. Management believes that the growth of the Bank will offer additional opportunities to leverage personnel resources. The Bank does not expect to hire employees in 2011, so salaries and benefits expense may increase slightly, but the target for assets per employee will remain at $10,000.

41

---

Table of Contents

        Non-interest expense for 2010 was $29,665, an increase of $8,360 or 39.24%, over the $21,305 expensed in 2009. Approximately 13.88% of the increase was attributable to professional services, approximately 26.58% of the increase was attributable to the addition of new employees during the year and approximately 14.04% of the increase was attributable to increased collection efforts. The Bank ended 2010 with 99 full-time employees. Assets per employee were $14,678 at year-end 2010 compared to $15,203 at year-end 2009.

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

        Income Taxes —The Corporation's effective tax rate in 2010 was 33.92% compared to 37.92% in 2009 and 38.10% in 2008. Management anticipates that tax rates in future years will approximate the rates paid in 2010.

Changes in Financial Condition

        Assets —Total assets at December 31, 2010 were $1,453,166, an increase of $69,734 or 5.04%, over total assets of $1,383,432 at December 31, 2009. Average assets for 2010 were $1,408,299, an increase of $101,094, or 7.73% over average assets in 2009. Loan growth was the primary reason for these increases. Net loans were $1,208,348 at year-end 2010, up $56,960, or 4.95% over the year-end 2009 total net loans of $1,151,388.

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

        The Bank's Business Bank model of operation results in a higher level of earning assets than most peer banks. Earning assets are defined as assets that earn interest income. Earning assets include short-term investments, the investment portfolio and net loans. The Bank maintains a relatively high level of earning assets because few assets are allocated to facilities, cash and due-from bank accounts used for transaction processing. Earning assets at December 31, 2010 were $1,350,212, or 92.92% of total assets of $1,453,166. Earning assets at December 31, 2009 were $1,260,066, or 91.08% of total assets of $1,383,432. Management targets an earning asset to total asset ratio of 90% or higher. This ratio is expected to generally continue at these levels, although it may be affected by economic factors beyond the Bank's control.

        Liabilities —The Bank relies on increasing its deposit base to fund loan and other asset growth. The Williamson County marketplace is highly competitive with 30 financial institutions and 93 banking facilities (as of June 30, 2010). The Bank competes for local deposits by offering attractive products with premium rates. The Bank expects to have a higher average cost of funds for local deposits than most competitor banks because of its single location and lack of a branch network. Management's strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products. The Bank has promoted electronic banking services by providing them without charge and by offering in-bank customer training.

        The Bank also obtains funding in the wholesale deposit market which is accessed by means of an electronic bulletin board. This electronic market links banks and sellers of deposits to deposit purchasers such as credit unions, school districts, labor unions, and other organizations with excess liquidity. Deposits

42

---

Table of Contents

may be raised in $99 or $100 increments with maturities ranging from two weeks to five years. Management believes the utilization of the electronic bulletin board is highly efficient and the average rate has been generally less than rates paid in the local market. Participants in the electronic market pay a modest annual licensing fee and there are no transaction charges. Management has established policies and procedures to govern the acquisition of funding through the wholesale market. Wholesale deposits are categorized as "Purchased Time Deposits" on the detail of deposits shown in this Item 7. Management may also, from time to time, engage the services of a deposit broker to raise a block of funding at a specified maturity date.

        Total average deposits in 2010 were $1,251,656, an increase of $93,897, or 8.11% over the total average deposits of $1,157,759 in 2009. Average non-interest bearing deposits decreased by $266, or 1.09%, from $24,372 in 2009 to $24,106 in 2010. Average savings deposits increased by $177,754 from $92,510 in 2009 to $270,264 in 2010. Average purchased deposits decreased by $28,680, or 5.36%, from $534,942 in 2009 to $506,262 in 2010. The average rate paid on purchased deposits in 2010 was 2.35% compared to 3.29% in 2009. Purchased time deposit funding represented 38.4% of total funding in 2010 compared to 42.36% in 2009.

        Total average deposits in 2009 were $1,157,759, an increase of $208,754, or 22.00% over the total average deposits of $949,005 in 2008. Average non-interest bearing deposits increased by $1,028, or 4.40%, from $23,344 in 2008 to $24,372 in 2009. Average savings deposits increased by $85,979 from $6,531 in 2008 to $92,510 in 2009. Average purchased deposits increased by $79,888, or 17.56%, from $455,054 in 2008 to $534,942 in 2009. The average rate paid on purchased deposits in 2009 was 3.29% compared to 4.50% in 2008. Purchased Time Deposit funding represented 42.36% of total funding in 2009 compared to 47.95% in 2008. As a result of regulatory actions, the Bank could be required to limit its use of Purchased Time Deposits in the future, which could impact the Bank's liquidity.

