**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

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

**FOR THE QUARTERLY PERIOD ENDEDJune 30, 2007**

**Commission File Number: 000-51281**

**TENNESSEECOMMERCE BANCORP, INC.**

(Exact Name of Registrant As Specified in Its Charter)

| **Tennessee**                                                                      |   | **62-1815881**                     |
|------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or Other  Jurisdiction of                                                   |   | (IRS Employer  Identification No.) |
| Incorporation or  Organization)                                                    |   |                               |
|                                                                               |   |                               |
| **381  Mallory Station Rd., Suite 207  Franklin, Tennessee 37067**            |
| (Address of  Principal Executive Offices) ( Zip Code)                              |
|                                                                               |
| **(615) 599-2274**                                                            |
| (Registrant’s  Telephone Number, Including Area Code)                         |
|                                                                               |
| **Not  Applicable**                                                                |
| (Former name,  former address and former fiscal year if changed since last report) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes x                      No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one): 

| Large Accelerated Filer o | Accelerated  Filer o | Non-accelerated  Filer x |
|---------------------------|---------------------------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o                      No x

As of  August 6, 2007 there were 4,707,196shares of common stock, $0.50 par value per share, issued and outstanding.

 

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**Tennessee Commerce Bancorp, Inc.**

Table of Contents
| **Part I**  | ** ** | **Financial Information**                                                                                                                                       |   |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|             |       |                                                                                                                                                            |   |
| Item 1.          |       | Financial Statements                                                                                                                                            |   |
|             |       |                                                                                                                                                            |   |
|             |       | Consolidated  Balance Sheets at June 30, 2007 (unaudited) and December 31, 2006                                                                       |   |
|             |       |                                                                                                                                                            |   |
|             |       | Consolidated  Statements of Income (unaudited) for the Six Months Ended June 30, 2007  and 2006 and for the Three Months Ended June 30, 2007 and 2006 |   |
|             |       |                                                                                                                                                            |   |
|             |       | Consolidated  Statements of Changes in Shareholders’ Equity (unaudited) for the Six Months  Ended June 30, 2007 and 2006                                   |   |
|             |       |                                                                                                                                                            |   |
|             |       | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2007  and 2006                                                             |   |
|             |       |                                                                                                                                                            |   |
|             |       | 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 COMMERCEBANCORP, INC.CONSOLIDATED BALANCE SHEETSJUNE 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006

(dollars in thousands except share data)
| ** **                                                                                                                                                                                                   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                   |       |                    |       |                        |       |
| Cash and due from  financial institutions                                                                                                                                                                    |       | $                       | 5,823      |                        | $          | 177 |   |
| Federal funds sold                                                                                                                                                                                           |       | 19,600                  |       | 13,820                      |       |
| Cash and cash  equivalents                                                                                                                                                                                   |       | 25,423                  |       | 13,997                      |       |
| Securities available  for sale                                                                                                                                                                               |       | 61,699                  |       | 56,943                      |       |
| Loans                                                                                                                                                                                                        |       | 652,520                 |       | 545,518                     |       |
| Allowance for loan  losses                                                                                                                                                                                   |       | (8,619                  | )          | (6,968                      | )          |
| Net loans                                                                                                                                                                                                    |       | 643,901                 |       | 538,550                     |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Premises and equipment,  net                                                                                                                                                                                 |       | 1,543                   |       | 1,633                       |       |
| Accrued interest  receivable                                                                                                                                                                                 |       | 5,291                   |       | 4,116                       |       |
| Restricted equity  securities                                                                                                                                                                                |       | 938                     |       | 633                         |       |
| Deferred tax asset                                                                                                                                                                                           |       | 1,861                   |       | 635                         |       |
| Other assets                                                                                                                                                                                                 |       | 10,736                  |       | 7,011                       |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                                 |       | $                       | 751,392    |                        | $          | 623,518 |   |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                               |       |                    |       |                        |       |
| Liabilities                                                                                                                                                                                                  |       |                    |       |                        |       |
| Deposits                                                                                                                                                                                                     |       |                    |       |                        |       |
| Non-interest  bearing                                                                                                                                                                                        |       | $                       | 22,865     |                        | $          | 17,001 |   |
| Interest-bearing                                                                                                                                                                                             |       | 660,520                 |       | 543,566                     |       |
| Total deposits                                                                                                                                                                                               |       | 683,385                 |       | 560,567                     |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Accrued interest  payable                                                                                                                                                                                    |       | 1,740                   |       | 1,728                       |       |
| Long-term  subordinated debt                                                                                                                                                                                 |       | 8,248                   |       | 8,248                       |       |
| Other  liabilities                                                                                                                                                                                           |       | 804                     |       | 1,751                       |       |
| Total  liabilities                                                                                                                                                                                           |       | 694,177                 |       | 572,294                     |       |
| Shareholders’ equity                                                                                                                                                                                    |       |                    |       |                        |       |
| Preferred stock,  no par value per share. Authorized 1,000,000 shares; none issued                                                                                                                           |       | —                  |       | —                      |       |
| Common stock,  $0.50 par value per share. Authorized 10,000,000 shares at June 30, 2007 and  December 31, 2006; Issued and outstanding 4,672,796 at June 30, 2007 and  4,451,674 December 31, 2006 |       | 2,336                   |       | 2,226                       |       |
| Additional  paid-in capital                                                                                                                                                                                  |       | 44,111                  |       | 40,755                      |       |
| Retained earnings                                                                                                                                                                                            |       | 11,547                  |       | 8,530                       |       |
| Accumulated  other comprehensive loss                                                                                                                                                                        |       | (779                    | )          | (287                        | )          |
| Total  shareholders’ equity                                                                                                                                                                             |       | 57,215                  |       | 51,224                      |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Total liabilities and  shareholders’ equity                                                                                                                                                             |       | $                       | 751,392    |                        | $          | 623,518 |   |

