**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

 

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2005**

 

**CommissionFile Number 000-51281**

 

**TENNESSEE COMMERCE BANCORP,  INC.**

(Exact Name of Registrant AsSpecified in Its Charter)

 
| **Tennessee**                                                                                        | ** ** | **62-1815881**                     |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------|
| (State or  Other Jurisdiction of                                                                     |       | (IRS  Employer Identification No.) |
| Incorporation  or Organization)                                                                      |       |                               |
|                                                                                                 |       |                               |
| **381  Mallory Station Rd., Suite 207     Franklin,  Tennessee 37067** |
| (Address of  Principal Executive Offices and Zip Code)                                               |

 

**(615) 599-2274**

(Registrant’s Telephone Number,Including Area Code)

 

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.

 

YES o      NO ý

 

Indicate by check mark whether the Registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

 

YES o      NO ý

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock as of the latest practicable date: Common stock outstanding (par value $0.50 per share ) : 3,238,674 shares at July 31,2005. 

 

 

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**Tennessee Commerce Bancorp, Inc.**

 

Table of Contents

 
| ** **   | ** **                                                                                                                                                                                    | **Page** |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| Part I  | Financial Information                                                                                                                                                                         |     |
|         |                                                                                                                                                                                          |     |
| Item  1.     | Financial  Statements                                                                                                                                                                         |     |
|         |                                                                                                                                                                                          |     |
|         | Consolidated Balance Sheets at June 30, 2005 (unaudited) and December 31,  2004                                                                                                     | 1        |
|         |                                                                                                                                                                                          |     |
|         | Consolidated Statements of Income and Comprehensive Income  (unaudited) for the Six Months Ended June 30,  2005 and 2004 and for the Three Months Ended June 30, 2005 and 2004 | 2        |
|         |                                                                                                                                                                                          |     |
|         | Consolidated Statements of Changes in Shareholders’ Equity  (unaudited) for the Six Months Ended June 30, 2005 and 2004                                                             | 3        |
|         |                                                                                                                                                                                          |     |
|         | Consolidated Statements of Cash Flows (unaudited) for the Six Months  Ended June 30, 2005 and 2004                                                                                       | 4        |
|         |                                                                                                                                                                                          |     |
|         | Notes to Consolidated Financial Statements (unaudited)                                                                                                                                        | 5-7      |
|         |                                                                                                                                                                                          |     |
| Item 2.      | Management’s Discussion and Analysis of Financial Condition and Results  of Operations                                                                                                   | 8-21     |
|         |                                                                                                                                                                                          |     |
| Item 3.      | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                    | 22-24    |
|         |                                                                                                                                                                                          |     |
| Item 4.      | Controls and Procedures                                                                                                                                                                       | 25       |
|         |                                                                                                                                                                                          |     |
| Part II | Other  Information                                                                                                                                                                            |     |
|         |                                                                                                                                                                                          |     |
| Item  1.     | Legal  Proceedings                                                                                                                                                                            | 25       |
|         |                                                                                                                                                                                          |     |
| Item 2.      | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                   | 25-26    |
|         |                                                                                                                                                                                          |     |
| Item 3.      | Defaults Upon Senior Securities                                                                                                                                                               | 26       |
|         |                                                                                                                                                                                          |     |
| Item 4.      | Submission of Matters to a Vote of Security Holders                                                                                                                                           | 26-27    |
|         |                                                                                                                                                                                          |     |
| Item  5.     | Other  Information                                                                                                                                                                            | 27       |
|         |                                                                                                                                                                                          |     |
| Item 6.      | Exhibits                                                                                                                                                                                      | 27-28    |
|         |                                                                                                                                                                                          |     |
| Signatures   |                                                                                                                                                                                          | 29       |

 

----

 

**PART I: FINANCIAL INFORMATION**

 

**ITEM 1: FINANCIAL STATEMENTS**

 

TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATEDBALANCE SHEETS

JUNE 30, 2005 (UNAUDITED)AND DECEMBER 31, 2004

 

(dollars in thousands except share data)

 
| ** **                                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                      |       |              |       |                  |       |
| Cash and due  from financial institutions                                                                                                       |       | $                 | 2,874      |                  | $          | 3,838 |   |
| Federal  funds sold                                                                                                                             |       | 7,288             |       | 6,582                 |       |
| Cash and  cash equivalents                                                                                                                      |       | 10,162            |       | 10,420                |       |
| Securities  available for sale                                                                                                                  |       | 21,756            |       | 18,610                |       |
| Loans                                                                                                                                           |       | 279,879           |       | 216,167               |       |
| Allowance  for loan losses                                                                                                                      |       | (3,727            | )          | (2,841                | )          |
| Net loans                                                                                                                                       |       | 276,152           |       | 213,326               |       |
|                                                                                                                                            |       |              |       |                  |       |
| Premises and  equipment, net                                                                                                                    |       | 808               |       | 609                   |       |
| Accrued  interest receivable                                                                                                                    |       | 1,539             |       | 1,104                 |       |
| Restricted  equity securities                                                                                                                   |       | 453               |       | 321                   |       |
| Deferred tax  asset                                                                                                                             |       | 560               |       | 597                   |       |
| Other assets                                                                                                                                    |       | 1,915             |       | 930                   |       |
|                                                                                                                                            |       |              |       |                  |       |
| Total assets                                                                                                                                    |       | $                 | 313,345    |                  | $          | 245,917 |   |
|                                                                                                                                            |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| Liabilities                                                                                                                                     |       |              |       |                  |       |
| Deposits                                                                                                                                        |       |              |       |                  |       |
| Noninterest-bearing                                                                                                                             |       | $                 | 17,634     |                  | $          | 15,239 |   |
| Interest-bearing                                                                                                                                |       | 261,547           |       | 206,155               |       |
| Total  deposits                                                                                                                                 |       | 279,181           |       | 221,394               |       |
|                                                                                                                                            |       |              |       |                  |       |
| Accrued  interest payable                                                                                                                       |       | 709               |       | 445                   |       |
| Accrued  bonuses                                                                                                                                |       | 207               |       | 125                   |       |
| Long-term  subordinated debt                                                                                                                    |       | 8,248             |       | —                |       |
| Other  liabilities                                                                                                                              |       | 57                |       | 353                   |       |
| Total  liabilities                                                                                                                              |       | 288,402           |       | 222,317               |       |
| Shareholders’  equity                                                                                                                      |       |              |       |                  |       |
| Preferred  stock, no par value. Authorized 1,000,000 shares; none issued or outstanding  at June 30, 2005 and December 31, 2004       |       | —            |       | —                |       |
| Common  stock, $0.50 par value. Authorized 5,000,000 shares; Issued and outstanding  3,238,674 at June 30, 2005 and December 31, 2004 |       | 1,619             |       | 1,619                 |       |
| Additional  paid-in capital                                                                                                                     |       | 21,401            |       | 21,401                |       |
| Retained  earnings                                                                                                                              |       | 1,997             |       | 714                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                  |       | (74               | )          | (134                  | )          |
| Total  shareholders’ equity                                                                                                                |       | 24,943            |       | 23,600                |       |
|                                                                                                                                            |       |              |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | $                 | 313,345    |                  | $          | 245,917 |   |

 

Note : The balance sheet presented above at December 31,2004 has been derived from the audited consolidated financial statements atthat date but does not include all of the information and footnotes required bygenerally accepted accounting principles for complete financial statements.

 

See accompanying notes to consolidatedfinancial statements.

 

1

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVEINCOME

SIX MONTHS ENDED JUNE 30,2005 AND 2004

THREE MONTHS ENDED JUNE 30,2005 AND 2004

(UNAUDITED)

 

(dollars in thousands except share data)

 
| ** **                                          | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2005**                            | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Interest income                                     |       |                                |       |                                  |       |   |   |   |   |
| Loans, including fees                               |       | $                                   | 9,752      |                                  | $          | 5,182 |   | $ | 5,290 |   | $ | 2,748 |   |
| Securities                                          |       | 406                                 |       | 278                                   |       | 211 |   | 150 |   |
| Federal funds sold                                  |       | 63                                  |       | 26                                    |       | 47 |   | 16 |   |
| Total interest income                               |       | 10,221                              |       | 5,486                                 |       | 5,548 |   | 2,914 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Interest expense                                    |       |                                |       |                                  |       |   |   |   |   |
| Deposits                                            |       | 3,681                               |       | 1,764                                 |       | 2,064 |   | 921 |   |
| Other                                               |       | 150                                 |       | 2                                     |       | 142 |   | 1 |   |
| Total interest expense                              |       | 3,831                               |       | 1,766                                 |       | 2,206 |   | 922 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Net interest income                                 |       | 6,390                               |       | 3,720                                 |       | 3,342 |   | 1,992 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Provision for loan losses                           |       | 1,800                               |       | 905                                   |       | 1,150 |   | 425 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Net interest income after provision for loan losses |       | 4,590                               |       | 2,815                                 |       | 2,192 |   | 1,567 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Non interest income                                 |       |                                |       |                                  |       |   |   |   |   |
| Service charges on deposit accounts                 |       | 54                                  |       | 67                                    |       | 28 |   | 38 |   |
| Mortgage banking                                    |       | 39                                  |       | 54                                    |       | 20 |   | 29 |   |
| Securities gains                                    |       | 4                                   |       | 11                                    |       | 7 |   | — |   |
| Gain on sale of loans                               |       | 440                                 |       | 139                                   |       | 295 |   | — |   |
| Other                                               |       | 38                                  |       | 31                                    |       | 16 |   | 7 |   |
| Total non interest income                           |       | 575                                 |       | 302                                   |       | 366 |   | 74 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Non interest expense                                |       |                                |       |                                  |       |   |   |   |   |
| Salaries and employee benefits                      |       | 1,788                               |       | 1,244                                 |       | 885 |   | 620 |   |
| Occupancy and equipment                             |       | 288                                 |       | 231                                   |       | 162 |   | 154 |   |
| Data processing fees                                |       | 226                                 |       | 151                                   |       | 113 |   | 69 |   |
| Professional fees                                   |       | 162                                 |       | 150                                   |       | 75 |   | 107 |   |
| Other                                               |       | 524                                 |       | 386                                   |       | 227 |   | 146 |   |
| Total non interest expense                          |       | 2,988                               |       | 2,162                                 |       | 1,462 |   | 1,096 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Income before income taxes                          |       | 2,177                               |       | 955                                   |       | 1,096 |   | 545 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Income tax expense                                  |       | 894                                 |       | 377                                   |       | 475 |   | 217 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Net income                                          |       | 1,283                               |       | 578                                   |       | 621 |   | 328 |   |
| Unrealized gains (losses) on securities, net        |       | 60                                  |       | (218                                  | )          | 268 |   | (343 | ) |
| Comprehensive income (loss)                         |       | 1,343                               |       | 360                                   |       | 889 |   | (15 | ) |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Earnings per share (EPS):                           |       |                                |       |                                  |       |   |   |   |   |
| Basic EPS                                           |       | $                                   | .40        |                                  | $          | .22 |   | $ | .19 |   | $ | .12 |   |
| Diluted EPS                                         |       | .37                                 |       | .21                                   |       | .18 |   | .12 |   |
|                                                |       |                                |       |                                  |       |   |   |   |   |
| Weighted average shares outstanding:                |       |                                |       |                                  |       |   |   |   |   |
| Basic                                               |       | 3,238,674                           |       | 2,568,116                             |       | 3,238,674 |   | 2,674,548 |   |
| Diluted                                             |       | 3,479,977                           |       | 2,710,023                             |       | 3,479,977 |   | 2,816,119 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