Information regarding the Corporation's return on assets, return on equity and equity to asset ratio is located in Item 6 of this Annual Report on Form 10-K.

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

        All lending activities of the Bank are under the direct supervision and control of the Direct Loan Committee, the Indirect Loan Committee, the President's Committee and, in some cases, the full Board of Directors of the Bank. The Direct and Indirect Loan Committees are chaired by senior lenders John Burton and Doug Rogers, respectively. The Chief Credit Officer and the Chief Operating Officer serve as permanent members of both committees. These two committees approve any new loans in an amount up to 15% of Tier I Capital. Any new loan in an amount equal to or above $5,000 is sent for approval to the President's Loan Committee, which is chaired by Chairman/CEO/President Mike Sapp and consists of the members of the Direct or Indirect Loan Committees and the Senior Vice President of Risk Management. The Bank's Board of Directors must ratify all proposed extensions of credit made by management that are in excess of $10,000. In addition, the full Board must approve all extensions of credit to the Bank's directors, executive officers and their related parties.

        Management of the Bank periodically reviews the loan portfolio, particularly non-accrual and renegotiated loans. The review may result in a determination that a loan should be placed on a non-accrual status for income recognition. In addition, to the extent that management identifies potential losses in the loan portfolio, it reduces the book value of such loans, through charge-offs, to their estimated collectible value. The Bank's policy is that accrual of interest is discontinued on a loan when management of the Bank determines that collection of interest is doubtful based on consideration of economic and business factors affecting collection efforts.

43

---

Table of Contents

        When a loan is classified as non-accrual, any unpaid interest is reversed against current income. Interest is included in income thereafter only to the extent received in cash. The loan remains in a non-accrual classification until such time as the loan is brought current, when it may be returned to accrual classification. When principal or interest on a non-accrual loan is brought current, if in management's opinion future payments are questionable, the loan would remain classified as non-accrual. After a non-accrual or renegotiated loan is charged off, any subsequent payments of either interest or principal are applied first to any remaining balance outstanding, then to recoveries and lastly to income.

        The Bank's underwriting guidelines are applied to three major categories of loans, commercial and industrial, consumer, and real estate which includes residential, construction and development and certain other real estate loans. The Bank requires its loan officers and loan committee to consider the borrower's character, the borrower's financial condition, the economic environment in which the loan will be repaid, as well as, for commercial loans, the borrower's management capability and the borrower's industry. Before approving a loan, the loan officer or committee must determine that the borrower is creditworthy, is a capable manager, understands the specific purpose of the loan, understands the source and plan of repayment, and determine that the purpose, plan and source of repayment as well as collateral are acceptable, reasonable and practical given the normal framework within which the borrower operates.

        The maintenance of an adequate loan loss reserve is one of the fundamental concepts of risk management for every financial institution. Management is responsible for ensuring that controls are in place to monitor the adequacy of the loan loss reserve in accordance with GAAP, the Bank's stated policies and procedures, and regulatory guidance. Quantification of the level of reserve which is prudently conservative, but not excessive, involves a high degree of judgment.

        Management's assessment of the adequacy of the loan loss reserve considers a wide range of factors including portfolio growth, mix, collateral and geographic diversity, and terms and structure. Portfolio performance trends, including past dues and charge-offs, are monitored closely. Management's assessment includes a continuing evaluation of current and expected market conditions and the potential impact of economic events on borrowers. Management's assessment program is monitored by an ongoing loan review program conducted by an independent accounting firm and periodic examinations by bank regulators.

        Management uses a variety of financial methods to quantify the level of the loan loss reserve. At inception, each loan transaction is assigned a risk rating that ranges from "RR1—Excellent" to "RR4—Average." The risk rating is determined by an analysis of the borrower's credit history and capacity, collateral, and cash flow. The weighted average risk rating of the portfolio provides an indication of overall risk and identifies trends. The portfolio is additionally segmented by loan type, collateral, and purpose. Loan transactions that have exhibited signs of increased risk are downgraded to a "Watch," "Critical," or "Substandard" classification, i.e., RR5, RR6 and RR7, respectively. These loans are closely monitored for rehabilitation or potential loss and the loan loss reserve is adjusted accordingly.

