**UNITED STATES SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2006**

 

**CommissionFile Number 000-51281**

 

**TENNESSEE COMMERCE BANCORP, INC.**

(Exact Name of Registrant AsSpecified in Its Charter)

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

 

**(615) 599-2274**

(Registrant’s TelephoneNumber, Including Area Code)

 

**Not Applicable**

(Former name, former address and formerfiscal year if changes since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.
| Yes ý | No o |
|------------|------|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one): 
| Large Accelerated Filer o | Accelerated Filer o | Non-accelerated Filer ý |
|---------------------------|--------------------------|-----------------------------------|

 

 

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

 

Asof April 28, 2006 there were 3,240,674 shares of common stock, $0.50 parvalue per share, issued and outstanding.

 

 

----

 

**TennesseeCommerce Bancorp, Inc.**

 

Table of Contents

 
| **Part I**  | **Financial Information**                                                                                                             | ** ** |
|------------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
|             |                                                                                                                                  |       |
| Item 1.          | Financial  Statements                                                                                                                 |       |
|             |                                                                                                                                  |       |
|             | Consolidated  Balance Sheets at March 31, 2006 (unaudited) and December 31, 2005                                            |       |
|             |                                                                                                                                  |       |
|             | Consolidated  Statements of Income (unaudited) for the Three Months Ended March 31,  2006 and 2005                               |       |
|             |                                                                                                                                  |       |
|             | Consolidated  Statements of Changes in Shareholders’ Equity (unaudited) for the Three  Months Ended March 31, 2006 and 2005 |       |
|             |                                                                                                                                  |       |
|             | Consolidated  Statements of Cash Flows (unaudited) for the Three Months Ended  March 31, 2006 and 2005                           |       |
|             |                                                                                                                                  |       |
|             | Notes  to Consolidated Financial Statements (unaudited)                                                                               |       |
|             |                                                                                                                                  |       |
| Item  2.         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           |       |
|             |                                                                                                                                  |       |
| Item  3.         | Quantitative  and Qualitative Disclosures About Market Risk                                                                           |       |
|             |                                                                                                                                  |       |
| Item  4.         | Controls  and Procedures                                                                                                              |       |
|             |                                                                                                                                  |       |
| **Part II** | **Other Information**                                                                                                                 | ** ** |
|             |                                                                                                                                  |       |
| Item 1.          | Legal  Proceedings                                                                                                                    |       |
|             |                                                                                                                                  |       |
| Item 1A.         | Risk Factors                                                                                                                          |       |
|             |                                                                                                                                  |       |
| Item  2.         | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                          |       |
|             |                                                                                                                                  |       |
| Item  3.         | Defaults  Upon Senior Securities                                                                                                      |       |
|             |                                                                                                                                  |       |
| Item  4.         | Submission  of Matters to a Vote of Security Holders                                                                                  |       |
|             |                                                                                                                                  |       |
| Item 5.          | Other  Information                                                                                                                    |       |
|             |                                                                                                                                  |       |
| Item 6.          | Exhibits                                                                                                                              |       |
|             |                                                                                                                                  |       |
| Signatures       |                                                                                                                                  |       |

 

2

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1:FINANCIAL STATEMENTS**

 

TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATEDBALANCE SHEETS

MARCH 31, 2006(UNAUDITED) AND DECEMBER 31, 2005

 

(dollars in thousands except share data)

 
| ** **                                                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                    |       |               |       |                  |       |
| Cash and due  from financial institutions                                                                                                                     |       | $                  | 3,121      |                  | $          | 6,877 |   |
| Federal  funds sold                                                                                                                                           |       | 6,683              |       | 12,535                |       |
| Cash and cash equivalents                                                                                                                                     |       | 9,804              |       | 19,412                |       |
| Securities  available for sale                                                                                                                                |       | 40,047             |       | 31,992                |       |
| Loans                                                                                                                                                         |       | 384,284            |       | 348,586               |       |
| Allowance  for loan losses                                                                                                                                    |       | (5,020             | )          | (4,399                | )          |
| Net loans                                                                                                                                                     |       | 379,264            |       | 344,187               |       |
|                                                                                                                                                          |       |               |       |                  |       |
| Premises and  equipment, net                                                                                                                                  |       | 823                |       | 769                   |       |
| Accrued  interest receivable                                                                                                                                  |       | 2,581              |       | 2,148                 |       |
| Restricted  equity securities                                                                                                                                 |       | 389                |       | 383                   |       |
| Deferred tax  asset                                                                                                                                           |       | 585                |       | 490                   |       |
| Other assets                                                                                                                                                  |       | 4,825              |       | 4,659                 |       |
|                                                                                                                                                          |       |               |       |                  |       |
| Total assets                                                                                                                                                  |       | $                  | 438,318    |                  | $          | 404,040 |   |
|                                                                                                                                                          |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                |       |               |       |                  |       |
| Liabilities                                                                                                                                                   |       |               |       |                  |       |
| Deposits                                                                                                                                                      |       |               |       |                  |       |
| Noninterest-bearing                                                                                                                                           |       | $                  | 18,774     |                  | $          | 33,372 |   |
| Interest-bearing                                                                                                                                              |       | 382,203            |       | 334,333               |       |
| Total deposits                                                                                                                                                |       | 400,977            |       | 367,705               |       |
|                                                                                                                                                          |       |               |       |                  |       |
| Accrued interest payable                                                                                                                                      |       | 1,082              |       | 1,126                 |       |
| Long-term subordinated debt                                                                                                                                   |       | 8,248              |       | 8,248                 |       |
| Other liabilities                                                                                                                                             |       | 734                |       | 531                   |       |
| Total liabilities                                                                                                                                             |       | 411,041            |       | 377,610               |       |
|                                                                                                                                                          |       |               |       |                  |       |
| Shareholders’  equity                                                                                                                                    |       |               |       |                  |       |
| Preferred stock, no par value. Authorized  1,000,000 shares; none issued                                                                                      |       | —             |       | —                |       |
| Common stock, $0.50 par value. Authorized  5,000,000 shares; issued and outstanding 3,240,674 at March 31, 2006 and  3,238,674 at December 31, 2005 |       | 1,620              |       | 1,619                 |       |
| Additional paid-in capital                                                                                                                                    |       | 21,467             |       | 21,401                |       |
| Retained earnings                                                                                                                                             |       | 4,690              |       | 3,781                 |       |
| Accumulated other comprehensive loss                                                                                                                          |       | (500               | )          | (371                  | )          |
| Total shareholders’ equity                                                                                                                               |       | 27,277             |       | 26,430                |       |
|                                                                                                                                                          |       |               |       |                  |       |
| Total liabilities and shareholders’ equity                                                                                                               |       | $                  | 438,318    |                  | $          | 404,040 |   |

 

Note : The balance sheetpresented above at December 31, 2005 has been derived from the auditedconsolidated financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

See accompanying notes to consolidated financialstatements.

 

3

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATEDSTATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31,2006 AND 2005

(UNAUDITED)

 

(dollars in thousands except share data)

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Interest  income                                     |       |                                   |       |   |   |
| Loans, including fees                                |       | $                                      | 7,847      |   | $ | 4,463 |   |
| Securities                                           |       | 451                                    |       | 194 |   |
| Federal funds sold                                   |       | 106                                    |       | 16 |   |
| Total interest income                                |       | 8,404                                  |       | 4,673 |   |
|                                                 |       |                                   |       |   |   |
| Interest  expense                                    |       |                                   |       |   |   |
| Deposits                                             |       | 4,002                                  |       | 1,618 |   |
| Other                                                |       | 147                                    |       | 7 |   |
| Total interest expense                               |       | 4,149                                  |       | 1,625 |   |
|                                                 |       |                                   |       |   |   |
| Net interest  income                                 |       | 4,255                                  |       | 3,048 |   |
|                                                 |       |                                   |       |   |   |
| Provision  for loan losses                           |       | 1,000                                  |       | 650 |   |
|                                                 |       |                                   |       |   |   |
| Net interest  income after provision for loan losses |       | 3,255                                  |       | 2,398 |   |
|                                                 |       |                                   |       |   |   |
| Non interest  income                                 |       |                                   |       |   |   |
| Service charges on deposit accounts                  |       | 49                                     |       | 26 |   |
| Mortgage banking                                     |       | 22                                     |       | 19 |   |
| Securities gains (losses)                            |       | —                                 |       | (4 | ) |
| Gain on sale of loans                                |       | 254                                    |       | 144 |   |
| Other                                                |       | (80                                    | )          | 23 |   |
| Total non-interest income                            |       | 245                                    |       | 208 |   |
|                                                 |       |                                   |       |   |   |
| Non interest  expense                                |       |                                   |       |   |   |
| Salaries and employee benefits                       |       | 1,200                                  |       | 903 |   |
| Occupancy and equipment                              |       | 200                                    |       | 127 |   |
| Data processing fees                                 |       | 157                                    |       | 112 |   |
| Professional fees                                    |       | 191                                    |       | 87 |   |
| Other                                                |       | 270                                    |       | 296 |   |
| Total non-interest expense                           |       | 2,018                                  |       | 1,525 |   |
|                                                 |       |                                   |       |   |   |
| Income  before income taxes                          |       | 1,482                                  |       | 1,081 |   |
|                                                 |       |                                   |       |   |   |
| Income tax  expense                                  |       | 573                                    |       | 419 |   |
| Net income                                           |       | $                                      | 909        |   | $ | 662 |   |
|                                                 |       |                                   |       |   |   |
| Earnings per  share (EPS):                           |       |                                   |       |   |   |
| Basic EPS                                            |       | $                                      | 0.28       |   | $ | 0.20 |   |
| Diluted EPS                                          |       | 0.25                                   |       | 0.19 |   |
|                                                 |       |                                   |       |   |   |
| Weighted  average shares outstanding:                |       |                                   |       |   |   |
| Basic                                                |       | 3,240,563                              |       | 3,238,674 |   |
| Diluted                                              |       | 3,565,727                              |       | 3,479,977 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