2

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30,2005 and 2004

(UNAUDITED)

 

(dollars in thousands except share data)

 
| ** **                                                                      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**         | ** ** | **Total**              | ** ** |
| ** **                                                                      | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Earnings**  | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                                                      | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
|                                                                            |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at December 31,  2003                                              |       | $          | 1,230      |           | $          | 13,245        |       | $                 | (952       | )                      | $          | (125 | ) | $ | 13,398 |   |
| Comprehensive  income                                                           |       |       |       |           |       |          |       |              |       |                   |       |
| Net income                                                                      |       | —     |       | —         |       | 578           |       | —            |       | 578                    |       |
| Other  comprehensive income, net of income taxes                                |       |       |       |           |       |          |       |              |       |                   |       |
| Unrealized  losses on securities available for sale during the period           |       | —     |       | —         |       | —        |       | (225              | )          | (225                   | )          |
| Reclassification  adjustment for gains included in net income, net of $4 in tax |       | —     |       | —         |       | —        |       | 7                 |       | 7                      |       |
|                                                                            |       |       |       |           |       |          |       |              |       |                   |       |
| Total  comprehensive income                                                     |       |       |       |           |       |          |       |              |       | 360                    |       |
|                                                                            |       |       |       |           |       |          |       |              |       |                   |       |
| Issuance of  520,352 common shares                                              |       | 260        |       | 5,456          |       | —        |       | —            |       | 5,716                  |       |
|                                                                            |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at June 30,  2004                                                  |       | $          | 1,490      |           | $          | 18,701        |       | $                 | (374       | )                      | $          | (343 | ) | $ | 19,474 |   |
|                                                                            |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at December 31,  2004                                              |       | $          | 1,619      |           | $          | 21,401        |       | $                 | 714        |                   | $          | (134 | ) | $ | 23,600 |   |
| Comprehensive  income                                                           |       |       |       |           |       |          |       |              |       |                   |       |
| Net income                                                                      |       | —     |       | —         |       | 1,283         |       | —            |       | 1,283                  |       |
| Other  comprehensive income, net of income taxes                                |       |       |       |           |       |          |       |              |       |                   |       |
| Unrealized  gains on securities available for sale during the period            |       | —     |       | —         |       | —        |       | 57                |       | 57                     |       |
| Reclassification  adjustment for gains included in net income, net of $1 in tax |       | —     |       | —         |       | —        |       | 3                 |       | 3                      |       |
|                                                                            |       |       |       |           |       |          |       |              |       |                   |       |
| Total  comprehensive income                                                     |       |       |       |           |       |          |       |              |       | 1,343                  |       |
|                                                                            |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at June 30,  2005                                                  |       | $          | 1,619      |           | $          | 21,401        |       | $                 | 1,997      |                   | $          | (74 | ) | $ | 24,943 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30,2005 AND 2004

(UNAUDITED)

 

(dollars in thousands except share data)

 
| ** **                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                                              |       |                                |       |   |   |
| **Cash flows from operating activities**                                          |       |                                |       |   |   |
| Net income                                                                        |       | $                                   | 1,283      |   | $ | 578 |   |
| Adjustments to reconcile net income to net cash used by operating activities      |       |                                |       |   |   |
| Depreciation                                                                      |       | 80                                  |       | 80 |   |
| Deferred loan fees                                                                |       | (2                                  | )          | (1 | ) |
| Provision for loan losses                                                         |       | 1,800                               |       | 905 |   |
| FHLB stock dividends                                                              |       | (7                                  | )          | (4 | ) |
| Net amortization of investment securities                                         |       | 22                                  |       | 28 |   |
| Gain on sales of securities                                                       |       | (4                                  | )          | (11 | ) |
| Change in:                                                                        |       |                                |       |   |   |
| Accrued interest receivable                                                       |       | (435                                | )          | (124 | ) |
| Accrued interest payable                                                          |       | 264                                 |       | 29 |   |
| Other assets and liabilities                                                      |       | (951                                | )          | (309 | ) |
| Net cash from operating activities                                                |       | 2,050                               |       | 1,171 |   |
|                                                                              |       |                                |       |   |   |
| **Cash flows from investing activities**                                          |       |                                |       |   |   |
| Purchases of securities available for sale                                        |       | (5,470                              | )          | (7,973 | ) |
| Proceeds from sales of securities available for sale                              |       | 1,489                               |       | 1,478 |   |
| Proceeds from maturities, prepayments and calls of securities  available for sale |       | 914                                 |       | 1,675 |   |
| Investment in unconsolidated subsidiary                                           |       | (248                                | )          | — |   |
| Net change in loans                                                               |       | (64,624                             | )          | (38,175 | ) |
| Purchases of Federal Home Loan Bank Stock                                         |       | (125                                | )          | (82 | ) |
| Net purchases of premises and equipment                                           |       | (279                                | )          | (39 | ) |
| Net cash from investing activities                                                |       | (68,343                             | )          | (43,116 | ) |
|                                                                              |       |                                |       |   |   |
| **Cash flows from financing activities**                                          |       |                                |       |   |   |
| Net change in deposits                                                            |       | 57,787                              |       | 37,879 |   |
| Proceeds from long-term subordinated debt                                         |       | 8,248                               |       | — |   |
| Proceeds from issuance of common stock                                            |       | —                              |       | 5,716 |   |
| Net cash from financing activities                                                |       | 66,035                              |       | 43,595 |   |
|                                                                              |       |                                |       |   |   |
| **Net change in cash and cash equivalents**                                       |       | (258                                | )          | 1,650 |   |
|                                                                              |       |                                |       |   |   |
| Cash and cash equivalents at beginning of period                                  |       | 10,420                              |       | 7,723 |   |
|                                                                              |       |                                |       |   |   |
| **Cash and cash equivalents at end of period**                                    |       | $                                   | 10,162     |   | $ | 9,373 |   |
|                                                                              |       |                                |       |   |   |
| **Supplemental cash flow information:**                                           |       |                                |       |   |   |
| Cash paid during period for interest                                              |       | $                                   | 3,567      |   | $ | 1,737 |   |
| Cash paid during period for income taxes                                          |       | 1,289                               |       | 327 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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**TENNESSEE COMMERCE BANCORP, INC.**

 

Notes to Consolidated Financial Statements

 

Note 1 – Basis of Presentation

 

Tennessee Commerce Bancorp, Inc.(the “Corporation”) is a holding company for Tennessee Commerce Bank (the “Bank”).  In March, 2005, the Corporation formed awholly owned subsidiary, Tennessee Commerce Bank Statutory Trust I, (the “TrustI”). The Bank and the Trust I are the only subsidiaries of the Corporation. Theaccompanying consolidated financial statements include the accounts of theCorporation, and the Bank. The Trust I is not consolidated in accordance withFASB Interpretation No. 46 (revised December 2003) Consolidation ofVariable Interest Entities (FIN46R). Material intercompany accounts andtransactions have been eliminated.

 

The unaudited consolidatedfinancial statements as of June 30, 2005 and for the six and three monthperiods ended June 30, 2005 and 2004 have been prepared in accordance withaccounting principles generally accepted in the United States of America and inaccordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X as promulgated by the Securities and Exchange Commission (“SEC”),and in the opinion of management, include all adjustments, consisting of normalrecurring adjustments, to present fairly the information. They do not includeall the information and footnotes required by generally accepted accountingprinciples for complete financial statements. Operating results for the sixmonth period ended June 30, 2005, are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005. Forfurther information, refer to the 2004 consolidated financial statements andfootnotes thereto included in the Corporation’s Form 10.

 

Note 2 – Earnings per Share of Common Stock

 

The factorsused in the earnings per share computation follow.