        It is management's intent to maintain a loan loss reserve that is adequate to absorb current and estimated losses which are inherent in a loan portfolio. The historical loss ratio (net charge-offs as a percentage of average loans) was 1.53%, 2.17% and 0.64% for the years ended December 31, 2010, 2009 and 2008, respectively. The year-end loan loss reserve as a percentage of the end of period loans was 1.75%, 1.70% and 1.30%, respectively, for the same years. Because of the commercial emphasis of the Bank's operation, management has kept a reserve level in excess of historical results.

        The provision for loan losses for 2010 was $20,011, a decrease of $11,028 over the $31,039 provision for 2009. In 2010, expenses reflected the impact of $18,461 in net charge-offs during the year and the incremental provision required as a result of the $56,960 increase in loan volume. The Bank's provision for loan losses is subject to increase as a result of management's determination or if directed by regulators for prior periods as a result of ongoing regulatory examinations.

44

---

Table of Contents

Credit Risk Management and Reserve for Loan Losses

        Credit risk and exposure to loss are inherent parts of the banking business. Management seeks to manage and minimize these risks through its loan and investment policies and loan review procedures. Management establishes and continually reviews lending and investment criteria and approval procedures that it believes reflect the risk sensitive nature of the Bank. The loan review procedures are set to monitor adherence to the established criteria and to ensure that on a continuing basis such standards are enforced and maintained. Management's objective in establishing lending and investment standards is to manage the risk of loss and provide for income generation through pricing policies.

        The Bank targets small- and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic pressures than larger borrowers in periods of economic weakness. If loan losses occur to a level where the loan loss reserve is not sufficient to cover actual loan losses, the Bank's earnings will decrease. The Bank uses an independent accounting firm to review its loans for quality in addition to the reviews that may be conducted by bank regulatory agencies as part of their usual examination process.

        Management regularly reviews the loan portfolio and determines the amount of loans to be charged-off. In addition, management considers such factors as the Bank's previous loan loss experience, prevailing and anticipated economic conditions, industry concentrations and the overall quality of the loan portfolio. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for losses on loans and real estate owned. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available at the time of their examinations. In addition, any loan or portion thereof which is classified as a "loss" by regulatory examiners is charged-off.

45

---

Table of Contents

Financial Tables

        The financial information below regarding the Corporation and the Bank should be read in conjunction with the Corporation's financial statements included in Item 8 of this Annual Report on Form 10-K.

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

        The following tables present the average yearly balances of each principal category of assets, liabilities and shareholders' equity of the Corporation and the Bank. The tables are presented on a taxable equivalent basis, as applicable.

---

(1)

Unrealized loss of $546 is excluded from yield calculation.

(2)

Non-accrual loans are included in average loan balances and loan fees of $5,904 are included in interest income.

(3)

Loans are presented net of allowance for loan loss.

46

---

Table of Contents

---

(1)

Unrealized loss of $806 is excluded from yield calculation.

(2)

Non-accrual loans are included in average loan balances and loan fees of $5,347 are included in interest income.

(3)

Loans are presented net of allowance for loan loss.

47

---

Table of Contents

---

(1)

Unrealized loss of $318 is excluded from yield calculation.

(2)

Non-accrual loans are included in average loan balances and loan fees of $5,730 are included in interest income.

(3)

Loans are presented net of allowance for loan loss.

48

---

Table of Contents

        The following tables provide an analysis of the impact of changes in volume and rate on interest income and interest expense from 2010 to 2009 and 2009 to 2008:

 

---

(1)

Unrealized losses of $546 and $806 are excluded from yield calculation for the 12 months ended December 31, 2010 and 2009, respectively.

Liability and Asset Management

        The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the dollar amount of rate sensitive assets re-pricing during a period and the volume of rate sensitive liabilities re-pricing during the same period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest

49

---

Table of Contents

rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.

        The Bank's Asset Liability and Investment Committee, which consists of the Corporation's non-independent board members and executive officers and certain other bank officers, Arthur F. Helf, Michael R. Sapp, H. Lamar Cox and Frank Perez, is charged with monitoring the liquidity and funds position of the Bank. The committee regularly reviews (a) the rate sensitivity position on a three-month, six-month and one-year time horizon; (b) loans to deposit ratios; and (c) average maturity for certain categories of liabilities. The Bank operates an asset/liability management model. At December 31, 2010, the Bank had a positive cumulative re-pricing gap between four and 12 months of approximately $6,716 or 0.46% of total year-end assets. See Item 7A of this Annual Report on Form 10-K for additional information.

Deposits

        The Bank's primary source of funds is interest-bearing deposits. The following tables present the average amount of and average rate paid on each of the following deposit categories for 2010, 2009 and 2008:

        The following table indicates amount outstanding of time certificates of deposit of $100 thousand or more and respective maturities as of December 31, 2010:

50

---

Table of Contents