----

 

TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYTHREE MONTHS ENDED MARCH 31, 2006 and 2005

(UNAUDITED)

 

(dollars in thousands except share data)

 
| ** **                                                                        | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Other**         | ** ** | ** **             | ** ** |
| ** **                                                                        | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Comprehensive** | ** ** | **Total**              | ** ** |
| ** **                                                                        | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Earnings**  | ** ** | **Income**        | ** ** | **Shareholders’** | ** ** |
| ** **                                                                        | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **(Loss)**        | ** ** | **Equity**             | ** ** |
|                                                                              |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at  December 31, 2004                                                |       | $          | 1,619      |           | $          | 21,401        |       | $                 | 714        |                   | $          | (134 | ) | $ | 23,600 |   |
| Comprehensive  income                                                             |       |       |       |           |       |          |       |              |       |                   |       |
| Net income                                                                        |       | —     |       | —         |       | 662           |       | —            |       | 662                    |       |
| Other comprehensive income, net of income  taxes                                  |       |       |       |           |       |          |       |              |       |                   |       |
| Unrealized losses on securities available  for sale during the period             |       | —     |       | —         |       | —        |       | (205              | )          | (205                   | )          |
| Reclassification adjustment for gains  included in net income, net of ($1) in tax |       | —     |       | —         |       | —        |       | (3                | )          | (3                     | )          |
|                                                                              |       |       |       |           |       |          |       |              |       |                   |       |
| Total  comprehensive income                                                       |       |       |       |           |       |          |       |              |       | 454                    |       |
|                                                                              |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at  March 31, 2005                                                   |       | $          | 1,619      |           | $          | 21,401        |       | $                 | 1,376      |                   | $          | (342 | ) | $ | 24,054 |   |
|                                                                              |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at  December 31, 2005                                                |       | $          | 1,619      |           | $          | 21,401        |       | $                 | 3,781      |                   | $          | (371 | ) | $ | 26,430 |   |
| Comprehensive  income                                                             |       |       |       |           |       |          |       |              |       |                   |       |
| Net income                                                                        |       | —     |       | —         |       | 909           |       | —            |       | 909                    |       |
| Other comprehensive income, net of income  taxes                                  |       |       |       |           |       |          |       |              |       |                   |       |
| Unrealized losses on securities available  for sale during the period             |       | —     |       | —         |       | —        |       | (129              | )          | (129                   | )          |
|                                                                              |       |       |       |           |       |          |       |              |       |                   |       |
| Total  comprehensive income                                                       |       |       |       |           |       |          |       |              |       | 27,210                 |       |
|                                                                              |       |       |       |           |       |          |       |              |       |                   |       |
| Stock option  transactions                                                        |       | 1          |       | 66             |       | —        |       | —            |       | 67                     |       |
|                                                                              |       |       |       |           |       |          |       |              |       |                   |       |
| Balance at  March 31, 2006                                                   |       | $          | 1,620      |           | $          | 21,467        |       | $                 | 4,690      |                   | $          | (500 | ) | $ | 27,277 |   |

 

See accompanying notes to consolidated financialstatements.

 

5

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWSTHREE MONTHS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)

 

(dollars in thousands except share data)

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**     | ** ** |
| ** **                                                                        | ** ** | **2006**               | ** ** | **2005** | ** ** |
|                                                                              |       |                   |       |   |   |
| **Cash  flows from operating activities**                                         |       |                   |       |   |   |
| Net income                                                                        |       | $                      | 909        |   | $ | 662 |   |
| Adjustments to reconcile net income to net  cash used by operating activities     |       |                   |       |   |   |
| Depreciation                                                                      |       | 50                     |       | 36 |   |
| Deferred loan fees                                                                |       | (10                    | )          | (3 | ) |
| Provision for loan losses                                                         |       | 1,000                  |       | 650 |   |
| FHLB stock dividends                                                              |       | (6                     | )          | (3 | ) |
| Stock-based compensation expense                                                  |       | 44                     |       | — |   |
| Deferred Income Tax                                                               |       | (18                    | )          | — |   |
| Net amortization of investment securities                                         |       | 8                      |       | 9 |   |
| Gain on sales of securities                                                       |       | —                 |       | 4 |   |
| Change in:                                                                        |       |                   |       |   |   |
| Accrued interest payable                                                          |       | (44                    | )          | 106 |   |
| Accrued interest receivable                                                       |       | (433                   | )          | (168 | ) |
| Other assets and liabilities                                                      |       | 37                     |       | (135 | ) |
| Net cash from operating activities                                                |       | 1,537                  |       | 1,158 |   |
|                                                                              |       |                   |       |   |   |
| **Cash  flows from investing activities**                                         |       |                   |       |   |   |
| Purchases of securities available for sale                                        |       | (8,625                 | )          | (3,470 | ) |
| Proceeds from sales of securities available  for sale                             |       | —                 |       | 496 |   |
| Proceeds from maturities, prepayments and  calls of securities available for sale |       | 356                    |       | 416 |   |
| Investment in unconsolidated subsidiary                                           |       | —                 |       | (248 | ) |
| Net change in loans                                                               |       | (36,067                | )          | (25,461 | ) |
| Purchases of Federal Home Loan Bank Stock                                         |       | —                 |       | — |   |
| Net purchases of premises and equipment                                           |       | (104                   | )          | (15 | ) |
| Net cash from investing activities                                                |       | (44,440                | )          | (28,282 | ) |
|                                                                              |       |                   |       |   |   |
| **Cash  flows from financing activities**                                         |       |                   |       |   |   |
| Net change in deposits                                                            |       | 33,272                 |       | 29,074 |   |
| Proceeds from long-term subordinated debt                                         |       | —                 |       | 8,248 |   |
| Proceeds from exercise of common stock  options                                   |       | 23                     |       | — |   |
| Net cash from financing activities                                                |       | 33,295                 |       | 37,322 |   |
|                                                                              |       |                   |       |   |   |
| **Net  change in cash and cash equivalents**                                      |       | (9,608                 | )          | 10,198 |   |
|                                                                              |       |                   |       |   |   |
| Cash and  cash equivalents at beginning of period                                 |       | 19,412                 |       | 10,420 |   |
|                                                                              |       |                   |       |   |   |
| **Cash and  cash equivalents at end of period**                                   |       | $                      | 9,804      |   | $ | 20,618 |   |
|                                                                              |       |                   |       |   |   |
| **Supplemental  cash flow information:**                                          |       |                   |       |   |   |
| Cash paid during period for interest                                              |       | $                      | 4,193      |   | $ | 1,519 |   |
| Cash paid during period for income taxes                                          |       | 55                     |       | 8 |   |

 

See accompanying notes to consolidated financialstatements.

 

6

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TENNESSEE COMMERCE BANCORP, INC.

 

Notes to ConsolidatedFinancial 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 a wholly owned subsidiary, TennesseeCommerce Bank Statutory Trust I, (the “Trust I”). The Bank and the Trust I arethe only subsidiaries of the Corporation. The accompanying consolidatedfinancial statements include the accounts of the Corporation, and the Bank. TheTrust I is not consolidated in accordance with FASB Interpretation No. 46(revised December 2003) Consolidation of Variable Interest Entities(FIN46R). Material intercompany accounts and transactions have been eliminated.

 

The unaudited consolidatedfinancial statements as of March 31, 2006 and for the three month periodsended March 31, 2006 and 2005 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 threemonth period ended March 31, 2006 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2006. Forfurther information, refer to the 2005 consolidated financial statements andfootnotes thereto included in our Form 10K.

 

Note 2 – Earnings per Share of Common Stock

 

The factors used in theearnings per share computation follow.

 

(dollars in thousands except share data)

 
| ** **                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Basic                                                                           |       |                                   |       |   |   |
| Net income                                                                      |       | $                                      | 909        |   | $ | 662 |   |
|                                                                            |       |                                   |       |   |   |
| Weighted average common shares outstanding                                      |       | 3,240,563                              |       | 3,238,674 |   |
|                                                                            |       |                                   |       |   |   |
| Basic earnings per common share                                                 |       | $                                      | 0.28       |   | $ | 0.20 |   |
|                                                                            |       |                                   |       |   |   |
| Diluted                                                                         |       |                                   |       |   |   |
| Net income                                                                      |       | $                                      | 909        |   | $ | 662 |   |
|                                                                            |       |                                   |       |   |   |
| Weighted average common shares outstanding  for basic earnings per common share |       | 3,240,563                              |       | 3,238,674 |   |
| Add: Dilutive effects of assumed exercises  of stock options                    |       | 325,164                                |       | 241,303 |   |
|                                                                            |       |                                   |       |   |   |
| Average shares and dilutive potential  common shares                            |       | 3,565,727                              |       | 3,479,977 |   |
|                                                                            |       |                                   |       |   |   |
| Diluted earnings per common share                                               |       | $                                      | 0.25       |   | $ | 0.19 |   |

 

No options were antidilutive for any periodpresented.