 

(dollars in thousands except share data)

 
| ** **                                                                      | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                            | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                            |       |                                |       |                                  |       |   |   |   |   |
| Basic                                                                           |       |                                |       |                                  |       |   |   |   |   |
| Net income                                                                      |       | $                                   | 1,283      |                                  | $          | 578 |   | $ | 621 |   | $ | 328 |   |
|                                                                            |       |                                |       |                                  |       |   |   |   |   |
| Weighted average  common shares outstanding                                     |       | 3,238,674                           |       | 2,568,116                             |       | 3,238,674 |   | 2,674,548 |   |
|                                                                            |       |                                |       |                                  |       |   |   |   |   |
| Basic  earnings per common share                                                |       | $                                   | 0.40       |                                  | $          | 0.22 |   | $ | 0.19 |   | $ | 0.12 |   |
| Diluted                                                                         |       |                                |       |                                  |       |   |   |   |   |
| Net income                                                                      |       | $                                   | 1,283      |                                  | $          | 578 |   | $ | 621 |   | $ | 328 |   |
|                                                                            |       |                                |       |                                  |       |   |   |   |   |
| Weighted average  common shares outstanding for basic earnings per common share |       | 3,238,674                           |       | 2,568,116                             |       | 3,238,674 |   | 2,674,548 |   |
| Add:  Dilutive effects of assumed exercises of stock options                    |       | 241,303                             |       | 141,907                               |       | 241,303 |   | 141,571 |   |
|                                                                            |       |                                |       |                                  |       |   |   |   |   |
| Average  shares and dilutive potential common shares                            |       | 3,479,977                           |       | 2,710,023                             |       | 3,479,977 |   | 2,816,119 |   |
|                                                                            |       |                                |       |                                  |       |   |   |   |   |
| Diluted  earnings per common share                                              |       | $                                   | 0.37       |                                  | $          | 0.21 |   | $ | 0.18 |   | $ | 0.12 |   |

 

No options were antidilutive

 

5

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Note 3 – Stock Compensation

 

Employeecompensation expense under stock options is reported using the intrinsic valuemethod.  No stock-based compensation costis reflected in net income, as all options granted had an exercise price equalto or greater than the market price of the underlying common stock at date ofgrant.

 

The FinancialAccounting Standards Board (FASB) recently issued new accounting standards onshare-based payments (FAS 123R). FAS 123R requires all public companies torecord compensation cost for stock options provided to employees in return foremployee service. The cost is measured at the fair value of the options whengranted, and this cost is expensed over the employee service period, which isnormally the vesting period of the options. This will apply to awards grantedor modified after the first quarter or year beginning after December 15,2005. Compensation cost will also be recorded for prior option grants that vestafter the date of adoption. The effect on results of operations will depend onthe level of future option grants and the calculation of the fair value of theoptions granted at such future date, as well as the vesting periods provided,and so cannot be currently predicted. Existing options that will vest afteradoption date are expected to result in additional compensation expense ofapproximately $4,125 in 2006. There will be no significant effect on theCorporation’s financial position as total equity will not change.

 

6

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The following tableillustrates the effect on net income and earnings per share if expense wasmeasured using the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation.

 

(dollars in thousands except share data)

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                            | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                               |       |                                |       |                                  |       |   |   |   |   |
| Net income  as reported                                                            |       | $                                   | 1,283      |                                  | $          | 578 |   | $ | 621 |   | $ | 328 |   |
| Deduct:  Stock-based compensation expense determined under fair value based method |       | 25                                  |       | 70                                    |       | 12 |   | 35 |   |
|                                                                               |       |                                |       |                                  |       |   |   |   |   |
| Pro forma  net income                                                              |       | $                                   | 1,258      |                                  | $          | 508 |   | $ | 609 |   | $ | 293 |   |
|                                                                               |       |                                |       |                                  |       |   |   |   |   |
| Basic  earnings per share as reported                                              |       | $                                   | 0.40       |                                  | $          | 0.22 |   | 0.19 |   | 0.12 |   |
| Pro forma  basic earnings per share                                                |       | 0.39                                |       | 0.20                                  |       | 0.19 |   | 0.11 |   |
|                                                                               |       |                                |       |                                  |       |   |   |   |   |
| Diluted  earnings per share as reported                                            |       | 0.37                                |       | 0.21                                  |       | 0.18 |   | 0.12 |   |
| Proforma  diluted earnings per share                                               |       | 0.36                                |       | 0.19                                  |       | 0.18 |   | 0.10 |   |

 

The pro forma effects are computed usingoption pricing models, using the following weighted-average assumptions as ofgrant date.

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Risk-free interest rate |       | n/a      |       | 3.23     | %          |
| Expected option life    |       | n/a      |       | 7 years  |       |
| Dividend yield          |       | n/a      |       | 0.0      | %          |

 

No options were granted during the three orsix month period ending June 30, 2005. The weighted average fair value ofoptions granted during the six month period ending June 30, 2004 was $2.23.  There were no options grantedduring the three month period ending June 30, 2004.

 

Note 4 – Trust Preferred Securities

 

In March 2005,the Corporation formed a financing subsidiary, Tennessee Commerce StatutoryTrust I, a Delaware statutory trust (the “Trust I”). In March 2005, TrustI issued and sold 8,000 Fixed/Floating rate capital securities, with aliquidation amount of $1,000 per capital security, to First Tennessee BankNational Association. At the same time, the Corporation issued to Trust I$8,248,000 of Fixed/Floating rate junior subordinated deferrable interestdebentures due 2035. The debentures pay a 6.73% fixed rate payable quarterly for the first five years and afloating rate based on a 3 month Libor rate plus a margin thereafter.

 

In accordance with FASB Interpretation No. 46(revised December 2003) Consolidation of Variable Interest Entities(FIN46R), the Trust I is not consolidated. The Corporation will report asliabilities the subordinated debentures issued by the Corporation and held byTrust I.

 

7

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

 

**Forward-LookingStatements**

 

Management’s discussion of theCorporation and management’s analysis of the Corporation’s operations andprospects, and other matters, may include forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995 and other provisionsof federal and state securities laws. Although the Corporation believes that the assumptions underlying suchforward-looking statements contained in this Report are reasonable, any of theassumptions could be inaccurate and, accordingly, there can be no assurancethat the forward-looking statements included herein will prove to beaccurate.  The use of such words asexpect, anticipate, forecast, and comparable terms should be understood by thereader to indicate that the statement is “forward-looking” and thus subject tochange in a manner that can be unpredictable. Factors that could cause actual results to differ from the resultsanticipated, but not guaranteed, in this Report, include (without limitation)economic and social conditions, competition for loans, mortgages, and otherfinancial services and products, changes in interest rates, unforeseen changesin liquidity, results of operations, and financial conditions affecting theCorporation’s customers, as well as other risks that cannot be accuratelyquantified or completely identified. Many factors affecting the Corporation’s financial condition andprofitability, including changes in economic conditions, the volatility ofinterest rates, political events and competition from other providers offinancial services simply cannot be predicted. Because these factors are unpredictable and beyond the Corporation’scontrol, earnings may fluctuate from period to period.  The purpose of this type of information is toprovide readers with information relevant to understanding and assessing thefinancial condition and results of operations of the Corporation, and not topredict the future or to guarantee results. The Corporation is unable to predict the types of circumstances,conditions, and factors that can cause anticipated results to change.  The Corporation undertakes no obligation topublish revised forward-looking statements to reflect the occurrence of changesor unanticipated events, circumstances, or results.

 

**CorporationOverview**

 

Tennessee Commerce Bancorp, Inc.(the “Corporation”) is a one-bank holding company formed as a Tennesseecorporation to own the shares of Tennessee Commerce Bank (the “Bank”).  The Corporation was incorporated on March 22,2000, for the purpose of acquiring 100% of the shares of the Bank and the shareexchange was completed on May 31, 2000. The Bank commenced operations as a Tennessee state chartered bank on January 14,2000, and both the Bank’s and Corporation’s principal executive offices arelocated at 381 Mallory Station Road, Suite 207, Franklin, Tennessee37067.  On March 29, 2005, theCorporation formed a wholly owned subsidiary, Tennessee Commerce Bank StatutoryTrust I, (the “Trust I”). The Bank and the Trust I are the only subsidiaries ofthe Corporation.

 

The Bank offers a full range ofcompetitive retail and commercial banking services.  The deposit services offered include varioustypes of checking accounts, savings accounts, money market investment accounts,certificates of deposits, and retirement accounts.  Lending services include consumer installmentloans, various types of mortgage loans, personal lines of credit, home equityloans, credit cards, real estate construction loans, commercial loans to smalland medium size businesses and professionals, and letters of credit. The Bankissues VISA credit cards and is a merchant depository for cardholder draftsunder VISA credit cards.  The Bank alsooffers check cards and debit cards.  TheBank offers its customers courier services, access to third-party automatedteller machines (“ATMs”), and state of the art electronic banking. The Bank hastrust powers but does not have a trust department.

 

8

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**BusinessBank Strategy** - The Bank is located in Franklin,Tennessee, fifteen miles south of Nashville. Franklin is in Williamson County,one of the most affluent and rapidly growing counties in the nation and theBank conducts business from a single location in the Cool Springs commercialarea of Franklin. Although the Bank offers a full range of banking services andproducts, it operates with a focused “Business Bank” strategy.  The “Business Bank” strategy emphasizesbanking services for small to medium sized businesses, entrepreneurs, andprofessionals.  The Bank competes bycombining the personal service and appeal of a community bank institution withthe sophistication and flexibility of a larger bank.  This strategy distinguishes the Bank from itscompetitors in efforts to attract loans and deposits of local businesses.

 

The Bank does not compete basedon the traditional definition of “convenience” and has no plans to develop abranch bank network.  Business isconducted from a single office with no teller line, drive-through window orextended banking hours.  The Bankcompetes by providing responsive and personalized service to meet customerneeds.  Convenience is created bytechnology and by a free courier service which transports deposits directlyfrom the customer’s location to the Bank. The Bank provides free electronic banking and cash management tools andon-site training for business customers. The Bank competes for consumer business by providing superior products,attractive deposit rates, free Internet Banking services, and access to a thirdparty regional ATM network. The Bank targets service, manufacturing, andprofessional customers and avoids retail businesses with high transactionvolume.