 

Note: The balance sheet presented above atDecember 31, 2006 has been derived from the audited consolidated financialstatements at that date but does not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.

See accompanying notes to consolidated financialstatements.

3

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TENNESSEE COMMERCEBANCORP, INC.CONSOLIDATED STATEMENTS OF INCOMESIX MONTHS ENDED JUNE 30, 2007 AND 2006THREE MONTHS ENDED JUNE 30, 2007 AND 2006(UNAUDITED)

(dollarsin thousands except share data)
| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                          | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income                                      |       |                                              |       |                                                |       |   |   |   |   |
| Loans, including fees                                |       | $                                                 | 25,985     |                                                | $          | 16,659 |   | $ | 13,886 |   | $ | 8,812 |   |
| Securities                                           |       | 1,587                                             |       | 943                                                 |       | 823 |   | 488 |   |
| Federal funds sold                                   |       | 251                                               |       | 156                                                 |       | 143 |   | 54 |   |
| Total interest income                                |       | 27,823                                            |       | 17,758                                              |       | 14,852 |   | 9,354 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Interest expense                                     |       |                                              |       |                                                |       |   |   |   |   |
| Deposits                                             |       | 15,273                                            |       | 8,723                                               |       | 8,047 |   | 4,721 |   |
| Other                                                |       | 319                                               |       | 337                                                 |       | 159 |   | 190 |   |
| Total interest expense                               |       | 15,592                                            |       | 9,060                                               |       | 8,206 |   | 4,911 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Net interest  income                                 |       | 12,231                                            |       | 8,698                                               |       | 6,646 |   | 4,443 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Provision for  loan losses                           |       | 3,000                                             |       | 2,000                                               |       | 1,500 |   | 1,000 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 9,231                                             |       | 6,698                                               |       | 5,146 |   | 3,443 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Non-interest  income                                 |       |                                              |       |                                                |       |   |   |   |   |
| Service charges on deposit accounts                  |       | 118                                               |       | 80                                                  |       | 57 |   | 31 |   |
| Gain on sale of loans                                |       | 1,280                                             |       | 612                                                 |       | 463 |   | 358 |   |
| Other                                                |       | 34                                                |       | (158                                                | )          | 90 |   | (100 | ) |
| Total non-interest income                            |       | 1,432                                             |       | 534                                                 |       | 610 |   | 289 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Non-interest  expense                                |       |                                              |       |                                                |       |   |   |   |   |
| Salaries and employee benefits                       |       | 3,238                                             |       | 2,505                                               |       | 1,766 |   | 1,305 |   |
| Occupancy and equipment                              |       | 512                                               |       | 390                                                 |       | 244 |   | 190 |   |
| Data processing fees                                 |       | 505                                               |       | 330                                                 |       | 279 |   | 173 |   |
| Professional fees                                    |       | 492                                               |       | 381                                                 |       | 254 |   | 190 |   |
| Other                                                |       | 965                                               |       | 628                                                 |       | 554 |   | 358 |   |
| Total non-interest expense                           |       | 5,712                                             |       | 4,234                                               |       | 3,097 |   | 2,216 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Income before  income taxes                          |       | 4,951                                             |       | 2,998                                               |       | 2,659 |   | 1,516 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Income tax  expense                                  |       | 1,934                                             |       | 1,157                                               |       | 1,048 |   | 584 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Net income                                           |       | $                                                 | 3,017      |                                                | $          | 1,841 |   | $ | 1,611 |   | $ | 932 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Earnings per  share (EPS):                           |       |                                              |       |                                                |       |   |   |   |   |
| Basic EPS                                            |       | $                                                 | 0.67       |                                                | $          | 0.57 |   | $ | 0.36 |   | $ | 0.29 |   |
| Diluted EPS                                          |       | 0.63                                              |       | 0.52                                                |       | 0.34 |   | 0.27 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding:                |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                |       | 4,517,133                                         |       | 3,240,619                                           |       | 4,502,985 |   | 3,240,674 |   |
| Diluted                                              |       | 4,818,619                                         |       | 3,549,680                                           |       | 4,788,889 |   | 3,533,632 |   |