 

7

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Note 3 – Stock Compensation

 

On January 1, 2006, weadopted SFAS No. 123(R), that addresses the accounting forshare-based payment transactions in which a company receives employee servicesin exchange for equity instruments. SFAS No. 123(R) eliminates the abilityto account for share-based compensation transactions, as we formerly did, usingthe intrinsic value method as prescribed by Accounting Principles Board, orAPB, Opinion No. 25, “Accounting for Stock Issued to Employees,” andgenerally requires that such transactions be accounted for using afair-value-based method and recognized as expense in the accompanyingconsolidated statement of income.

 

We adopted SFAS No. 123(R)using the modified prospective method which requires the application of theaccounting standard as of January 1, 2006. The accompanying consolidatedfinancial statements as of and for the first quarter of 2006 reflect the impactof adopting SFAS No. 123(R). In accordance with the modifiedprospective method, the consolidated financial statements for prior periodshave not been restated to reflect, and do not include, the impact of SFAS No. 123(R).

 

Stock-based compensationexpense recognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Stock-basedcompensation expense recognized in the accompanying consolidated statement ofincome during the first quarter of 2006 included compensation expense forstock-based payment awards granted prior to, but not yet vested, as of December 31,2005 based on the grant date fair value estimated in accordance with SFAS No. 123(R).As stock-based compensation expense recognized in the accompanying statement ofincome for the first quarter of 2006 is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures. SFAS No. 123(R)requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.

 

Stock-based expenserecognized in the quarter ending March 31, 2006 was $44. The optionsvesting in that period were granted in 2003 and 2005. The 30,000 optionsgranted in 2003, vested in February and had an estimated fair value of$1.65 per share. The options granted in 2005 were granted in July and August andhad an estimated fair value of $3.96 and $4.07 respectively.

 

The estimated fair valuesare computed using option pricing models, using the following weighted-averageassumptions as of grant date shown below.

 
| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Risk-free  interest rate |       | 3.96     | %          | 3.23     | %          | 3.82     | %          |
| Expected  option life    |       | 5 years  |       | 7 years  |       | 7 years  |       |
| Dividend  yield          |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |

 

The weighted average fair value of options grantedduring the year was $4.03 for 2005, $2.23 for 2004 and $2.29 for 2003. Nooptions were granted in the quarter ended March 31, 2006.

 

Note 4 – Trust Preferred Securities

 

In March 2005, weformed a financing subsidiary, Tennessee Commerce Statutory Trust I, a Delawarestatutory trust, or 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, we issued to Trust I $8,248,000 ofFixed/Floating rate junior subordinated deferrable interest debentures due2035. The debentures pay a 6.73% fixed rate payable quarterly for the firstfive years and a floating rate based on a 3 month Libor rate plus a marginthereafter.

 

In accordance with FASBInterpretation No. 46 (revised December 2003) Consolidation ofVariable Interest Entities (FIN46R), the Trust I is not consolidated. We reportas liabilities the subordinated debentures issued by the Corporation and heldby Trust I.

 

8

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

 

**Forward-Looking Statements**

 

Management’s discussionabout us and management’s analysis of the our operations and prospects, andother matters, may include forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and other provisions offederal and state securities laws.  Although we believe that theassumptions underlying such forward-looking statements contained in this reportare reasonable, any of the assumptions could be inaccurate and, accordingly,there can be no assurance that the forward-looking statements included hereinwill prove to be accurate.  The use of such words as expect, anticipate,forecast, and comparable terms should be understood by the reader to indicatethat the statement is “forward-looking” and thus subject to change in a mannerthat can be unpredictable.  Factors that could cause actual results todiffer materially from the results anticipated, but not guaranteed, in thisreport, include (without limitation) economic and social conditions,competition for loans, mortgages, and other financial services and products,changes in interest rates, unforeseen changes in liquidity, results ofoperations, and financial conditions affecting our customers, as well as otherrisks that cannot be accurately quantified or completely identified.  Manyfactors affecting our financial condition and profitability, including changesin economic conditions, the volatility of interest rates, political events andcompetition from other providers of financial services simply cannot bepredicted.  Because these factors are unpredictable and beyond ourcontrol, earnings may fluctuate from period to period.  The purpose ofthis type of information is to provide readers with information relevant tounderstanding and assessing our financial condition and results of operations,and not to predict the future or to guarantee results.  We are unable topredict the types of circumstances, conditions, and factors that can causeanticipated results to change.  We undertake no obligation to publishrevised forward-looking statements to reflect the occurrence of changes orunanticipated events, circumstances, or results.

 

**Corporation Overview**

** **

TennesseeCommerce Bancorp, Inc., headquartered in Franklin, Tennessee, is theholding company for Tennessee Commerce Bank. Organized in January 2000, Tennessee Commerce Bank has a focusedstrategy that serves the banking needs of small to medium-sized businesses,entrepreneurs and professionals in the Nashville metropolitan statistical area,or the Nashville MSA, as well as the funding needs of certain national andregional equipment vendors and financial services companies.  We call this strategy our “business bank”strategy. We primarily conduct business from a single location in the CoolSprings commercial area of Franklin, Tennessee, fifteen miles south ofNashville.  Franklin is in WilliamsonCounty, one of the most rapidly growing counties in the nation. According tothe U.S. Census Bureau, Williamson County ranked 59th out of the top100 fastest growing counties in the nation from July 2004 to July 2005.We also operate a loan production office in Birmingham, Alabama, which weopened in February 2006 and which is staffed with one senior lendingofficer.

 

We offer afull range of competitive retail and commercial banking services to localcustomers in the Nashville MSA.  Ourdeposit services include a broad offering of checking accounts, savingsaccounts, money market investment accounts, certificates of deposits, andretirement accounts.  Lending servicesinclude consumer installment loans, various types of mortgage loans, personallines of credit, home equity loans, credit cards, real estate constructionloans, commercial loans to small and medium-sized businesses and professionals,and letters of credit. We issue VISA credit cards and are a merchant depositoryfor cardholder drafts under VISA credit cards. We also offer check cards and debit cards.  We offer our local customers free courierservices, access to third-party automated teller machines, or ATMs, and stateof the art electronic banking. We have trust powers but do not have a trustdepartment.

 

**Our Business Strategy**

** **

We execute ourbusiness bank strategy by combining the personal service and appeal of acommunity banking institution with the sophistication of a larger bank.  We believe this strategy distinguishes usfrom our competitors in efforts to attract loans and deposits of local small tomedium-sized businesses and national and regional equipment vendors andfinancial services companies.  The November 2005issue of the Nashville Business Journal ranked us as the second largestNashville area small business lender (ranked by dollar amount of small businessloans) for the second year in a row. Further, the rapid growth within the Nashville MSA along with severalbank mergers and acquisitions has left many business owners without significantbanking relationships. We seek to take advantage of this opportunity.

 

9

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We do notcompete based on the traditional definition of “convenience” and have no plansto develop a comprehensive branch bank network. For us, convenience is created by technology and by a free courierservice for local customers which transports deposits directly from thebusiness location to the bank.  We conductbusiness primarily from a single banking office with no teller line,drive-through window or extended banking hours. We compete by providing responsive and personalized service to meetcustomer needs.  We provide freeelectronic banking and cash management tools and on-site training for businesscustomers.  We compete for consumerbusiness by providing superior products, attractive deposit rates, freeinternet banking services, and access to a third party regional ATM network. Weprimarily target service, manufacturing, and professional customers and avoidretail businesses with high transaction volume.

 

The businessbank strategy is highlighted by differences between the financial statements ofour bank and more traditional financial institutions. The business bank modelcreates a high degree of leverage.  Byavoiding the investment and maintenance costs of a typical branch network, weare able to maintain earning assets at a higher level than peer institutions.  Management targets a minimum earning assetratio of 97% compared to the average of 85% to 90% for all FDIC-insured banksand at March 31, 2006 we had an earnings asset ratio of 97.19%.

 

The businessbank model is also highly efficient.  Wetarget the non-retail sector of the commercial market, which is characterizedby lower levels of transactions and processing costs.  The commercial customer mix and the strategicoutsourcing of non-customer functions, such as data processing, informationtechnology and internal audit, allow us to operate with a smaller, morehighly-trained staff.  Management targetsan average assets per employee ratio of $7.5 million, compared to the averageratio of approximately $2.9 million assets per employee for Tennessee statechartered banks at the end of the third quarter 2005.

 

In addition toour Williamson County and Nashville MSA focus, we have also developed anexpertise in indirect lending to companies across the country.  The transactions are fixed rate monthlyinstallment loans originated through a third party equipment vendor orfinancial services company. Our indirect lending programs are divided into twoprograms based on loan size. In the first program, through an establishednetwork of vendors and financial service companies, we have opportunities tofinance business asset secured loan transactions for national middle-market andinvestment grade companies. In the second program, a different network ofvendors and financial service companies located in Tennessee, Alabama, Georgia,California and Michigan partner with us in an indirect funding program forsmaller transactions (generally $125,000 or less per transaction). Bothindirect funding programs provide geographic and collateral diversity for theportfolio.

 

In eachprogram, the equipment vendor or financial service company originates anequipment lease with its customer that is funded by us as a non-recoursecommercial loan that is secured by the assignment of the lease and theunderlying rights to the collateral. We earn excellent yields and have no servicingexpense or residual value risk in any transaction originated by our partnervendors and financial service companies. We currently intend to maintain loansgenerated through our indirect funding programs at between approximately 35%and 40% of our total loan portfolio.

 

**Our Market Area**

** **

We considerWilliamson county and the Nashville MSA our primary market.  Growth in this market has been supported bythe creation of the Nashville Economic Market, which is a regional economicdevelopment initiative comprising 10 of the counties within the NashvilleMSA.  According to SNL Financial, or SNL,the population and median household income of the Nashville MSA grewapproximately 10% and 15%, respectively, from 2000 to 2005 to reach a total of1,444,066 in population and $50,043 in median household income. According toSNL, from 2005 to 2010, population and median household income are expected toincrease approximately 10% and 15%, respectively.  FDIC insured deposits increased byapproximately 46% to $25.2 billion from 2000 to 2005 in the Nashville MSA.