 

The Business Bank strategy isevident in differences in the financial statements of the Bank and moretraditional financial institutions. The Business Bank model creates a highdegree of leverage.  By avoiding theinvestment and maintenance costs of a typical branch network, the Bank is ableto maintain Earning Assets at a higher level than peer institutions.  Assets of the Bank are centered in the loanportfolio which consists primarily of commercial and industrial loans.

 

The Business Bank model ishighly efficient.  The Bank targets thenon-retail sector of the commercial market which is characterized by lowerlevels of transactions and processing costs. The commercial customer mix and the strategic outsourcing ofnon-customer functions, such as data processing, allow the Bank to operate witha smaller, more highly trained staff. Management targets an average asset per employee ratio of $7 millioncompared to the average of less than $2.5 million in assets per employee forTennessee state chartered banks.  TheBank also promotes the use of technology, both internally and externally, tomaximize the efficiency of operations.

 

9

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**Overviewof Operating Results for the Three and Six Months ended June 30, 2005 and June 30,2004 and Financial Condition at June 30, 2005 and December 31, 2004.**

 

(dollars inthousands except share data in the remainder of this Item 2)

 

The results of operations forthe quarter ended June 30, 2005 compared to the quarter ended June 30,2004 reflected a 89.32% increase in net income and a 50.00% increase inearnings per share, assuming dilution. The increase in earnings resultedprimarily from a 67.77% increase in net interest income due to higher averageloan balances. Also, noninterest income increased by $292 for the three monthsended June 2005 compared to the same period in 2004. This was due to anincrease of $295 in loan sale gains between the two three month periods. Theseincreases were partially offset by increases in noninterest expense and theprovision for loan losses. For the six months ended June 30, 2005, netincome was $1,283, an increase of $705 or 121.97% compared to net income of$578 for the same period in 2004. Diluted earnings per share increased $.16 pershare or 76.19% for the six months ended June 30, 2005 compared to thesame period in 2004. The six months ended June 30, 2005, reflected acontinuation of the Bank’s trend of rapid asset growth increasing by $67,428 or27.41% from $245,917 at December 31, 2004 to $313,345 at June 30,2005. Net loans increased by 29.45% or $62,826 from December 31, 2004 to June 30,2005, while total deposits increased by 26.10% or $57,787 during that sameperiod.

 

**Comparisonof Operating Results for the Three Months ended June 30, 2005 and June 30,2004**

 

**Net Income**- Net income for the three months ended June 30, 2005 was $621 an increaseof $293 or 89.32%, compared to the net income of $328 for the three monthsended June 30, 2004.  The increaseis primarily attributable to a 67.77% increase in net interest income from $1,992for the three months ended June 30, 2004 to $3,342 for the same period in2005. The increase of $1,350 in net interest income was the result of overallgrowth of the Corporation, including a 62.00% increase in the ending net loanbalance from June 30, 2004 to the same date in 2005. Noninterest incomeincreased 394.59% or $292, from $74 in the quarter ended June 30, 2004 to$366 for the same period in 2005. This was due to an increase of $295 in loansale gains between the two three month periods. These increases were partiallyoffset by a $725 increase in the provision for loan losses, from $425 duringthe three months ended June 30, 2004 to $1,150 for the same period in2005. Also, noninterest expense increased by 33.39% to $1,462 for the threemonth period ended June 30, 2005 compared to $1,096 for the same period in2004. The increase in the provision for loan losses was the result of fundingthe allowance for loan losses to match the significant loan growth. Theincrease in noninterest expense was due to the increase in personnel andgeneral operating expenses due to the Corporation’s growth.

 

**NetInterest Income** - Net interest income for the threemonths ended June 30, 2005 was $3,342 compared to $1,992 for the sameperiod in 2004, a gain of $1,350 or 67.77%. The increase in net interest income was largely attributable to strongloan growth.  The ending net loan balanceat June 30 increased by 62.00% or $105,694 from $170,458 in 2004 to $276,152for the same date in 2005. Loan growth was matched by an increase in depositsfrom $180,172 at June 30, 2004 to $279,181 for the same date in 2005 – anincrease of $99,009 or 54.95%.

 

10

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**Provisionfor Loan Losses** - The provision for loan lossesfor the three months ended June 30, 2005 was $1,150, an increase of $725,or 170.59%, above the provision of $425 expensed in the same period in2004.  This increase was primarily due tosignificant loan growth. The provision is discussed as it relates to theallowance for loan losses in the following Comparison of Financial Conditionsection. At June 30, 2005, the loan loss reserve of $3,727 was 1.33% ofgross loans of $279,879.

 

**NoninterestIncome** – Noninterest income increased 394.59% or $292,from $74 in the quarter ended June 30, 2004 to $366 for the same period in2005. The increase was primarily due to an increase in net gains on loan salesof $295 for the quarter ended June 30, 2005 compared to the same quarterin 2004. This increase was primarily due to one loan transaction in June 2005resulting in a gain of $178.

 

**NoninterestExpense** – Noninterest expense for the three monthsended June 30, 2005 was $1,462, an increase of $366 or 33.39%, over the $1,096expensed in the same period in 2004. Approximately 72.67% of the increase was due to the addition of nine newemployees during the period between the two quarter end dates. At June 30,2005, the Corporation had 38 full time employees.

 

**Comparisonof Operating Results for the Six Months ended June 30, 2005 and June 30,2004**

 

**Net Income**- Net income for the six months ended June 30, 2005 was $1,283 an increaseof $705 or 121.97%, compared to the net income of $578 for the two quartersended June 30, 2004.  The increaseis attributable to a 71.77% increase in net interest income from $3,720 for thesix months ended June 30, 2004 to $6,390 for the same period in 2005. Theincrease of $2,670 in net interest income was the result of overall growth ofthe Corporation, including a 63.42% increase in average loan balances in thesix months ended June 30, 2005 compared to the same period in 2004. Thispositive effect was partially offset by a 98.89% increase in the provision forloan losses, from $905 during the six months ended June 30, 2004 to $1,800for the same period in 2005. Also, noninterest expense increased by 38.20% to$2,988 for the six month period ended June 30, 2005 compared to $2,162 forthe same period in 2004. The increase in the provision for loan losses was theresult of funding the allowance for loan losses to match the significant loangrowth. The increase in noninterest expense was due to the increase inpersonnel and general operating expenses due to the Corporation’s growth.

 

11

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(dollars inthousands)

 
| ** **                                   | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **% Increase** | ** ** |
|                                         |       |                                |       |       |       |   |   |
| Interest income                              |       | $                                   | 10,221     |       | $          | 5,486 |   | 86.31 | % |
| Interest expense                             |       | 3,831                               |       | 1,766      |       | 116.93 |   |
| Net interest income                          |       | 6,390                               |       | 3,720      |       | 71.77 |   |
| Provision for loan losses                    |       | 1,800                               |       | 905        |       | 98.89 |   |
| Net interest after provision for loan losses |       | 4,590                               |       | 2,815      |       | 63.05 |   |
| Noninterest income                           |       | 575                                 |       | 302        |       | 90.39 |   |
| Noninterest expense                          |       | 2,988                               |       | 2,162      |       | 38.20 |   |
| Net income before taxes                      |       | 2,177                               |       | 955        |       | 127.95 |   |
| Income tax expense                           |       | 894                                 |       | 377        |       | 137.13 |   |
| Net income                                   |       | $                                   | 1,283      |       | $          | 578 |   | 121.97 | % |

 

**NetInterest Income** - Net interest income for the sixmonths ended June 30, 2005 was $6,390 compared to $3,720 for the sameperiod in 2004, a gain of $2,670 or 71.77%. The increase in net interest income was largely attributable to strongloan growth.  The average loan balancefor the six months ended June 30 increased by 63.42% or $96,527 from$152,187 for that period in 2004 to $248,714 for the same period in 2005. Loangrowth was matched by an increase in average deposits from $159,400 for the sixmonths ended June 30, 2004 to $248,816 for the same period in 2005 – anincrease of $89,416 or 56.09%.

 

**NetInterest Margin**- The net interest margin improvedfrom 4.41% for the six months ended June 30, 2004 to 4.75% for the sameperiod in 2005 due to an improved yield on earning assets offset to a lesserdegree by an increase in the cost of funding. Interest income increased by$4,735 or 86.31%, from $5,486 during the six months ended June 30, 2004 to$10,221 during the same period in 2005. The increase was primarily due toincreased volume.  Average earning assetsincreased from $169,418 in the six months ended June 30, 2004 to $270,721in the same period in 2005, an increase of $101,303 or 59.79%.  The increase in earning assets was due toloan growth. Average loan balances increased by $96,527 or 63.42%.  The average yield on earning assets increasedfrom 6.51% in the six months ended June 30, 2004 to 7.61% in the sameperiod in 2005. The increase in yield on earning assets and cost of funds, as apercentage of average balances was primarily due to increases in short terminterest rates by the Federal Reserve Open Market Committee (FOMC).

 

Interest expense increased from$1,766 in the six months ended June 30, 2004 to $3,831 in the six monthsended June 30, 2005. The $2,065 or 116.93%, increase in expense was dueprimarily to increases in the volume of deposits. Average interest bearingdeposits increased by $86,030 or 58.38%. The cost of funds increased from 2.41% in the six months ended June 30,2004 to 3.25% in the same period in 2005, an increase of 84 basis points.

 

12

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# **Average Balance Sheets, NetInterest Income, and Changes in Interest Income and Interest Expense**

# ** **

The following table shows the average dailybalances of each principal category of assets, liabilities and stockholders’equity of the Corporation, and an analysis of net interest income, and thechange in interest income and interest expense segregated into amountsattributable to changes in volume and changes in rates for the six monthperiods ended June 30, 2004 and 2005. The table is presented on a taxequivalent basis if applicable.