 

Seeaccompanying notes to consolidated financial statements.

4

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TENNESSEE COMMERCEBANCORP, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYSIX MONTHS ENDED JUNE  30, 2007 AND 2006(UNAUDITED)

 (dollarsin thousands)
| ** **                                                            | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Balance at  December 31, 2005                                    |       | $                 | 1,619      |                             | $          | 21,401                            |       | $                                                     | 3,781      |                                  | $          | (371 | ) | $ | 26,430 |   |
| Comprehensive  income                                                 |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Net income                                                            |       | —            |       | —                           |       | 1,841                             |       | —                                                |       | 1,841                                 |       |
| Other comprehensive income, net of income taxes                       |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Unrealized losses on securities available for sale  during the period |       | —            |       | —                           |       | —                            |       | (550                                                  | )          | (550                                  | )          |
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
|  Total  comprehensive income                                     |       | —            |       | —                           |       | —                            |       | —                                                |       | 1,291                                 |       |
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
|  Stock  option transactions                                      |       | 1                 |       | 105                              |       | —                            |       | —                                                |       | 106                                   |       |
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Balance at  June 30, 2006                                        |       | $                 | 1,620      |                             | $          | 21,506                            |       | $                                                     | 5,622      |                                  | $          | (921 | ) | $ | 27,827 |   |
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Balance at  December 31, 2006                                    |       | $                 | 2,226      |                             | $          | 40,755                            |       | $                                                     | 8,530      |                                  | $          | (287 | ) | $ | 51,224 |   |
| Comprehensive  income                                                 |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Net income                                                            |       | —            |       | —                           |       | 3,017                             |       | —                                                |       | 3,017                                 |       |
| Other comprehensive income, net of income taxes                       |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Unrealized losses on securities available for sale  during the period |       | —            |       | —                           |       | —                            |       | (492                                                  | )          | (492                                  | )          |
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Total  comprehensive income                                           |       |              |       |                             |       |                              |       |                                                  |       | 2,525                                 |       |
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Stock option  transactions                                            |       | 110               |       | 3,356                            |       | —                            |       | —                                                |       | 3,466                                 |       |
|                                                                  |       |              |       |                             |       |                              |       |                                                  |       |                                  |       |
| Balance at  June 30, 2007                                        |       | $                 | 2,336      |                             | $          | 44,111                            |       | $                                                     | 11,547     |                                  | $          | (779 | ) | $ | 57,215 |   |

 

Seeaccompanying notes to consolidated financial statements.