 

10

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WilliamsonCounty and the Nashville MSA possess a diverse and growing economy.  Major employment is supported by sectorsincluding government, education, financial services, healthcare, manufacturing,distribution and entertainment.  TheNashville MSA is home to 19 colleges and universities educating over 94,000students.  As a result, employers areprovided with a relatively well-educated workforce capable of serving a widevariety of industries.  Centrally locatedwithin the eastern half of the United States and directly connected to threemajor interstate highways, the Nashville area is also an ideal distributioncenter for many companies.

 

**Overview ofOperating Results for the Three Months ended March 31, 2006 and March 31,2005 and Financial Condition at March 31, 2006 and December 31, 2005.**

 

(dollars in thousands except share data in theremainder of this Item 2)

 

The results of operationsfor the quarter ended March 31, 2006, compared to the quarter ended March 31,2005 reflected a 37.31% increase in net income and a 31.58% increase inearnings per share, assuming dilution. The increase in earnings resultedprimarily from a 39.60% increase in net interest income due to higher averageloan balances. The increased net interest income was partially offset byincreases in non-interest expense and the provision for loan losses. Thequarter ended March 31, 2006, reflected a continuation of the Bank’s trendof rapid asset growth increasing by $34,278 or 8.48% from $404,040 at December 31,2005 to $438,318 at March 31, 2006. Net loans increased by 10.19% or$35,077 from December 31, 2005 to March 31, 2006, while totaldeposits increased by 9.05% or $33,272 during that same period.

 

**Comparison of Operating Results forthe Three Months ended March 31, 2006 and March 31, 2005**

 

**Net Income** - Net income for the quarter ended March 31,2006 was $909 an increase of $247 or 37.31%, compared to the net income of $662for the quarter ended March 31, 2005.  The increase is attributableto a 39.60% increase in net interest income from $3,048 for the quarter ended March 31,2005 to $4,255 for the same period in 2006. The increase of $1,207 in netinterest income was the result of our overall growth, including a 58.08%increase in average loan balances in the three months ended March 31, 2006compared to the same period in 2005. This positive effect was partially offsetby a 53.85% increase in the provision for loan losses, from $650 during thethree months ended March 31, 2005 to $1,000 for the same period in 2006.Also, non-interest expense increased by 32.33% to $2,018 for the three monthperiod ended March 31, 2006 compared to $1,525 for the same period in2005. The increase in the provision for loan losses was primarily the result offunding the allowance for loan losses to match the significant loan growth. Theincrease in non-interest expense was due to the increase in personnel andgeneral operating expenses due to our growth.

 

(dollars in thousands)

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2006**                               | ** ** | **2005**   | ** ** | **% Increase** | ** ** |
|                                          |       |                                   |       |       |       |   |   |
| Interest  income                              |       | $                                      | 8,404      |       | $          | 4,673 |   | 79.84 | % |
| Interest  expense                             |       | 4,149                                  |       | 1,625      |       | 155.32 |   |
| Net interest income                           |       | 4,255                                  |       | 3,048      |       | 39.60 |   |
| Provision  for loan losses                    |       | 1,000                                  |       | 650        |       | 53.85 |   |
| Net interest after provision for loan  losses |       | 3,255                                  |       | 2,398      |       | 35.74 |   |
| Noninterest  income                           |       | 245                                    |       | 208        |       | 17.79 |   |
| Noninterest  expense                          |       | 2,018                                  |       | 1,525      |       | 32.33 |   |
| Net income before taxes                       |       | 1,482                                  |       | 1,081      |       | 37.10 |   |
| Income tax  expense                           |       | 573                                    |       | 419        |       | 36.75 |   |
| Net income                                    |       | $                                      | 909        |       | $          | 662 |   | 37.31 | % |

 

11

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**NetInterest Income** -Net interest income for the quarter ended March 31, 2006 was $4,255compared to $3,048 for the same period in 2005, a gain of $1,207 or39.60%.  The increase in net interest income was largely attributable tostrong loan growth.  The average loan balance for the three months ended March 31increased by 58.08% or $133,528 from $229,880 for that period in 2005 to$363,408 for the same period in 2006. Loan growth was matched by an increase inaverage interest earning deposits from $218,954 for the three months ended March 31,2005 to $367,933 for the same period in 2006 – an increase of $148,979 or68.04%.

 

**NetInterest Margin******- The netinterest margin decreased from 4.90% for the three months ended March 31,2005 to 4.18% for the same period in 2006 due to an increase in the cost offunds which offset an increase in the yield on earning assets. The net interestmargin increased from 3.91% for the quarter ending December 31, 2005 to4.18% for the quarter ending March 31, 2006 as a result of a 9.5% increasein the yield on earning assets between the quarters.  Interest income increased by $3,731 or79.84%, from $4,673 during the quarter ended March 31, 2005 to $8,404during the same period in 2006. The increase was primarily due to increasedvolume.  Average earning assets increased from $252,085 in the threemonths ended March 31, 2005 to $412,545 in the same period in 2006, anincrease of $160,460 or 63.65%.  The increase in earning assets wasprimarily due to loan growth. Average loan balances increased by $133,528 or58.08%.  The average yield on earning assets increased from 7.51% in thequarter ended March 31, 2005 to 8.25% in the same period in 2006. Theincrease in yield on earning assets and cost of funds, as a percentage ofaverage balances was primarily due to recent increases in short term interestrates by the Federal Reserve Open Market Committee, or FOMC. Between March 31,2005 and March 31, 2006, the FOMC raised the federal funds rate by 200basis points.

 

Interest expense increasedfrom $1,625 in the quarter ended March 31, 2005, to $4,149 in the quarterended March 31, 2006. The $2,524 or 155.32%, increase in expense was dueprimarily to increases in the volume of deposits. Average interest earningliabilities increased by $157,430 or 71.72%.  The cost of funds increasedfrom 3.00% in the quarter ended March 31, 2005 to 4.46% in the samequarter in 2006, an increase of 146 basis points.

 

12

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# **Average Balance Sheets, Net Interest Income, and Changesin Interest Income and Interest Expense**

 

The following table showsthe average daily balances of each principal category of our assets,liabilities and stockholders’ equity, and an analysis of net interest income,and the change in interest income and interest expense segregated into amountsattributable to changes in volume and changes in rates for the three monthperiods ended March 31, 2006 and 2005. The table is presented on a taxequivalent basis if applicable.

 
| ** **                                      | ** ** | **Three Months Ended March 31,  2006** | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| **(dollars in thousands)**                      | ** ** | **Average  Balance**                        | ** ** | **Interest**                                | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **ASSETS**                                      |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest  earning assets                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Securities  (taxable) (1)                       |       | $                                           | 37,634     |                                        | $          | 451 |   | 4.78 | % | $ | 19,075 |   | $ | 194 |   | 4.07 | % |
| Loans  (2) (3)                             |       | 363,408                                     |       | 7,847                                       |       | 8.76 | % | 229,880 |   | 4,463 |   | 7.87 | % |
| Federal  funds sold                             |       | 11,503                                      |       | 106                                         |       | 3.74 | % | 3,130 |   | 16 |   | 2.07 | % |
| Total  interest earning assets                  |       | 412,545                                     |       | 8,404                                       |       | 8.25 | % | 252,085 |   | 4,673 |   | 7.51 | % |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest  earning assets                     |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                         |       | 3,221                                       |       |                                        |       |   |   | 3,197 |   |   |   |   |   |
| Net fixed assets and equipment                  |       | 785                                         |       |                                        |       |   |   | 601 |   |   |   |   |   |
| Accrued interest and other assets               |       | 8,317                                       |       |                                        |       |   |   | 3,380 |   |   |   |   |   |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                           | 424,868    |                                        |       |   |   |   | $ | 259,263 |   |   |   |   |   |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities                   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Deposits (other than demand)                    |       | $                                           | 367,933    |                                        | $          | 4,003 |   | 4.41 | % | $ | 218,594 |   | $ | 1,618 |   | 3.00 | % |
| Federal funds purchased                         |       | 752                                         |       | 9                                           |       | 4.85 | % | 817 |   | 6 |   | 3.84 | % |
| Subordinated debt                               |       | 8,248                                       |       | 137                                         |       | 6.74 | % | 92 |   | 1 |   | 6.73 | % |
| Total interest bearing liabilities              |       | 376,933                                     |       | 4,149                                       |       | 4.46 | % | 219,503 |   | 1,625 |   | 3.00 | % |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing liabilities                |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest bearing demand deposits             |       | 19,663                                      |       |                                        |       |   |   | 14,586 |   |   |   |   |   |
| Other liabilities                               |       | 1,419                                       |       |                                        |       |   |   | 1,304 |   |   |   |   |   |
| Shareholders’ equity                       |       | 26,853                                      |       |                                        |       |   |   | 23,870 |   |   |   |   |   |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                           | 424,868    |                                        |       |   |   |   | $ | 259,263 |   |   |   |   |   |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net Interest  Spread                            |       | 3.79                                        | %          |                                        |       |   |   | 4.51 | % |   |   |   |   |
|                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net Interest  Margin                            |       | 4.18                                        | %          |                                        |       |   |   | 4.90 | % |   |   |   |   |

 

13

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(1)   Unrealized loss of $625 and $273 is excludedfrom yield calculation for the quarter ended March 31, 2006 and 2005respectively.