 

(dollars in thousands)

 
| ** **                                      | ** ** | **Six Months Ended June 30,  2005** | ** ** | **Six Months Ended June 30,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **Average**                              | ** ** | ** **                               | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Balance**                              | ** ** | **Interest**                             | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **ASSETS**                                      |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest earning assets                         |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Securities (taxable) (1)                        |       | $                                        | 20,023     |                                     | $          | 406 |   | 4.03 | % | $ | 14,787 |   | $ | 278 |   | 3.75 | % |
| Loans (2) (3)                              |       | 245,453                                  |       | 9,752                                    |       | 8.01 | % | 150,054 |   | 5,182 |   | 6.94 | % |
| Federal funds sold                              |       | 5,245                                    |       | 63                                       |       | 2.42 | % | 4,577 |   | 26 |   | 1.15 | % |
| Total interest earning assets                   |       | 270,721                                  |       | 10,221                                   |       | 7.61 | % | 169,418 |   | 5,486 |   | 6.51 | % |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Noninterest earning assets                      |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                         |       | 3,663                                    |       |                                     |       |   |   | 2,968 |   |   |   |   |   |
| Net fixed assets and equipment                  |       | 675                                      |       |                                     |       |   |   | 657 |   |   |   |   |   |
| Accrued interest and other assets               |       | 3,813                                    |       |                                     |       |   |   | 1,706 |   |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                        | 278,872    |                                     |       |   |   |   | $ | 174,749 |   |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest bearing liabilities                    |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Deposits (other than demand)                    |       | $                                        | 233,369    |                                     | $          | 3,681 |   | 3.18 | % | $ | 147,339 |   | $ | 1,764 |   | 2.41 | % |
| Federal funds purchased                         |       | 508                                      |       | 10                                       |       | 3.84 | % | 188 |   | 2 |   | 2.38 | % |
| Subordinated debt                               |       | 4,192                                    |       | 140                                      |       | 6.75 | % | — |   | — |   | — |   |
| Total interest bearing liabilities              |       | 238,069                                  |       | 3,831                                    |       | 3.25 | % | 147,527 |   | 1,766 |   | 2.41 | % |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Noninterest bearing liabilities                 |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Noninterest bearing demand deposits             |       | 15,447                                   |       |                                     |       |   |   | 12,061 |   |   |   |   |   |
| Other liabilities                               |       | 1,241                                    |       |                                     |       |   |   | 332 |   |   |   |   |   |
| Shareholders’ equity                       |       | 24,115                                   |       |                                     |       |   |   | 14,829 |   |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ Equity |       | $                                        | 278,872    |                                     |       |   |   |   | $ | 174,749 |   |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net Interest Spread                             |       | 4.36                                     | %          |                                     |       |   |   | 4.09 | % |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net Interest Margin                             |       | 4.75                                     | %          |                                     |       |   |   | 4.41 | % |   |   |   |   |

 

----

(1)          Unrealizedloss of $307 and $227 is excluded from yield calculation for the six monthsended June 30, 2005 and 2004 respectively.

(2)          Non-accrualloans are included in average loan balances and loan fees of $757 and $313 areincluded in interest income for the six months ended June 30, 2005 and2004 respectively.

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

 

13

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The following table outlines the componentsof the net interest margin for the three month periods ended June 30, 2005and 2004 and identifies the impact of changes in volume and the changes inrate.

 

(dollars in thousands)

 
| ** **                    | ** ** | **June 30, 2005 change from  June 30, 2004 due to:** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                    | ** ** | **Volume**                                                     | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                                           |       |   |   |   |   |
| Interest income               |       |                                                           |       |   |   |   |   |
| Loans                         |       | $                                                              | 3,695      |   | $ | 875 |   | $ | 4,570 |   |
| Securities – taxable (1) |       | 103                                                            |       | 25 |   | 128 |   |
| Federal funds sold            |       | 4                                                              |       | 33 |   | 37 |   |
| Total interest income         |       | 3,802                                                          |       | 933 |   | 4,735 |   |
|                          |       |                                                           |       |   |   |   |   |
| Interest expense              |       |                                                           |       |   |   |   |   |
| Deposits (other than demand)  |       | 1,242                                                          |       | 675 |   | 1,917 |   |
| Federal funds purchased       |       | 6                                                              |       | 2 |   | 8 |   |
| Subordinated debt             |       | 140                                                            |       | — |   | 140 |   |
| Total interest expense        |       | 1,388                                                          |       | 677 |   | 2,065 |   |
|                          |       |                                                           |       |   |   |   |   |
| Net interest income           |       | $                                                              | 2,414      |   | $ | 256 |   | $ | 2,670 |   |

 

----

(1) Unrealized loss of $307 and $227 isexcluded from yield calculation for the six months ended June 30, 2005 and2004 respectively.

 

**Provisionfor Loan Losses** - The provision for loan lossesfor the six months ended June 30, 2005 was $1,800, an increase of $895, or98.89%, above the provision of $905 expensed in the same period in 2004.  This increase was primarily due tosignificant loan growth. The provision is discussed as it relates to theallowance for loan losses in the following Comparison of Financial Conditionsection. At June 30, 2005, the loan loss reserve of $3,727 was 1.33% ofgross loans of $279,879.

 

**NoninterestIncome** - The Bank earned $39 in mortgageorigination fees during the six months ended June 30, 2005 compared to $54earned in 2004, a decline of $15 or 27.77%. The decline in mortgage origination income is attributed to risinginterest rates in from mid-2004 and the slowing of refinancing activity.Management believes that rates will continue to rise and that the mortgage unitwill provide a value-added service with modest revenue results. Income earnedin the form of service charges on deposits totaled $54 for the six months endedJune 30, 2005, a decrease of $13 compared to the same period in 2004.  Sale of securities showed a gain of $4 forthe six months ended June 30, 2005, compared with a gain of $11 for thesame period in 2004. The Bank earned $440 on loan sale transactions in the sixmonths ended June 30, 2005, a 216.54% increase compared to $139 during thesame period in 2004. This increase is primarily due to one loan sale transactionin June 2005 resulting in a gain of $178. Management will continue toconsider loan sale transactions if the opportunity for a reasonable return isavailable.

 

**NoninterestExpense** – Noninterest expense for the six monthsended June 30, 2005 was $2,988, an increase of $826 or 38.20%, over the$2,162 expensed in the same period in 2004. Approximately 65.85% of the increase was due to the addition of nine newemployees during the period between the two quarter end dates. At June 30,2005, the Corporation had 38 full time employees. Assets per employee were $8.5million at June 30, 2004 and $8.2 million at June 30, 2005.  Management targets $7 million per full timeemployee as a measure of staffing efficiency.

 

14

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Efficiency Ratio

(dollars in thousands )

 
| ** **          | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                |       |                                |       |   |   |
| Noninterest expense |       | $                                   | 2,988      |   | $ | 2,162 |   |
| Net interest income |       | 6,390                               |       | 3,720 |   |
| Noninterest income  |       | 575                                 |       | 302 |   |
| Total Revenues      |       | $                                   | 6,965      |   | $ | 4,022 |   |
|                |       |                                |       |   |   |
| Efficiency Ratio    |       | 42.90                               | %          | 53.75 | % |

 

**IncomeTaxes** - The Corporation’s effective tax rate forthe six months ended June 30, 2005 was 41.06% compared to 39.48% for thesix months ended June 30, 2004. Management anticipates that tax rates infuture periods will approximate the rates paid in 2004.

 

**Comparisonof Financial Condition at June 30, 2005 and December 31, 2004**

 

**Assets-**Total assets at June 30, 2005 were $313,345, an increase of $66,428or 27.01%, over total assets of $245,917 at December 31, 2004. Loan growthwas the primary reason for the increase. June 30, 2005 net loans were $276,152, up $62,826, or 29.45% overthe December 31, 2004 total net loans of $213,326.

 

The Bank’s Business Bank modelof operation generally results in a higher level of earning assets than peerbanks.  Earning assets are defined asassets which earn interest income. Earning assets include short-term investments, the investment portfolio,and net loans.  The Bank maintains ahigher level of earning assets because fewer assets are allocated tofacilities, cash, and due-from bank accounts used for transactionprocessing.  Earning assets at June 30,2005 were $305,196, or 97.39% of total assets of $313,345.  Earning assets at December 31, 2004 were$238,518, or 96.99% of total assets of $245,917.

 

15

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**Loans**- The Bank had total net loans of $276 million at June 30, 2005. Thefollowing table sets forth the composition of the Bank’s loan portfolio at June 30,2005 and December 31, 2004 (dollars in thousands) :

 
| ** **                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                   |       |              |       |                  |       |
| Real estate                            |       |              |       |                  |       |
| Construction                           |       | $                 | 31,135     |                  | $          | 22,813 |   |
| 1-4 family residential                 |       | 16,119            |       | 15,963                |       |
| Other                                  |       | 39,670            |       | 33,694                |       |
| Commercial, financial and agricultural |       | 188,971           |       | 139,799               |       |
| Consumer                               |       | 3,984             |       | 3,898                 |       |
|                                   |       |              |       |                  |       |
| Total loans                            |       | $                 | 279,879    |                  | $          | 216,617 |   |
| Less: allowance for loan losses        |       | (3,727            | )          | (2,841                | )          |
|                                   |       |              |       |                  |       |
| Net loans                              |       | $                 | 276,152    |                  | $          | 213,326 |   |

 

Composition of loan portfolio by type

(dollars inthousands)

 
| ** **                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                   |       |              |       |                  |       |
| Real estate:                           |       |              |       |                  |       |
| Construction                           |       | 11.12             | %          | 10.55                 | %          |
| 1 to 4 family residential              |       | 5.77              | %          | 7.38                  | %          |
| Other                                  |       | 14.17             | %          | 15.59                 | %          |
| Commercial, financial and agricultural |       | 67.52             | %          | 64.67                 | %          |
| Consumer                               |       | 1.42              | %          | 1.80                  | %          |
|                                   |       |              |       |                  |       |
| Total                                  |       | 100               | %          | 100                   | %          |

 

Management of the Bankperiodically reviews the loan portfolio, particularly non-accrual andrenegotiated loans.  The review mayresult in a determination that a loan should be placed on a non-accrual statusfor income recognition. When a loan is classified as non-accrual, any unpaidinterest is reversed against current income. Interest is included in income thereafter only to the extent received incash.  The loan remains in a non-accrualclassification until such time as the loan is brought current, when it may bereturned to accrual classification.