5

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TENNESSEE COMMERCEBANCORP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSSIX MONTHS ENDED JUNE 30, 2007 AND 2006(UNAUDITED)

(dollarsin thousands)
| ** **                                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Operating  activities**                                                         |       |                                              |       |   |   |
| Net income                                                                        |       | $                                                 | 3,017      |   | $ | 1,841 |   |
| Adjustments to reconcile net income to net cash from  operating activities        |       |                                              |       |   |   |
| Depreciation                                                                      |       | 167                                               |       | 103 |   |
| Deferred loan fees                                                                |       | (261                                              | )          | 20 |   |
| Provision for loan losses                                                         |       | 3,000                                             |       | 2,000 |   |
| FHLB stock dividends                                                              |       | —                                            |       | (6 | ) |
| Stock-based compensation expense                                                  |       | —                                            |       | 81 |   |
| Deferred Income Tax                                                               |       | (924                                              | )          | (283 | ) |
| Net amortization of investment securities                                         |       | 6                                                 |       | 14 |   |
| Loss (gain) on sales of securities                                                |       | (10                                               | )          | — |   |
| Change in:                                                                        |       |                                              |       |   |   |
| Accrued interest payable                                                          |       | 12                                                |       | 127 |   |
| Accrued interest receivable                                                       |       | (1,175                                            | )          | (719 | ) |
| Other assets and liabilities                                                      |       | (4,672                                            | )          | (1,582 | ) |
| Net cash from operating activities                                                |       | (840                                              | )          | 1,596 |   |
|                                                                              |       |                                              |       |   |   |
| **Investing  activities**                                                         |       |                                              |       |   |   |
| Purchases of securities available for sale                                        |       | (17,987                                           | )          | (11,019 | ) |
| Proceeds from sales of securities available for sale                              |       | 11,275                                            |       | — |   |
| Proceeds from maturities, prepayments and calls of  securities available for sale |       | 1,166                                             |       | 745 |   |
| Net change in loans                                                               |       | (108,090                                          | )          | (86,331 | ) |
| Purchases of Federal Home Loan Bank Stock                                         |       | (305                                              | )          | (217 | ) |
| Net purchases of premises and equipment                                           |       | (77                                               | )          | (184 | ) |
| Net cash from investing activities                                                |       | (114,018                                          | )          | (97,006 | ) |
|                                                                              |       |                                              |       |   |   |
| **Financing  activities**                                                         |       |                                              |       |   |   |
| Net change in deposits                                                            |       | 122,818                                           |       | 94,004 |   |
| Net change in Fed Funds purchased and repurchase  agreements                      |       | —                                            |       | 5,000 |   |
| Proceeds from issuance of common stock                                            |       | —                                            |       | — |   |
| Proceeds from exercise of common stock options                                    |       | 1,714                                             |       | 25 |   |
| Excess tax benefit from option exercises                                          |       | 1,752                                             |       | — |   |
| Net cash from financing activities                                                |       | 126,284                                           |       | 99,029 |   |
|                                                                              |       |                                              |       |   |   |
| **Net  change in cash and cash equivalents**                                      |       | 11,426                                            |       | 3,619 |   |
|                                                                              |       |                                              |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 13,997                                            |       | 19,412 |   |
|                                                                              |       |                                              |       |   |   |
| **Cash  and cash equivalents at end of period**                                   |       | $                                                 | 25,423     |   | $ | 23,031 |   |
|                                                                              |       |                                              |       |   |   |
| **Supplemental  cash flow information:**                                          |       |                                              |       |   |   |
| Cash paid during period for interest                                              |       | $                                                 | 15,580     |   | $ | 8,933 |   |
| Cash paid during  period for income taxes                                         |       | 2,685                                             |       | 1,346 |   |

 

Seeaccompanying notes to consolidated financial statements.

6

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TENNESSEECOMMERCE BANCORP, INC.