(2)   Non-accrual loans are included in averageloan balances and loan fees of $612 and $373 are included in interest incomefor the quarter ended March 31, 2006 and 2005 respectively.

(3)   Loans are presented net of allowance for loanloss.

 

The following table outlinesthe components of the net interest margin for the three month periods ended March 31,2006 and 2005 and identifies the impact of changes in volume and the changes inrate.

 
| ** **                    | ** ** | **March 31, 2006 change from  March 31, 2005 due to:** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------|------------|
| **(dollars in thousands)**    | ** ** | **Volume**                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                                             |       |   |   |   |   |
| Interest  income              |       |                                                             |       |   |   |   |   |
| Loans                         |       | $                                                                | 2,836      |   | $ | 548 |   | $ | 3,384 |   |
| Securities – taxable (1) |       | 214                                                              |       | 43 |   | 257 |   |
| Federal funds sold            |       | 69                                                               |       | 21 |   | 90 |   |
| Total  interest income        |       | 3,119                                                            |       | 612 |   | 3,731 |   |
|                          |       |                                                             |       |   |   |   |   |
| Interest  expense             |       |                                                             |       |   |   |   |   |
| Deposits (other than demand)  |       | 1,413                                                            |       | 972 |   | 2,385 |   |
| Federal funds purchased       |       | (1                                                               | )          | 4 |   | 3 |   |
| Subordinated debt             |       | 135                                                              |       | 1 |   | 136 |   |
| Total  interest expense       |       | 1,547                                                            |       | 977 |   | 2,524 |   |
|                          |       |                                                             |       |   |   |   |   |
| Net interest  income          |       | $                                                                | 1,572      |   | $ | (365 | ) | $ | 1,207 |   |

 

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(1) Unrealized loss of$625 and $273 is excluded from yield calculation for the quarter ended March 31,2006 and 2005 respectively.

 

**Provisionfor Loan Losses** -The provision for loan losses for the quarter ended March 31, 2006 was$1,000, an increase of $350, or 53.85%, above the provision of $650 expensed inthe same period in 2005.  This increase was primarily due to significantloan growth.

 

The provision is discussedas it relates to the allowance for loan losses in the following Comparison ofFinancial Condition section. At March 31, 2006, the loan loss reserve of$5,020 was 1.31% of gross loans of $384,284.

 

**NoninterestIncome** - Weearned $22 in mortgage origination fees during the quarter ended March 31,2006 compared to $19 earned in 2005, an increase of $3 or 15.79%.  Incomeearned in the form of service charges on deposits totaled $49 for the quarterended March 31, 2006, an increase of $23 compared to the same period in2005. No gain or loss was recognized on the sale of securities in the quarterended March 31, 2006 compared with a loss of $4 for the same period in2005.

 

The Bank earned $254 on loansale transactions in the quarter ended March 31, 2006, a 76.39% increasecompared to $144 during the same period in 2005. This increase was primarilydue to demand from purchasers. Management will continue to consider loan saletransactions if the opportunity for a reasonable return is available.

 

14

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**NoninterestExpense** -Noninterest expense for the three months ended March 31, 2006, was $2,018,an increase of $493 or 32.33%, over the $1,525 expensed in the same period in2005.  Approximately 60.24% of the increase was due to the addition of 16new employees during the period between the two quarters. At March 31,2006, we had 51 full time employees. Assets per employee were $8.1 millionat March 31, 2005 and $8.6 million at March 31, 2006. Managementtargets $7.5 million per full time employee as a measure of staffing efficiency.

 

Efficiency Ratio

(dollars in thousands )

 
| ** **           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Noninterest  expense |       | $                                      | 2,018      |   | $ | 1,525 |   |
| Net interest  income |       | 4,255                                  |       | 3,048 |   |
| Noninterest  income  |       | 245                                    |       | 208 |   |
| Total  Revenues      |       | $                                      | 4,500      |   | $ | 3,256 |   |
|                 |       |                                   |       |   |   |
| Efficiency  Ratio    |       | 44.84                                  | %          | 46.84 | % |

 

**IncomeTaxes** – Oureffective tax rate for the quarter ended March 31, 2006 was 38.66%compared to 38.76% for the quarter ended March 31, 2005. Managementanticipates that tax rates in future periods will approximate the rates paid in2006.

 

**Comparison of Financial Conditionat March 31, 2006 and December 31, 2005**

 

**Assets****-**Total assets at March 31, 2006 were$438,318, an increase of $34,278 or 8.48%, over total assets of $404,040 at December 31,2005. Loan growth was the primary reason for the increase.  March 31,2006 net loans were $379,264, up $35,077, or 10.19% over the December 31,2005 total net loans of $344,187. The cash and cash equivalents balancedecreased by $9,608 between December 31, 2005 and March 31, 2006 asfunds were used to fund loans made in the first quarter of 2006.

 

Our business bank model ofoperation results in a higher level of earning assets than peer banks. Earning assets are defined as assets which earn interest income.  Earningassets include short-term investments, the investment portfolio, and netloans.  We maintain a higher level of earning assets because fewer assetsare allocated to facilities, cash, and due-from bank accounts used fortransaction processing.  Earning assets at March 31, 2006, were$425,994, or 97.19% of total assets of $438,318.  Earning assets at December 31,2005, were $388,714, or 96.21% of total assets of $404,040.

 

15

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**Loans** - We had total net loans of $379,264 millionat March 31, 2006. The following table sets forth the composition of ourloan portfolio at March 31, 2006 and December 31, 2005 (dollars inthousands) :

 
| ** **                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Real estate                             |       |                     |       |                        |       |
| Construction                            |       | $                        | 43,885     |                        | $          | 38,279 |   |
| 1-4 family residential                  |       | 19,554                   |       | 18,358                      |       |
| Other                                   |       | 54,182                   |       | 50,371                      |       |
| Commercial,  financial and agricultural |       | 258,650                  |       | 233,948                     |       |
| Consumer                                |       | 3,614                    |       | 3,149                       |       |
| Other                                   |       | 4,399                    |       | 4,481                       |       |
|                                    |       |                     |       |                        |       |
| Total loans                             |       | 384,284                  |       | 348,586                     |       |
| Less:  allowance for loan losses        |       | (5,020                   | )          | (4,399                      | )          |
|                                    |       |                     |       |                        |       |
| Net loans                               |       | $                        | 379,264    |                        | $          | 344,187 |   |

 

Composition of loan portfolio by type

(dollars in thousands)

 
| ** **                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Real estate:                            |       |                     |       |                        |       |
| Construction                            |       | 11.42                    | %          | 10.98                       | %          |
| 1 to 4 family residential               |       | 5.09                     | %          | 5.27                        | %          |
| Other                                   |       | 14.10                    | %          | 14.45                       | %          |
| Commercial,  financial and agricultural |       | 67.31                    | %          | 67.11                       | %          |
| Consumer                                |       | 0.94                     | %          | 0.90                        | %          |
| Other                                   |       | 1.14                     | %          | 1.29                        | %          |
|                                    |       |                     |       |                        |       |
| Total                                   |       | 100                      | %          | 100                         | %          |

 

16

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The following table setsforth the composition of our commercial, financial and agricultural loanportfolio at March 31, 2006 and December 31, 2005 (dollars inthousands) :

 
| ** **                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Amount**               | ** ** | **%**                       | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial,  financial and agricultural |       |                     |       |                        |       |   |   |   |   |
| Direct funding                          |       | $                        | 111,899    |                        | 43.26      | % | $ | 94,742 |   | 40.50 | % |
| Indirect  funding                       |       |                     |       |                        |       |   |   |   |   |
| Large                                   |       | 50,350                   |       | 19.47                       | %          | 52,144 |   | 22.29 | % |
| Small                                   |       | 96,401                   |       | 37.27                       | %          | 87,062 |   | 37.21 | % |
| Total                                   |       | $                        | 258,650    |                        | 100.00     | % | $ | 233,948 |   | 100.00 | % |

 

Management periodicallyreviews the loan portfolio, particularly non-accrual and renegotiatedloans.  The review may result in a determination that a loan should beplaced on a non-accrual status for income recognition. When a loan isclassified asnon-accrual,any unpaid interest is reversed against current income.  Interest isincluded in income thereafter only to the extent received in cash.  Theloan remains in a non-accrual classification until such time as the loan isbrought current, when it may be returned to accrual classification.

 

The following table presentsinformation regarding non-accrual, past due and restructured loans at March 31,2006 and December 31, 2005:

 
| **(dollars in thousands)**                                                                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Non-accrual  loans                                                                                      |       |                     |       |                        |       |
| Number                                                                                                  |       | 43                       |       | 46                          |       |
| Amount                                                                                                  |       | $                        | 2,597      |                        | $          | 2,928 |   |
|                                                                                                    |       |                     |       |                        |       |
| Accruing loans which are contractually past  due 90 days or more as to principal and interest payments: |       |                     |       |                        |       |
| Number                                                                                                  |       | 6                        |       | 9                           |       |
| Amount                                                                                                  |       | $                        | 177        |                        | $          | 352 |   |
|                                                                                                    |       |                     |       |                        |       |
| Loans  defined as “troubled debt restructurings”                                              |       |                     |       |                        |       |
| Number                                                                                                  |       | 3                        |       | 3                           |       |
| Amount                                                                                                  |       | $                        | 1,136      |                        | $          | 1,144 |   |

 

As of March 31, 2006and December 31, 2005, there are no loans classified for regulatorypurposes as doubtful or substandard that have not been disclosed in the abovetable, which (i) represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity, or capital resources, or (ii) represent material credits aboutwhich management is aware of any information which causes management to haveserious doubts as to the ability of such borrowers to comply with the loanrepayment terms.