 

16

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The following table presentsinformation regarding non-accrual, past due and restructured loans at June 30,2005 and December 31, 2004:

 

  (dollars in thousands)

 
| ** **                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                                                                                    |       |              |       |                  |       |
| Non-accrual loans                                                                                       |       |              |       |                  |       |
| Number                                                                                                  |       | 16                |       | 17                    |       |
| Amount                                                                                                  |       | $                 | 1,346      |                  | $          | 2,161 |   |
|                                                                                                    |       |              |       |                  |       |
| Accruing loans which are contractually past due 90 days or more as to  principal and interest payments: |       |              |       |                  |       |
| Number                                                                                                  |       | 12                |       | 4                     |       |
| Amount                                                                                                  |       | $                 | 1,628      |                  | $          | 111 |   |
|                                                                                                    |       |              |       |                  |       |
| Loans defined as “troubled debt restructurings”                                               |       |              |       |                  |       |
| Number                                                                                                  |       | 2                 |       | 2                     |       |
| Amount                                                                                                  |       | $                 | 1,539      |                  | $          | 1,544 |   |
|                                                                                                    |       |              |       |                  |       |
| Total nonperforming loans and accruing loans past due 90 days or more                                   |       | $                 | 4,513      |                  | $          | 3,816 |   |

 

As of June 30, 2005 and December 31,2004, there are no loans classified for regulatory purposes as doubtful orsubstandard that have not been disclosed in the above table, which (i) representor result from trends or uncertainties which management reasonably expects willmaterially impact future operating results, liquidity, or capital resources, or(ii) represent material credits about which management is aware of anyinformation which causes management to have serious doubts as to the ability ofsuch borrowers to comply with the loan repayment terms.

 

**Allowancefor loan losses** - The maintenance of an adequateallowance for loan losses (ALL) is one of the fundamental concepts of risk managementfor every financial institution. Management is responsible for ensuring thatcontrols are in place to insure the adequacy of the loan loss reserve inaccordance with generally accepted accounting principals (GAAP), the Bank’sstated policies and procedures, and regulatory guidance.

 

It ismanagement’s intent to maintain an ALL which is adequate to absorb current andestimated losses which are inherent in a loan portfolio.  The loss ratio (net charge-offs as apercentage of average loans) was .37% for the six months ended June 30,2005 and .39% for the six months ended June 30, 2004. The ALL as apercentage of the outstanding loans at the end of the period was 1.33% at June 30,2005 and 1.34% at June 30, 2004. In management’s opinion, the commercial emphasisof the bank’s operation and the typically larger size and greater risk incommercial credits justify an ALL in excess of historical results.

 

17

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An analysis ofthe Bank’s loss experience is furnished in the following table for the sixmonths ended June 30, 2005 and the same period ended June 30, 2004:

 

(dollars in thousands)

 
| ** **                                                                                        | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                        | ** ** | **2005**          | ** ** | **2004**          | ** ** |
|                                                                                              |       |              |       |              |       |
| Allowance for loan losses at beginning of period                                                  |       | $                 | 2,841      |              | $          | 1,999 |   |
| Less: net loan charge-offs:                                                                       |       |              |       |              |       |
| Real estate:                                                                                      |       |              |       |              |       |
| Construction                                                                                      |       | —            |       | —            |       |
| 1 to 4 family residential                                                                         |       | —            |       | —            |       |
| Other                                                                                             |       | —            |       | 131               |       |
| Commercial, financial and agricultural                                                            |       | 987               |       | 466               |       |
| Consumer                                                                                          |       | 4                 |       | 31                |       |
|                                                                                              |       |              |       |              |       |
| Recoveries:                                                                                       |       |              |       |              |       |
| Real estate:                                                                                      |       |              |       |              |       |
| Construction                                                                                      |       | —            |       | —            |       |
| 1 to 4 family residential                                                                         |       | 1                 |       | —            |       |
| Other                                                                                             |       | —            |       | —            |       |
| Commercial, financial and agricultural                                                            |       | 53                |       | 28                |       |
| Consumer                                                                                          |       | 23                |       | 6                 |       |
|                                                                                              |       |              |       |              |       |
| Net Charge-offs                                                                                   |       | $                 | 914        |              | $          | 594 |   |
|                                                                                              |       |              |       |              |       |
| Provision for loans charged to expense                                                            |       | 1,800             |       | 905               |       |
| Allowance for loan losses at end of period                                                        |       | $                 | 3,727      |              | $          | 2,310 |   |
|                                                                                              |       |              |       |              |       |
| Net charge-offs as a percentage of average total loans outstanding  during the period             |       | .37               | %          | .39               | %          |
|                                                                                              |       |              |       |              |       |
| Ending allowance for loan losses as a percentage of total loans  outstanding at end of the period |       | 1.33              | %          | 1.34              | %          |

 

The allowance for loan lossesis established by charges to operations based on management’s evaluation of theloan portfolio, past due loan experience, collateral values, current economicconditions and other factors considered necessary to maintain the allowance atan adequate level.

 

**Securities**- The securities portfolio at June 30, 2005 was $21,756 compared to$18,610 at December 31, 2004.  TheCorporation views the securities portfolio as a source of income andliquidity.  Management has maintained theportfolio at 6.94% of total assets at June 30, 2005 and 7.56% of totalassets at December 31, 2004.

 

**Liabilities-** The Bank relies on a growing deposit base to fund loan and other assetgrowth. The Bank competes for local deposits by offering attractive productswith premium rates.  The Bank alsoobtains funding in the wholesale deposit market which is accessed by means ofan electronic bulletin board.  Thiselectronic market links banks and acquirers of funds to credit unions, schooldistricts, labor unions, and other organizations with excess liquidity. Theprocess is highly efficient and the average rate is generally less than ratespaid in the local market. Wholesale deposits are categorized as “Purchased TimeDeposits” on the detail of deposits shown in the table below.

 

18

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Total depositsat June 30, 2005 were $279,181, up $57,787 or 26.10% over the December 31,2004 total deposits of $221,394. Total average deposits during the six monthsending June 30, 2005 were $248,816, an increase of $89,416, or 56.09% overthe total average deposits of $159,400 during the six months ending June 30,2004. Average noninterest bearing deposits increased by $3,386, or 28.07%, from$12,061 in the six months ending June 30, 2004 to $15,447 in the sixmonths ending June 30, 2005. Average deposit balances for the six monthsended June 30, 2005 and 2004 and the average rates paid on those balancesare shown below.

 

Deposits

(dollars in thousands)

 
| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                          | ** ** | ** **                         | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                          | ** ** | **Average**                        | ** ** | **Rate** | ** ** | **Average** | ** ** | **Rate** | ** ** |
| ** **                          | ** ** | **Balance**                        | ** ** | **Paid (1)** | ** ** | **Balance** | ** ** | **Paid (1)** | ** ** |
|                                |       |                               |       |   |   |   |   |   |   |
| Types of Deposits                   |       |                               |       |   |   |   |   |   |   |
| Noninterest-bearing demand deposits |       | $                                  | 15,447     |   | — |   | $ | 12,061 |   | — |   |
| Interest-bearing demand deposits    |       | 2,625                              |       | 1.24 | % | 1,388 |   | 0.00 | % |
| Money market accounts               |       | 33,683                             |       | 3.34 | % | 13,598 |   | 1.62 | % |
| Savings accounts                    |       | 25,510                             |       | 2.57 | % | 35,849 |   | 2.41 | % |
| IRA accounts                        |       | 1,167                              |       | 3.81 | % | 1,043 |   | 3.61 | % |
| Purchased time deposits             |       | 140,978                            |       | 3.24 | % | 80,784 |   | 2.54 | % |
| Time deposits                       |       | 29,406                             |       | 3.48 | % | 14,677 |   | 2.57 | % |
|                                |       |                               |       |   |   |   |   |   |   |
| Total deposits                      |       | $                                  | 248,816    |   |   |   | $ | 159,400 |   |   |   |

 

----

(1)  Rate is annualized

 

**SubordinatedDebt** - In March 2005, the Corporation formeda financing subsidiary, Tennessee Commerce Statutory Trust I, a Delawarestatutory trust (the “Trust I”). In March 2005, Trust I issued and sold8,000 of Trust I’s Fixed/Floating rate capital securities, with a liquidationamount of $1,000 per capital security, to First Tennessee Bank NationalAssociation. At the same time, the Corporation issued to Trust I $8.248 millionof Fixed/Floating rate junior subordinated deferrable interest debentures due2035. The debentures pay a  6.73% fixedrate payable quarterly for the first five years and a floating rate based on a3 month Libor rate plus a margin thereafter. In accordance with FASBInterpretation No. 46 (revised December 2003) Consolidation ofVariable Interest Entities (FIN46R), the Trust I is not consolidated. Thesubordinated debentures are reported as a liability on the balance sheet of theCorporation.

 

**Off-balance Sheet Arrangements**

 

The Bank is aparty to financial instruments with off-balance sheet risk in the normal courseof business to meet the financing needs of its customers. At June 30,2005, the Bank had unfunded loan commitments outstanding of $37.6 million andunfunded lines of credit and letters of credit of $4.9 million. These financialinstruments include commitments to extend credit and standby letters ofcredit.  Those instruments involve, tovarying degrees, elements of credit risk in excess of the amount recognized inthe balance sheet.  The contract ornotional amounts of those instruments reflect the extent of involvement theBank has in those particular financial instruments. The Bank uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance sheet instruments.