Notes to Consolidated Financial Statements (unaudited)

Note 1— Basis of Presentation

Tennessee Commerce Bancorp, Inc. (the “Corporation”)is a holding company for Tennessee Commerce Bank (the “Bank”).  In March2005, the Corporation formed a wholly owned subsidiary, Tennessee Commerce BankStatutory Trust I (“Trust I”). The Bank and the Trust I are the onlysubsidiaries of the Corporation. The accompanying consolidated financialstatements include the accounts of the Corporation and the Bank. The Trust I isnot consolidated in accordance with FASB Interpretation No. 46 (revisedDecember 2003) Consolidation of Variable Interest Entities (FIN46R).Material intercompany accounts and transactions have been eliminated.

The unaudited consolidated financial statements as ofJune 30, 2007 and for the six and three month periods ended June 30, 2007 and2006 have been prepared in accordance with accounting principles generallyaccepted in the United States of America and in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X aspromulgated by the Securities and Exchange Commission (“SEC”), and in theopinion of management, include all adjustments, consisting of normal recurringadjustments, to present fairly the information included therein. They do notinclude all the information and notes required by generally accepted accountingprinciples for complete financial statements. Operating results for the six andthree month periods ended June 30, 2007 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2007. Forfurther information, refer to the consolidated financial statements andfootnotes thereto included in our Form 10-K for the year ended December 31,2006.

Note 2 — Earnings per Share of Common Stock

The factors used in the earnings per share computationfollow.

(dollarsin thousands except share data)
| ** **                                                                      | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2007**                                      | ** ** | **2006**                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Basic                                                                           |       |                                          |       |                                            |       |   |   |   |   |
| Net income                                                                      |       | $                                             | 3,017      |                                            | $          | 1,841 |   | $ | 1,611 |   | $ | 932 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Weighted average  common shares outstanding                                     |       | 4,517,133                                     |       | 3,240,619                                       |       | 4,502,985 |   | 3,240,674 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Basic earnings  per common share                                                |       | $                                             | 0.67       |                                            | $          | 0.57 |   | $ | 0.36 |   | $ | 0.29 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Diluted                                                                         |       |                                          |       |                                            |       |   |   |   |   |
| Net income                                                                      |       | $                                             | 3,017      |                                            | $          | 1,841 |   | $ | 1,611 |   | $ | 932 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Weighted average  common shares outstanding for basic earnings per common share |       | 4,517,133                                     |       | 3,240,619                                       |       | 4,502,985 |   | 3,240,674 |   |
| Add: Dilutive  effects of assumed exercises of stock options                    |       | 301,486                                       |       | 309,061                                         |       | 285,904 |   | 292,958 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Average shares  and dilutive potential common shares                            |       | 4,818,619                                     |       | 3,549,680                                       |       | 4,788,889 |   | 3,533,632 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Diluted earnings per common share                                               |       | $                                             | 0.63       |                                            | $          | 0.52 |   | $ | 0.34 |   | $ | 0.27 |   |

 

Nooptions were antidilutive.

7

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Note 3— Stock Compensation

On January 1, 2006, we adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), that addressesthe accounting for share-based payment transactions in which a company receivesemployee services in exchange for equity instruments. SFAS No. 123(R)eliminates the ability to account for share-based compensation transactions, aswe formerly did, using the intrinsic value method as prescribed by AccountingPrinciples Board, or APB, Opinion No. 25, “Accounting for Stock Issued toEmployees,” and generally requires that such transactions be accounted forusing a fair-value-based method and recognized as expense in the accompanyingconsolidated statement of income.

We adopted SFAS No. 123(R) using themodified prospective method which requires the application of the accountingstandard as of January 1, 2006. The accompanying consolidated financialstatements as of and for the periods ending June 30, 2007 reflect the impact ofadopting SFAS No. 123(R). In accordance with the modified prospectivemethod, the consolidated financial statements for prior periods have not beenrestated to reflect, and do not include, the impact ofSFAS No. 123(R).

Stock-based compensation expense recognized during theperiod is based on the value of the portion of stock-based payment awards thatis ultimately expected to vest. Stock-based compensation expense recognized inthe accompanying consolidated statements of income for the periods ending June30, 2007 included any compensation expense for stock-based payment awardsvesting during the period based on the grant date fair value estimated inaccordance with SFAS No. 123(R). As stock-based compensation expenserecognized in the accompanying statement of income for the period ending June30, 2007 is based on awards ultimately expected to vest, it has been reducedfor estimated forfeitures. SFAS No. 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.