 

**Allowancefor loan losses** -The maintenance of an adequate allowance for loan losses, or ALL, is one of thefundamental concepts of risk management for every financial institution.Management is responsible for ensuring that controls are in place to insure theadequacy of the loan loss reserve in accordance with generally acceptedaccounting principals (GAAP), our stated policies and procedures, andregulatory guidance.

 

17

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It is management’s intent tomaintain an ALL which is adequate to absorb current and estimated losses whichare inherent in a loan portfolio.  The historical loss ratio (netcharge-offs as a percentage of average loans) was 0.10% for the three monthsended March 31, 2006 and 0.14% for the three months ended March 31,2005. The ALL as a percentage of the outstanding loans at the end of the periodwas 1.31% at March 31, 2006 and 1.31% at March 31, 2005.

 

An analysis of our lossexperience is furnished in the following table for the quarter ended March 31,2006 and the same period ended March 31, 2005:

 

(dollars in thousands)

 
| ** **                                        | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Allowance  for loan losses at beginning of period |       | $                        | 4,399      |                     | $          | 2,841 |   |
| Charge-offs:                                      |       |                     |       |                     |       |
| Real estate:                                      |       |                     |       |                     |       |
| Construction                                      |       | —                   |       | —                   |       |
| 1 to 4 family residential                         |       | —                   |       | —                   |       |
| Other                                             |       | —                   |       | —                   |       |
| Commercial, financial and agricultural            |       | 480                      |       | 353                      |       |
| Consumer                                          |       | 3                        |       | 4                        |       |
| Total Charge-offs                                 |       | 483                      |       | 357                      |       |
|                                              |       |                     |       |                     |       |
| Recoveries:                                       |       |                     |       |                     |       |
| Real estate:                                      |       |                     |       |                     |       |
| Construction                                      |       | —                   |       | —                   |       |
| 1 to 4 family residential                         |       | —                   |       | 1                        |       |
| Other                                             |       | —                   |       | —                   |       |
| Commercial, financial and agricultural            |       | 83                       |       | 15                       |       |
| Consumer                                          |       | 21                       |       | 23                       |       |
| Total Recoveries                                  |       | 104                      |       | 39                       |       |
|                                              |       |                     |       |                     |       |
| Net  Charge-offs                                  |       | 379                      |       | 318                      |       |
|                                              |       |                     |       |                     |       |
| Provision  for loans charged to expense           |       | 1,000                    |       | 650                      |       |
| Allowance  for loan losses at end of period       |       | $                        | 5,020      |                     | $          | 3,173 |   |

 
| ** **                                                                                        | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Net charge-offs as a percentage of average  total loans outstanding during the period             |       | 0.10                     | %          | 0.14                     | %          |
|                                                                                              |       |                     |       |                     |       |
| Ending allowance for loan losses as a  percentage of total loans outstanding at end of the period |       | 1.31                     | %          | 1.31                     | %          |

 

The allowance for loanlosses is established by charges to operations based on management’s evaluationof the loan portfolio, past due loan experience, collateral values, currenteconomic conditions and other factors considered necessary to maintain theallowance at an adequate level.

 

18

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**Securities** - The securities portfolio at March 31,2006 was $40,047 compared to $31,992 at December 31, 2005.  We viewthe securities portfolio as a source of income and liquidity.  Managementhas maintained the portfolio at 9.14% of total assets at March 31, 2006and 7.92% of total assets at December 31, 2005.

 

**Liabilities****-** We depend on a growing deposit base to fundloan and other asset growth. We compete for local deposits by offeringattractive products with premium rates.  We also obtain funding in thewholesale deposit market which is accessed by means of an electronic bulletinboard.  This electronic market links banks and acquirers of funds tocredit unions, school districts, labor unions, and other organizations withexcess liquidity. The process is highly efficient and the average rate is generallyless than rates paid in the local market. Wholesale deposits are categorized as“Purchased Time Deposits” on the detail of deposits shown in the table below.

 

Total deposits at March 31,2006 were $400,977, up $33,272 or 9.05% over the December 31, 2005, totaldeposits of $367,705. Total average deposits during the quarter ending March 31,2006, were $387,596, an increase of $154,416, or 66.22% over the total averagedeposits of $233,180 during the quarter ending March 31, 2005. Averagenoninterest bearing deposits increased by $5,077, or 34.81%, from $14,586 inthe quarter ending March 31, 2005, to $19,663 in the quarter ending March 31,2006. Average deposit balances for the three months ended March 31, 2006and 2005 and the average rates paid on those balances are shown below.

 

Deposits

(dollars in thousands)

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Average  Balance**                  | ** ** | **Average  Rate  Paid (1)** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid (1)** | ** ** |
| Types of  Deposits                   |       |                                  |       |   |   |   |   |   |   |
| Noninterest-bearing  demand deposits |       | $                                     | 19,663     |   | — |   | $ | 14,586 |   | — |   |
| Interest-bearing  demand deposits    |       | 5,847                                 |       | 3.40 | % | 2,122 |   | 0.89 | % |
| Money market  accounts               |       | 54,825                                |       | 4.84 | % | 31,583 |   | 3.17 | % |
| Savings  accounts                    |       | 16,675                                |       | 2.64 | % | 27,476 |   | 2.54 | % |
| IRA accounts                         |       | 4,536                                 |       | 4.81 | % | 1,022 |   | 3.61 | % |
| Purchased  time deposits             |       | 156,593                               |       | 4.22 | % | 135,874 |   | 3.07 | % |
| Time  deposits                       |       | 129,457                               |       | 4.73 | % | 20,517 |   | 3.22 | % |
| Total deposits                       |       | $                                     | 387,596    |   |   |   | $ | 233,180 |   |   |   |

 

----

(1) Rate is annualized

 

**Subordinated Debt** - In March 2005, we formed a financingsubsidiary, Tennessee Commerce Statutory Trust I, a Delaware statutory trust,or the Trust I. In March 2005, Trust I issued and sold $8,000 of Trust I’sFixed/Floating rate capital securities, with a liquidation amount of $1,000 percapital security, to First Tennessee Bank National Association. At the sametime, we issued to Trust I $8,248,000 of Fixed/Floating rate juniorsubordinated deferrable interest debentures due 2035. The debentures pay a6.73% fixed rate payable quarterly for the first five years and a floating ratebased on a 3 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. We reportas liabilities the subordinated debentures issued by us and held by Trust I.

 

19

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**Off-balance Sheet Arrangements**

 

We are a party to financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of its customers. At March 31, 2006, we hadunfunded loan commitments outstanding of $44.8 million and standby letters ofcredit of $6.4 million. These financial instruments include commitments toextend credit and standby letters of credit.  Those instruments involve,to varying degrees, elements of credit risk in excess of the amount recognizedin the balance sheet.  The contract or notional amounts of thoseinstruments reflect the extent of our involvement in those particular financialinstruments. We use the same credit policies in making commitments andconditional obligations as it does for on-balance sheet instruments.

 

Because these commitmentsgenerally have fixed expiration dates and many will expire without being drawnupon, the total commitment level does not necessarily represent future cashrequirements. If needed, we can liquidate Federal funds sold or securitiesavailable for sale or borrow and purchase Federal funds from other financialinstitutions where we have available federal fund lines totaling $12 million.

 

# **Capital Resources/Liquidity**

# ** **

**Liquidity** - Of primary importance to depositors,creditors and regulators is the ability to have readily available fundssufficient to repay fully maturing liabilities.  We are subject to generalFDIC guidelines which do not require a minimum level of liquidity. Liquidityrequirements can also be met through short-term borrowings or the dispositionof short-term assets which are generally matched to correspond to the maturityof liabilities. Management believes its liquidity ratios meet the general FDICguidelines and we have assets and borrowing capacity to provide adequateliquidity. Management does not know of any trends or demands which arereasonably likely to result in liquidity increasing or decreasing in anymaterial manner.

 

**CapitalAdequacy**– Ourobjective is to maintain a level of capitalization that is sufficient to takeadvantage of profitable growth opportunities while meeting regulatoryrequirements.****To continue to grow,we must increase capital by generating earnings, issuing equities, borrowingfunds, or a combination of those activities. For example, in 2004, we issuedequity securities increasing capital by $8.5 million.  In March 2005,our subsidiary Trust I issued $8 million in Trust Preferred Securities thatmeet the capital guidelines to be classified as Tier I capital as explainedbelow. On April 25, 2006, we filed a Form S-1 registration statementdescribing a stock offering of 1,000,000 shares of our common stock to raisecapital in 2006.

 

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

 

The capital guidelinesclassify capital into two tiers, referred to as Tier I and Tier II. Under risk-based capital requirements, total capital consists ofTier I capital which is generally common stockholders’ equity lessgoodwill and Tier II capital which is primarily a portion of the allowance forloan losses and certain qualifying debt instruments.  In determiningrisk-based capital requirements, assets are assigned risk-weights of 0% to100%, depending primarily on the regulatory assigned levels of credit riskassociated with such assets.  Off-balance sheet items are considered inthe calculation of risk-adjusted assets through conversion factors establishedby the regulators.  The framework for calculating risk-based capital requiresbanks and bank holding companies to meet the regulatory minimums of 4%Tier I and 8% total risk-based capital.  In 1990 regulators added aleveraged computation to the capital requirements, comparing Tier Icapital to total average assets less goodwill.