 

19

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Because thesecommitments generally have fixed expiration dates and many will expire withoutbeing drawn upon, the total commitment level does not necessarily representfuture cash requirements. If needed, the Bank can liquidate Federal funds soldor securities available for sale or borrow and purchase Federal funds fromother financial institutions where the Bank has available federal fund linestotaling $12 million.

 

# **Capital Resources/Liquidity**

# ** **

**Liquidity**- Of primary importance to depositors, creditors and regulators is the abilityto have readily available funds sufficient to repay fully maturingliabilities.  The Bank is subject togeneral FDIC guidelines which do not require a minimum level of liquidity.Liquidity requirements can also be met through short-term borrowings or thedisposition of short-term assets which are generally matched to correspond tothe maturity of liabilities. Management believes its liquidity ratios meet thegeneral FDIC guidelines and the Corporation has assets and borrowing capacityto provide adequate liquidity. Management does not know of any trends ordemands which are reasonably likely to result in liquidity increasing ordecreasing in any material manner.

 

**CapitalAdequacy**- The objective of the Bank’s managementis to maintain a level of capitalization that is sufficient to take advantageof profitable growth opportunities while meeting regulatory requirements.****To continue to grow, the Bank must increase capital bygenerating earnings, issuing equities, borrowing funds, or a combination ofthose activities. If growth exceeds expectations, The Bank may need to raisecapital in the capital markets. For example, in 2004 the Corporation issuedequity securities increasing capital by $8.5 million.  In March 2005, the Corporation’ssubsidiary Trust I issued $8 million in Trust Preferred Securities that meetthe capital guidelines to be classified as Tier I capital as explained below.

 

The Federal Reserve Board hasadopted capital guidelines governing the activities of bank holding companies. Theseguidelines require the maintenance of an amount of capital based onrisk-adjusted assets so that categories of assets with potentially highercredit risk will require more capital backing than assets with lower risk.  In addition, banks and bank holding companiesare required to maintain capital to support, on a risk-adjusted basis, certainoff-balance sheet activities such as loan commitments.

 

The capital guidelines classifycapital into two tiers, referred to as Tier I and Tier II.  Under risk-based capital requirements, totalcapital consists of Tier I capital which is generally common stockholders’equity less goodwill and Tier II capital which is primarily a portion of theallowance for loan losses and certain qualifying debt instruments.  In determining risk-based capitalrequirements, assets are assigned risk-weights of 0% to 100%, dependingprimarily on the regulatory assigned levels of credit risk associated with suchassets.  Off-balance sheet items areconsidered in the calculation of risk-adjusted assets through conversionfactors established by the regulators. The framework for calculating risk-based capital requires banks and bankholding companies to meet the regulatory minimums of 4% Tier I and 8%total risk-based capital.  In 1990regulators added a leveraged computation to the capital requirements, comparingTier I capital to total average assets less goodwill.

 

20

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The Federal Deposit InsuranceCorporation Improvement Act of 1991 (“FDICIA”) established five capitalcategories for banks and bank holding companies.  The bank regulators adopted regulationsdefining these five capital categories in September 1992.  Under these new regulations each bank isclassified into one of the five categories based on its level of risk-basedcapital as measured by Tier I capital, total risk-based capital, andTier I leverage ratios and its supervisory ratings.

 

At June 30, 2005 and December 31,2004, The Bank’s and the Corporation’s risk-based capital ratios and theminimums to be considered well-capitalized under the Federal Reserve Board’sprompt corrective action guidelines were as follows:

 
| ** **                                              | ** ** | ** **        | ** ** | ** **            | ** ** | **Minimum to**       | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **be considered**    | ** ** |
| ** **                                              | ** ** | **2005**          | ** ** | **2004**              | ** ** | **well-capitalized** | ** ** |
|                                                    |       |              |       |                  |       |                 |       |
| Tier 1 “core” capital to risk-weighted assets |       |              |       |                  |       |                 |       |
| Tennessee Commerce Bank                                 |       | 10.38             | %          | 10.71                 | %          | 6.00                 | %          |
| Tennessee Commerce Bancorp, Inc.                   |       | 11.45             | %          | 10.81                 | %          | 6.00                 | %          |
|                                                    |       |              |       |                  |       |                 |       |
| Total capital to risk-weighted assets                   |       |              |       |                  |       |                 |       |
| Tennessee Commerce Bank                                 |       | 11.63             | %          | 11.96                 | %          | 10.00                | %          |
| Tennessee Commerce Bancorp, Inc.                   |       | 12.70             | %          | 12.06                 | %          | 10.00                | %          |
|                                                    |       |              |       |                  |       |                 |       |
| Tier 1 leverage ratio                                   |       |              |       |                  |       |                 |       |
| Tennessee Commerce Bank                                 |       | 10.04             | %          | 9.73                  | %          | 5.00                 | %          |
| Tennessee Commerce Bancorp, Inc.                   |       | 11.08             | %          | 9.83                  | %          | 5.00                 | %          |

 

On June 30, 2005 and December 31,2004, both the Bank and the Corporation exceeded the regulatory minimums andqualified as a well-capitalized institution under the regulations.

 

**Impact ofInflation and Changing Prices** - The financialstatements and related financial data presented herein have been prepared inaccordance with U.S. generally accepted accounting principles which require themeasurement of financial position and operating results in terms of historicaldollars without considering the changes in the relative purchasing power ofmoney over time and due to inflation. The impact of inflation on operations of the Bank is reflected inincreased operating costs.  Unlike mostindustrial companies, virtually all of the assets and liabilities of the Bankare monetary in nature.  As a result,interest rates have a more significant impact on the Bank’s performance thanthe effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in thesame magnitude as the price of goods and services.

 

21

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**ITEM 3: QUANTITATIVE AND QUALITATIVE ANALYSISOF MARKET RISK**

 

Like all financialinstitutions, the Corporation is subject to market risk from changes ininterest rates.  Interest rate risk isinherent in the balance sheet due to the mismatch between the maturities ofrate sensitive assets and rate sensitive liabilities.  Management develops its view of future ratetrends by monitoring economic indicators, examining the views of economists andother experts, and understanding the current status of the Corporation’sBalance Sheet. Management conducts a quarterly analysis of the rate sensitivityposition.  The results of the analysisare reported to the Corporation’s Board of Directors.

 

Management uses a computermodel to analyze the maturities of rate sensitive assets and liabilities.  The model measures the “GAP” which is definedas the difference between the dollar amount of rate sensitive assets repricingduring a period and the volume of rate sensitive liabilities repricing duringthe same period. GAP is also expressed as the ratio of rate sensitive assetsdivided by rate sensitive liabilities. If the ratio is greater than “one”, the dollar value of assets exceedsthe dollar value of liabilities; the balance sheet is “asset sensitive”.  Conversely, if the value of liabilitiesexceeds the value of assets, the ratio is less than one and the balance sheetis “liability sensitive”. The model measures scheduled maturities in periods ofthree months, four to twelve months, one to five years, and over five years.

 

22

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The table below illustrates therate sensitive position of the Corporation at June 30, 2005. Managementuses the one year GAP as the appropriate time period for setting strategy.

 

Rate Sensitivity Gap Analysis

(dollars in thousands)

 
| ** **                                                       | ** ** | ** **   | ** ** | **1-3**    | ** ** | **4-12**   | ** ** | **1-5**   | ** ** | **Over**    | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|-----------|------------|-------------|------------|------------|------------|
| **Maturities:**                                                  | ** ** | **Floating** | ** ** | **Months** | ** ** | **Months** | ** ** | **Years** | ** ** | **5 Years** | ** ** | **Total**  | ** ** |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  Earning Assets                                         |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Federal  funds sold                                              |       | $            | 7,288      |       | $          | —     |       | $         | —     |        | $          | —     |       | $ | — |   | $ | 7,288 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |        |       |       |       |
| U.S.  government agencies                                        |       | —       |       | 6,945      |       | —     |       | 2,543     |       | 4,782       |       | 14,270     |       |
| Mortgage-backed  securities                                      |       | —       |       | 815        |       | 2,475      |       | 2,406     |       | 1,790       |       | 7,486      |       |
| Total  securities                                                |       | —       |       | 7,760      |       | 2,475      |       | 4,949     |       | 6,572       |       | 21,756     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total loans                                                      |       | 84,845       |       | 32,549     |       | 77,181     |       | 81,281    |       | 4,023       |       | 279,879    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Interest Earning Assets                                   |       | 92,133       |       | 40,309     |       | 79,656     |       | 86,230    |       | 10,595      |       | 308,923    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Other Assets                                                     |       | —       |       | —     |       | —     |       | —    |       | 4,422       |       | 4,422      |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total Assets                                                     |       | $            | 92,133     |       | $          | 40,309     |       | $         | 79,656     |        | $          | 86,230     |       | $ | 15,017 |   | $ | 313,345 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  Bearing Liabilities                                    |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  checking                                               |       | $            | 3,012      |       | $          | —     |       | $         | —     |        | $          | —     |       | $ | — |   | $ | 3,012 |   |
| Money market  and savings                                        |       | 57,897       |       | —     |       | —     |       | —    |       | —      |       | 57,897     |       |
| Time  deposits                                                   |       | —       |       | 32,442     |       | 105,017    |       | 63,178    |       | —      |       | 200,637    |       |
| Total  deposits                                                  |       | 60,909       |       | 32,442     |       | 105,017    |       | 63,178    |       | —      |       | 261,546    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Subordinated  Debt                                               |       | —       |       | —     |       | —     |       | —    |       | 8,248       |       | 8,248      |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Interest Bearing Liabilities                              |       | 60,909       |       | 32,442     |       | 105,017    |       | 63,178    |       | 8,248       |       | 269,794    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Other  Liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 18,608      |       | 18,608     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Shareholders’  Equity                                       |       | —       |       | —     |       | —     |       | —    |       | 24,943      |       | 24,943     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Liabilities and Shareholders’ Equity                 |       | $            | 60,909     |       | $          | 32,442     |       | $         | 105,017    |        | $          | 63,178     |       | $ | 51,799 |   | $ | 313,345 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Rate  Sensitive Gap by period                                    |       | $            | 31,224     |       | $          | 7,867      |       | $         | (25,361    | )           | $          | 23,052     |       | $ | 2,347 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Cumulative  Gap                                                  |       |         |       | $          | 39,091     |       | $          | 13,730    |       | $           | 36,782     |       |       |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Cumulative  Gap as a percent Of Total Assets                     |       |         |       | 12.48      | %          | 4.38       | %          | 11.74     | %          |        |       |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Rate  sensitive assets / Rate sensitive liabilities (cumulative) |       | 1.51         |       | 1.42       |       | 1.07       |       | 1.14      |       | 1.15        |       |       |       |

 

In mid-2004, the FederalReserve Open Market Committee began a series of interest rate increases whichthe FOMC indicated would continue “at a measured pace”.  By June 30, 2005, short term interestrates had been increased by 225 basis points. Management has positioned the Bank for a rising rate environment bymaintaining an “asset sensitive” balance sheet in which more assets willreprice than liabilities.  Managementachieved this position during fourth quarter, 2004, by offering higher rates ofinterest on deposit liabilities in the two to three year maturity range.  At June 30, 2005, the Corporation’s oneyear GAP was 1.07.