For the six months ended June 30, 2007, there were200,000 stock option grants on June 13, 2007 and all other options outstandingwere vested prior to that period. There was no stock-based expense recognizedfor the six months ended June 30, 2007.

8

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A summary of the activity in the stock option plan isas follows :
| ** **                                        | ** ** | **Number** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Contractual  Remaining  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value (1)  (000’s)** | ** ** |
|---------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Outstanding at December 31, 2006                  |       | 871,092    |       | $                                       | 8.77       |                                                                  |       |                                                   |       |   |
| Granted                                           |       | 200,000    |       | 25.00                                   |       |                                                                  |       |                                                   |       |
| Exercised                                         |       | (221,122   | )          | 7.77                                    |       |                                                                  |       |                                                   |       |
| Forfeited or expired                              |       | —     |       |                                    |       |                                                                  |       |                                                   |       |
| Outstanding at June 30, 2007                      |       | 849,970    |       | $                                       | 12.86      |                                                                  | 6.20       |                                                   | $          | 10,531 |   |
| Outstanding and expected to vest at June 30, 2007 |       | 849,970    |       | $                                       | 12.86      |                                                                  | 6.20       |                                                   | $          | 10,531 |   |
| Options exercisable at June 30, 2007              |       | 649,970    |       | $                                       | 9.12       |                                                                  | 5.03       |                                                   | $          | 10,484 |   |

 

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(1)   Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying options and the quoted price of our stock of $25.25 percommon share for the 849,970 options outstanding and 649,970 optionsexercisable that were in-the-money at June 30, 2007.

The estimated fair values are computed using theBlack-Scholes option valuation model, using the following weighted-averageassumptions as of grant date shown below. 
| ** **               | ** ** | **2007**  | ** ** | **2005**     | ** ** | **2004**     | ** ** | **2003**     | ** ** |
|--------------------------|------------|-----------|------------|--------------|------------|--------------|------------|--------------|------------|
|                     |       |      |       |         |       |         |       |         |       |
| Risk-free  interest rate |       | 4.94      | %          | 3.96         | %          | 3.23         | %          | 3.82         | %          |
| Expected option  life    |       | 3.5 years |       | 5 years |       | 7 years |       | 7 years |       |
| Dividend yield           |       | 0.0       | %          | 0.0          | %          | 0.0          | %          | 0.0          | %          |

 

The options granted in 2007 had an estimated fair valueof $5.75. The options granted during 2005 were granted in July, August andNovember and had an estimated fair value of $3.96, $4.07 and $4.26respectively. The weighted average fair value of options granted during theyear was $5.75 for 2007, $4.03 for 2005, $2.23 for 2004 and $2.29 for 2003. Nooptions were granted in 2006.

9

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Note 4— Trust Preferred Securities

In March 2005, we formed a financing subsidiary,Tennessee Commerce Statutory Trust I, a Delaware statutory trust, or Trust I.In March 2005, Trust I issued and sold 8,000 of Trust I’s Fixed/Floatingrate capital securities, with a liquidation amount of $1,000 per capitalsecurity, to First Tennessee Bank National Association. At the same time, weissued to Trust I $8,248,000 of Fixed/Floating rate junior subordinateddeferrable interest debentures due 2035. The debentures pay a 6.73% fixed ratepayable quarterly for the first five years and a floating rate based on a 3month Libor rate plus a margin thereafter. In accordance with Financial AccountingStandards Board (“FASB”) Interpretation No. 46 (revisedDecember 2003) Consolidation of Variable Interest Entities (FIN46R), TrustI is not consolidated. We report as liabilities the subordinated debenturesissued by the Corporation and held by Trust I.

Note 5— Stock Issuance

On July 3, 2006and on July 28, 2006, we issued 1,000,000 and 150,000 shares, respectively, ofour common stock. After the issuance, there were 4,390,674 shares of commonstock outstanding.

 Note 6 – New Accounting Standards

InJuly 2006, the FASB issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109*(FIN 48), which prescribes a recognition threshold and measurement attributefor a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  FIN48 is effective for fiscal years beginning after December 15, 2006.  Our adoption of FIN 48 effective January 2007did not have a material effect on our consolidated financial statements.