 

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

 

20

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At March 31, 2006 and December 31,2005, the Bank’s and the Corporation’s risk-based capital ratios and theminimums for capital adequacy and to be considered well-capitalized under theFederal Reserve Board’s prompt corrective action guidelines were as follows:

 
| ** **                                               | ** ** | ** **         | ** ** | ** **            | ** ** | **Minimum  for** | ** ** | **Minimum to**       | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **capital**      | ** ** | **be considered**    | ** ** |
| ** **                                               | ** ** | **2006**           | ** ** | **2005**              | ** ** | **adequacy**     | ** ** | **well-capitalized** | ** ** |
|                                                     |       |               |       |                  |       |             |       |                 |       |
| Tier 1  “core” capital to risk-weighted assets |       |               |       |                  |       |             |       |                 |       |
| Tennessee Commerce Bank                                  |       | 8.72               | %          | 9.30                  | %          | 4.00             | %          | 6.00                 | %          |
| Tennessee Commerce Bancorp, Inc.                    |       | 8.93               | %          | 9.56                  | %          | 4.00             | %          | n/a                  |       |
|                                                     |       |               |       |                  |       |             |       |                 |       |
| Total  capital to risk-weighted assets                   |       |               |       |                  |       |             |       |                 |       |
| Tennessee Commerce Bank                                  |       | 9.97               | %          | 10.51                 | %          | 8.00             | %          | 10.00                | %          |
| Tennessee Commerce Bancorp, Inc.                    |       | 10.18              | %          | 10.77                 | %          | 8.00             | %          | n/a                  |       |
|                                                     |       |               |       |                  |       |             |       |                 |       |
| Tier 1  leverage ratio                                   |       |               |       |                  |       |             |       |                 |       |
| Tennessee Commerce Bank                                  |       | 8.21               | %          | 9.08                  | %          | 4.00             | %          | 5.00                 | %          |
| Tennessee Commerce Bancorp, Inc.                    |       | 8.49               | %          | 9.33                  | %          | 4.00             | %          | n/a                  |       |

 

On March 31, 2006 and December 31,2005, both the Bank and the Corporation exceeded the regulatory minimum capitalrequirements.

 

**Impact ofInflation and Changing Prices** - The financial statements and related financial data presented hereinhave been prepared in accordance with U.S. generally accepted accounting principleswhich require the measurement of financial position and operating results interms of historical dollars without considering the changes in the relativepurchasing power of money over time and due to inflation.  The impact ofinflation on operations of the Bank is reflected in increased operatingcosts.  Unlike most industrial companies, virtually all of the assets andliabilities of the Bank are monetary in nature.  As a result, interestrates have a more significant impact on the Bank’s performance than the effectsof general levels of inflation.  Interest rates do not necessarily move inthe same direction or in the same magnitude as the price of goods and services.

 

21

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**ITEM 3:QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK**

 

Like all financialinstitutions, we are subject to market risk from changes in interest rates.Interest rate risk is inherent in the balance sheet due to the mismatch betweenthe maturities of rate sensitive assets and rate sensitive liabilities. Ifrates are rising, and the level of rate sensitive liabilities exceeds the levelof rate sensitive assets, the net interest margin will be negatively impacted.Conversely, if rates are falling, and the level of rate sensitive liabilitiesis greater than the level of rate sensitive assets, the impact on the netinterest margin will be favorable. Managing interest rate risk is furthercomplicated by the fact that all rates do not change at the same pace, in otherwords, short term rates may be rising while longer term rates remain stable. Inaddition, different types of rate sensitive assets and rate sensitiveliabilities react differently to changes in rates.

 

To manage interest raterisk, we must take a position on the expected future trend of interest rates.Rates may rise, fall, or remain the same. Our asset liability committeedevelops its view of future rate trends and strives to manage rate risk withina targeted range by monitoring economic indicators, examining the views of economistsand other experts, and understanding the current status of our balance sheet.Our annual budget reflects the anticipated rate environment for the next twelvemonths. The asset liability committee conducts a quarterly analysis of the ratesensitivity position and reports its results to our board of directors.

 

The asset liabilitycommittee uses a computer model to analyze the maturities of rate sensitiveassets and liabilities. The model measures the “gap” which is defined as thedifference between the dollar amount of rate sensitive assets repricing duringa period and the volume of rate sensitive liabilities repricing during the sameperiod. Gap is also expressed as the ratio of rate sensitive assets divided byrate sensitive liabilities. If the ratio is greater than “one”, the dollarvalue of assets exceeds the dollar value of liabilities; the balance sheet is “assetsensitive”. Conversely, if the value of liabilities exceeds the value ofassets, the ratio is less than one and the balance sheet is “liabilitysensitive”. Our internal policy requires management to maintain the gap withina range of 0.75 to 1.25.

 

The model measures scheduledmaturities in periods of three months, four to twelve months, one to five yearsand over five years. The chart below illustrates our rate sensitive position atMarch 31, 2006. Management uses the one year gap as the appropriate timeperiod for setting strategy.

 

22

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Rate Sensitivity Gap Analysis

(dollars in thousands)

 
| ** **                                                       | ** ** | ** **   | ** ** | **1-3**    | ** ** | **4-12**   | ** ** | **1-5**   | ** ** | **Over**    | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|-----------|------------|-------------|------------|------------|------------|
| ** **                                                       | ** ** | **Floating** | ** ** | **Months** | ** ** | **Months** | ** ** | **Years** | ** ** | **5 years** | ** ** | **Total**  | ** ** |
| Maturities :                                                     |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  Earnings Assets                                        |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Federal  funds sold                                              |       | $            | 6,683      |       | $          | —     |       | $         | —     |        | $          | —     |       | $ | — |   | $ | 6,683 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |        |       |       |       |
| U.S. government agencies                                         |       | —       |       | —     |       | 492        |       | 9,502     |       | 22,148      |       | 32,142     |       |
| Mortgage-backed securities                                       |       | —       |       | 966        |       | 2,950      |       | 2,902     |       | 1,087       |       | 7,905      |       |
| Total  securities                                                |       |         |       | 966        |       | 3,442      |       | 12,404    |       | 23,235      |       | 40,047     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total loans                                                      |       | 121,611      |       | 41,022     |       | 106,881    |       | 108,604   |       | 6,166       |       | 384,284    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Interest Earning Assets                                   |       | 128,294      |       | 41,988     |       | 110,323    |       | 121,008   |       | 29,401      |       | 431,014    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Other Assets                                                     |       | —       |       | —     |       | —     |       | —    |       | 7,304       |       | 7,304      |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total Assets                                                     |       | $            | 128,294    |       | $          | 41,988     |       | $         | 110,323    |        | $          | 121,008    |       | $ | 36,705 |   | $ | 438,318 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  Bearing Liabilities                                    |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest checking                                                |       | $            | 4,588      |       | $          | —     |       | $         | —     |        | $          | —     |       | $ | — |   | $ | 4,588 |   |
| Money market and savings                                         |       | 65,965       |       | —     |       | —     |       | —    |       | —      |       | 65,965     |       |
| Time deposits                                                    |       | —       |       | 62,962     |       | 126,886    |       | 121,802   |       | —      |       | 311,650    |       |
| Total  deposits                                                  |       | 70,553       |       | 62,962     |       | 126,886    |       | 121,802   |       | —      |       | 382,203    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Subordinated  Debt                                               |       | —       |       | —     |       | —     |       | —    |       | 8,248       |       | 8,248      |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Interest Bearing Liabilities                              |       | 70,553       |       | 62,962     |       | 126,886    |       | 121,802   |       | 8,248       |       | 390,451    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Other  Liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 20,590      |       | 20,590     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Shareholders’  Equity                                       |       | —       |       | —     |       | —     |       | —    |       | 27,277      |       | 27,277     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Liabilities and Shareholders’ Equity                 |       | $            | 70,553     |       | $          | 62,962     |       | $         | 126,886    |        | $          | 121,802    |       | $ | 56,115 |   | $ | 438,318 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Rate  Sensitive Gap by period                                    |       | $            | 57,741     |       | $          | (20,974    | )          | $         | (16,563    | )           | $          | (794       | )          | $ | 29,401 |   |   |   |
| Cumulative  Gap                                                  |       |         |       | $          | 36,767     |       | $          | 20,204    |       | $           | 19,410     |       | $          | 48,811 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Cumulative  Gap as a percent of Total Assets                     |       |         |       | 8.39       | %          | 4.61       | %          | 4.43      | %          |        |       |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Rate sensitive assets / Rate sensitive  liabilities (cumulative) |       | 1.82         |       | 1.28       |       | 1.08       |       | 1.05      |       | 1.10        |       |       |       |

 

23

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From March 31, 2005 to March 31,2006, the Federal Reserve Open Market Committee has raised interest rates by200 basis points. Management has positioned the balance sheet to be slightlyasset sensitive at one year maturities. At March 31, 2006, our one yearGAP was 1.08.

 

The interest rate risk modelthat defines the GAP position also performs a “rate shock” test of the balancesheet. The rate shock test measures the impact on the net interest margin of animmediate shift in interest rates in either direction. Although this test is astatic model that provides information only at a certain point in time, it isuseful in 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 .19% of the average assets for 2006.

 

The chart below identifiesthe net 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 March 31, 2006

 
| **Rate Change**       | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
| Net Interest  Income       |       | $          | 16,601     |       | $          | 16,965     |       | $       | 17,313     |       | $          | 17,626     |       | $          | 17,867     |   | $ | 18,055 |   | $ | 18,224 |   |
| Actual  dollar risk        |       | (1,025     | )          | (661       | )          | (313       | )          | —  |       | 241        |       | 429        |       | 598        |       |
| Percent of  risk           |       | 5.82       | %          | 3.75       | %          | 1.78       | %          | —  |       | 1.37       | %          | 2.43       | %          | 3.39       | %          |
| Percent of  average assets |       | 0.19       | %          | 0.13       | %          | 0.06       | %          | —  |       | 0.05       | %          | 0.08       | %          | 0.11       | %          |
|                            |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

The chart below identifiesthe net income impact of a shift in rates of 100, 200 and 300 basis points ineither direction.