 

23

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The interest rate risk modelthat defines the GAP position also performs a “rate shock” test of the balancesheet.  The rate shock procedure measuresthe impact on the net interest margin of an immediate shift in interest ratesin either direction.  Although this is astatic model which provides information only at a certain point in time, it isuseful is assessing the impact of an unanticipated movement in interest rates.As shown below, the net interest dollar amount decrease assuming a 300 basispoint drop in interest rates is .23% of the average assets for the quarterended June 30, 2005.

 

The chart below identifies thenet interest margin impact of a shift in rates of 100, 200, and 300 basispoints in either direction.

 

Interest Income and Expense Under Rate Shock

(dollars in thousands)

 

At June 30, 2005

 
| ** **                 | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Net Interest  Income       |       | $          | 14,373     |       | $          | 14,611     |       | $       | 14,834     |       | $          | 15,023     |       | $          | 15,149     |   | $ | 15,236 |   | $ | 15,308 |   |
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Actual  dollar risk        |       | (650       | )          | (412       | )          | (189       | )          | —  |       | 126        |       | 213        |       | 285        |       |
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Percent of  risk           |       | 4.33       | %          | 2.74       | %          | 1.26       | %          | 0.00    | %          | .83        | %          | 1.42       | %          | 1.90       | %          |
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Percent of  average assets |       | .23        | %          | .15        | %          | .06        | %          | 0.00    | %          | .04        | %          | .07        | %          | .10        | %          |
|                            |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

24

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**ITEM 4: CONTROLS AND PROCEDURES**

 

A. Evaluation of Disclosure Controls andProcedures

 

TheCorporation maintains disclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”)), that aredesigned to ensure that information required to be disclosed by it in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and that such information isaccumulated and communicated to the Corporation’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. The Corporation carried out anevaluation, under the supervision and with the participation of its management,including it Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of its disclosure controls andprocedures as of the end of the period covered by this report. Based on theevaluation of these disclosure controls and procedures, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Corporation’s disclosurecontrols and procedures were effective.

 

B. Changes in Internal Controls andProcedures

 

There were nochanges in our internal controls over financial reporting during the quarterended June 30, 2005, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART II: OTHER INFORMATION**

 

**ITEM 1: LEGAL PROCEEDINGS**

 

None

 

**ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

A.           During March throughAugust in 2004, the Corporation sold 775,000 shares of its common stock ina public offering at a per share price of $11.00.  520,352 shares were sold at a per share priceof $11.00 during the six months ended June 30, 2004. The proceeds wereused for general corporate purposes. This offering was limited to residents ofthe state of Tennessee, and the Corporation relied on the exemption provided bySection 3(a)(11) of the Securities Act of 1933, relating to securitiesissued only in the state where the issuer is located. No shares were sold inthe six months ended June 30, 2005.

 

During June of 2004, H.Lamar Cox, the Chief Financial Officer exercised the option to purchase 2,000shares of common stock at an exercise price of $11.00 per share.  This exercise of stock options was atransaction by the Corporation that did not involve a public offering.  The Corporation relied on the exemptionprovided by Section 4(2) of the Securities Act of 1933.

 

25

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During August of 2004,Junie Nuestro, a former employee exercised the option to purchase 1,000 sharesof common stock at an exercise price of $7.00 per share.  This exercise of stock options was atransaction by the Corporation that did not involve a public offering.  The Corporation relied on the exemptionprovided by Section 4(2) of the Securities Act of 1933.

 

B.             None

 

C.             None

 

**ITEM 3: DEFAULTS UPON SENIOR SECURITIES**

 

A.           None

 

B.             None

 

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

 

A.           The Annual Meeting ofShareholders of the Corporation was held April 11, 2005.

 

B.             Directors elected atthe Annual Meeting were: Dorris E. Bennett, Michael R. Sapp, Dennis L. Grimaud,and Winston C. Hickman. Other Directors of the Corporation whose term of officeas a director continued after the Annual Meeting were: H. Lamar Cox, Paul W.Dierksen, Arthur F. Helf, Fowler H. Low, William W. McInnes, Thomas R. Miller,Darrel Reifschneider, Regg E. Swanson, and Paul A. Thomas.

 

C.             The followingproposals were considered by shareholders at the Annual Meeting :

 

Proposal 1 – Election of Class III Directors

 

The followingDirectors were re-elected

 
| ** **         | ** ** | **Votes**  | ** ** |
|--------------------|------------|------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| ** **         | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| Dorris E. Bennett  |       | 2,223,736  |       | 6,500 |   | 2,500 |   | — |   |
| Michael R. Sapp    |       | 2,223,736  |       | 6,500 |   | 2,500 |   | — |   |
| Dennis L.Grimaud   |       | 2,223,736  |       | 6,500 |   | 2,500 |   | — |   |
| Winston C. Hickman |       | 2,223,736  |       | 6,500 |   | 2,500 |   | — |   |

 

26

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Proposal 2 – Appointment ofCrowe, Chizek and Company, LLC as the Corporation’s independent accountants andauditors for the fiscal year 2005

 
| ** ** | ** ** | **Votes**   | ** ** |
|------------|------------|-------------|------------|
| ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 2,230,236  |       | —      |       | 2,500 |   | — |   |

 

D. None

 

**ITEM 5:OTHER INFORMATION**

 

A.           None

 

B.             None

 

**ITEM 6:EXHIBITS**

 

Index to Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                  |
|----------------------|------------|--------------------------------------------------------------------------------------------------|
|                 |       |                                                                                             |
| 2.1 *                |       | Articles of Share Exchange of Tennessee  Commerce Bank and Tennessee Commerce Bancorp, Inc. |
|                 |       |                                                                                             |
| 2.2 *                |       | Plan of  Share Exchange of Tennessee Commerce Bank and Tennessee Commerce Bancorp, Inc.     |
|                 |       |                                                                                             |
| 3.1*                 |       | Charter of  Tennessee Commerce Bancorp, Inc.                                                |
|                 |       |                                                                                             |
| 3.2 *                |       | Bylaws of  Tennessee Commerce Bancorp, Inc.                                                 |
|                 |       |                                                                                             |
| 10.1 *               |       | Tennessee  Commerce Bancorp, Inc. Stock Option Plan – Employees                        |
|                 |       |                                                                                             |
| 10.2 *               |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Plan – Directors                   |
|                 |       |                                                                                             |
| 10.3 *               |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Plan – Incorporators               |
|                 |       |                                                                                             |
| 10.4 *               |       | Tennessee  Commerce Bancorp, Inc. 2003 Stock Option Plan – Directors                   |
|                 |       |                                                                                             |
| 10.5 *               |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with Arthur F. Helf           |
|                 |       |                                                                                             |
| 10.6 *               |       | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with Michael R. Sapp          |

 

27

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| 10.7 *  |   | Tennessee  Commerce Bancorp, Inc. 1999 Stock Option Agreement with H. Lamar Cox                      |
|---------|--------|-----------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                      |
| 10.8 *  |   | Employment  Agreement between Tennessee Commerce Bancorp, Inc. and Arthur F. Helf                    |
|    |   |                                                                                                      |
| 10.9 *  |   | Employment  Agreement between Tennessee Commerce Bancorp, Inc. and Michael R. Sapp                   |
|    |   |                                                                                                      |
| 10.10 * |   | Employment  Agreement between Tennessee Commerce Bancorp, Inc. and H. Lamar Cox                      |
|    |   |                                                                                                      |
| 11.1    |   | Computation  of Per Share Earnings                                                                        |
|    |   |                                                                                                      |
| 31.1    |   | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|    |   |                                                                                                      |
| 31.2    |   | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|    |   |                                                                                                      |
| 32.1    |   | Certification  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|    |   |                                                                                                      |
| 32.2    |   | Certification  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

----

* Previously filed as an Exhibit toTennessee Commerce Bancorp, Inc.’s Form 10 as filed with theSecurities Exchange Commission on April 29, 2005.

 

28

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SIGNATURES

 

In accordance with the requirements of theExchange Act, the Registrant caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 
|                 | Tennessee Commerce Bancorp, Inc.                                                |
|----------------------|--------------------------------------------------------------------------------------|
|                 |             (Registrant) |
|                 |                                                                                 |
| August 12, 2005 |                                                                                 | /s/ Arthur F. Helf |   |
| (Date)               |                                                                                 | Arthur F. Helf |
|                 | Chairman and Chief Executive Officer                                                 |
|                 |                                                                                 |
| August 12, 2005 |                                                                                 | /s/ H. Lamar Cox |   |
| (Date)               |                                                                                 | H. Lamar Cox |
|                 | Chief Financial Officer                                                              |

 

29

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