 

Net Income Under Rate Shock

(dollars in thousands)

 

At March 31, 2006

 
| **Rate Change**       | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
| Net Income                 |       | $          | 3,880      |       | $          | 4,105      |       | $       | 4,320      |       | $          | 4,513      |       | $          | 4,662      |   | $ | 4,778 |   | $ | 4,882 |   |
| Actual  dollar risk        |       | (633       | )          | (408       | )          | (193       | )          | —  |       | 149        |       | 265        |       | 369        |       |
| Percent of  risk           |       | 14.02      | %          | 9.04       | %          | 4.28       | %          | —  |       | 3.30       | %          | 5.87       | %          | 8.18       | %          |
| Percent of  average assets |       | 0.12       | %          | 0.08       | %          | 0.04       | %          | —  |       | 0.03       | %          | 0.05       | %          | 0.07       | %          |
|                            |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

As shown above, net interestincome and net income should benefit from an increase in market interest rates.This reflects the asset sensitive bias of the balance sheet at March 31,2006. The model simulates activity so that maturing balances are replaced withnew balances at the new rate level and repricing balances are adjusted to thenew rate shock level. In a rising rate environment, early withdrawal andrepricing levels may increase. Because the balance sheet is asset sensitive asshown by the positive one year GAP ratio of 1.08, the net effect of the earlywithdrawals of the liabilities and the repricing of the assets will be a netincrease in net interest income and net income.

 

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The above analysis may noton its own be an entirely accurate indicator of how net interest income or netinterest margin will be affected by changes in interest rates. Incomeassociated with interest-earning assets and costs associated with interest-bearingliabilities may not be affected uniformly by changes in interest rates. Inaddition, the magnitude and duration of changes in interest rates may have asignificant impact on net interest income. Interest rates on certain types ofassets and liabilities fluctuate in advance of changes in general market rates,while interest rates on other types may lag behind changes in general marketrates. The asset liability committee develops its view of future rate trends bymonitoring economic indicators, examining the views of economists and otherexperts, and understanding the current status of our balance sheet and conductsa quarterly analysis of the rate sensitivity position. The results of theanalysis are reported to the board.

 

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**ITEM 4:CONTROLS AND PROCEDURES**

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosurecontrols 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 us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. We carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this report. Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Controls and Procedures

 

There were no changes in ourinternal controls over financial reporting during the quarter ended March 31,2006, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II: OTHER INFORMATION**

 

**ITEM 1:LEGAL PROCEEDINGS**

 

None

 

**ITEM 1A:RISK FACTORS**

 

There were nomaterial changes to our risk factors included in Part I, Item 1A ofour Form 10-K as filed with the Securities and Exchange Commission onMarch 28, 2006, except as set forth below as related to our filing of aregistration statement on Form S-1 relating to the issuance of 1,000,000shares of common stock.

 

***Even though our common stock is currently traded on the Nasdaq over thecounter market, or OTCBB, and we anticipate that it will be listed on theNasdaq National Market upon the closing of this offering, the trading volume inour common stock has been thin and the sale of substantial amounts of ourcommon stock in the public market could depress the price of our common stock.***

 

While we haveapplied to have our common stock listed on the Nasdaq National Market upon theclosing of the offering, we can give no assurance that we will qualify forlisting upon the closing or at any time after the closing. While we believethat if we are successful in listing our common stock on the Nasdaq NationalMarket, the trading volume of our common stock should increase, we cannot becertain when a more active and liquid trading market for our common stock willdevelop or be sustained. Because of this, our shareholders may not be ableto sell their shares at the volumes, prices or times that they desire.

 

We cannotpredict the effect, if any, that future sales of our common stock in themarket, or availability of shares of our common stock for sale in the market,will have on the market price of our common stock. We, therefore, can give noassurance that sales of substantial amounts of our common stock in the market,or the potential for large amounts of sales in the market, would not cause theprice of our common stock to decline or impair our ability to raise capitalthrough sales of our common stock.

 

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The marketprice of our common stock may fluctuate in the future, and thesefluctuations may be unrelated to our performance. General market pricedeclines or overall market volatility in the future could adversely affect theprice of our common stock, and the current market price may not beindicative of future market prices.

 

***We may issue additional common stock or otherequity securities in the future which could dilute the ownership interest ofexisting shareholders.***

 

In order tomaintain our capital at desired levels or required regulatory levels, or tofund future growth, our board of directors may decide from time to time toissue additional shares of common stock, or securities convertible into,exchangeable for or representing rights to acquire shares of our common stock.The sale of these securities may significantly dilute our shareholders’ownership interest as a shareholder and the per share book value of our commonstock. New investors in the future may also have rights, preferences andprivileges senior to our current shareholders which may adversely impactour current shareholders.

 

***Holders of our subordinated debentures have rightsthat are senior to those of our common shareholders.***

 

We havesupported our continued growth through the issuance of trust preferredsecurities from an affiliated special purpose trust and accompanyingsubordinated debentures. At December 31, 2005, we had outstanding trustpreferred securities and accompanying subordinated debentures totaling $8.2million. We conditionally guarantee payments of the principal and interest onthe trust preferred securities. Further, the accompanying subordinateddebentures we issued to the trust are senior to our shares of common stock. Asa result, we must make payments on the subordinated debentures before anydividends can be paid on our common stock and, in the event of our bankruptcy,dissolution or liquidation, the holders of the subordinated debentures must besatisfied before any distributions can be made on our common stock. We have theright to defer distributions on our subordinated debentures (and the relatedtrust preferred securities) for up to five years, during which time we may notpay dividends on our common stock.

 

***Our ability to declare and pay dividends on ourcommon stock is limited by law and we may be unable to pay futuredividends.***

 

We derive ourincome solely from dividends on the shares of common stock of the bank. Thebank’s ability to declare and pay dividends to us is limited by its obligationsto maintain sufficient capital and by other general restrictions on itsdividends that are applicable to banks that are regulated by the FDIC and theTDFI. In addition, the Federal Reserve Board may impose restrictions onour ability to pay dividends on our common stock. In addition, we must makepayments on the subordinated debentures before any dividends can be paid on ourcommon stock, and we may not pay dividends while we are deferring interestpayments on our trust preferred securities and the related subordinateddebentures. As a result, we cannot assure our shareholders that we will declareor pay dividends on shares of our common stock in the future.

 

***The marketprice of our common stock may decline after the stock offering.***

 

The price pershare at which we sell our common stock in the offering may be more or lessthan the market price of our common stock on the date the stock offering isconsummated. If the actual purchase price is less than the market price for theshares of common stock, some purchasers in the stock offering may be inclinedto immediately sell shares of common stock to attempt to realize a profit. Anysuch sales, depending on the volume and timing could cause the market price ofour common stock to decline. Additionally, because stock prices generallyfluctuate over time, there is no assurance purchasers of common stock in theoffering will be able to sell shares after the offering at a price equal to orgreater than the actual purchase price. Purchasers should consider thesepossibilities in determining whether to purchase shares of common stock and thetiming of any sale of shares of common stock.

 

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

 

(a)   During January of 2006, H. Lamar Cox,the Chief Administrative Officer, exercised the option to purchase 2,000 sharesof common stock at an exercise price of $5.00 per share.  This exercise ofstock options was a transaction by the Corporation that did not involve apublic offering.  We relied on the exemption provided by Section 4(2) ofthe Securities Act of 1933.

 

(b)   None

 

(c)   None

 

**Our abilityto declare and pay dividends on our common stock is limited by law and wemay be unable to pay future dividends. W**e derive our income solely from dividends onthe shares of common stock of the bank. The bank’s ability to declare and paydividends to us is limited by its obligations to maintain sufficient capitaland by other general restrictions on its dividends that are applicable to banksthat are regulated by the FDIC and the TDFI. In addition, the Federal ReserveBoard may impose restrictions on our ability to pay dividends on ourcommon stock. As a result, we cannot assure our shareholders that we willdeclare or pay dividends on shares of our common stock in the future.

 

**ITEM 3:DEFAULTS UPON SENIOR SECURITIES**

 

(a)   None

 

(b)   None

 

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

 

None

 

**ITEM 5:OTHER INFORMATION**

 

(a)   None

 

(b)   None

 

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**ITEM 6: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**               |       | Employment Agreement between Tennessee Commerce  Bancorp, Inc. and George W. Fort                   |
|                 |       |                                                                                                     |
| 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 |

 

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

**  Previously filed as an Exhibit toTennessee Commerce Bancorp, Inc.’s Form S-1 as filed with theSecurities Exchange Commission on April 25, 2006 and incorporated byreference herein.

 

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SIGNATURES

 

In accordance with therequirements of the Exchange Act, the Registrant caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 
|              | Tennessee Commerce Bancorp, Inc. |               |
|-------------------|---------------------------------------|--------------------|
|              | (Registrant)                          |               |
|              |                                  |
| May 15, 2006 |                                  | /s/ Arthur F. Helf |   |
| (Date)            |                                  | Arthur F. Helf     |
|              | Chairman and Chief Executive Officer  |
|              |                                  |
| May 15, 2006 |                                  | /s/ George W. Fort |   |
| (Date)            |                                  | George W. Fort     |
|              | Chief Financial Officer               |

 

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