InFebruary of 2007, the FASB issued Statement of Financial Accounting StandardNo. 159 (“SFAS 159”), The Fair Value Option for Financial Assets andFinancial Liabilities, which gives entities the option to measure eligiblefinancial assets, and financial liabilities at fair value on an instrument byinstrument basis, that are otherwise not permitted to be accounted for at fairvalue under other accounting standards. The election to use the fair valueoption is available when an entity first recognizes a financial asset orfinancial liability. Subsequent changes in fair value must be recorded inearnings. This statement is effective as of the beginning of a company’s firstfiscal year after November 15, 2007. We are in the process of analyzingthe impact of SFAS 159.

10

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward-Looking Statements**

Management’s discussion about us and management’sanalysis of our operations and prospects, and other matters, may includeforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 and other provisions of federal and statesecurities laws.  Although we believe that the assumptions underlying suchforward-looking statements contained in this report are reasonable, any of theassumptions could be inaccurate and, accordingly, there can be no assurancethat the forward-looking statements included herein will prove to beaccurate.  The use of such words as expect, anticipate, believe, estimate,foresee, may, might, will, intend, could, would, plan, forecast, and comparableterms should be understood by the reader to indicate that the statement is “forward-looking”and thus subject to change in a manner that can be unpredictable.  Theseforward-looking statements include, without limitation, those relating to ourbusiness bank strategy, competition, deposit base, earning asset ratio, averageasset per employee ratio, loan sale transactions, staffing efficiency, taxrates, non-accrual loans, allowance for loan losses, liquidity, our ability toattract loans and deposits and our future growth and profitability. We cautionyou not to place undue reliance on the forward-looking statements contained inthis report, in that actual results could differ materially from thoseindicated in such forward-looking statements as a result of a variety offactors. These factors include, but are not limited to economic and socialconditions, competition for loans, mortgages, and other financial services andproducts, changes in interest rates, unforeseen changes in liquidity, resultsof operations, and financial conditions affecting our customers, as well asother risks that cannot be accurately quantified or completelyidentified.  Many factors affecting our financial condition andprofitability, including changes in economic conditions, the volatility ofinterest rates, political events and competition from other providers offinancial services simply cannot be predicted.  These factors areunpredictable and beyond our control, so earnings may fluctuate from period toperiod.  The purpose of this type of information is to provide readers withinformation relevant to understanding and assessing our financial condition andresults of operations, and not to predict the future or to guaranteeresults.  We are unable to predict the types of circumstances, conditions,and factors that can cause anticipated results to change.  We undertake noobligation to publish revised forward-looking statements to reflect theoccurrence of changes or unanticipated events, circumstances, or results thatoccur after the date of this report.

**Corporation Overview**

Tennessee CommerceBancorp, Inc., headquartered in Franklin, Tennessee, is the bank holdingcompany for Tennessee Commerce Bank.  Organized in January 2000,Tennessee Commerce Bank has a focused strategy that serves the banking needs ofsmall to medium-sized businesses, entrepreneurs and professionals in theNashville metropolitan statistical area, or the Nashville MSA, as well as thefunding needs of certain national and regional equipment vendors and financialservices companies.  We call this strategy our “business bank” strategy.We primarily conduct business from a single location in the Cool Springscommercial area of Franklin, Tennessee, fifteen miles south of Nashville. Franklin is in Williamson County, one of the most rapidly growing counties inthe nation. According to the U.S. Census Bureau, Williamson County ranked59th out of the top 100 fastest growing counties in the nation fromJuly 2004 to July 2005. We also operate a loan production office inBirmingham, Alabama, which we opened in February 2006 and which is staffedwith one senior lending officer.

11

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We offer a fullrange of competitive retail and commercial banking services to local customersin the Nashville MSA.  Our deposit services include a broad offering ofchecking accounts, savings accounts, money market investment accounts,certificates of deposits, and retirement 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 cardsand debit cards.  We offer our local customers free courier services,access to third-party automated teller machines, or ATMs, and state of the artelectronic banking. We have trust powers but do not have a trust department.

**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 us from our competitors in efforts toattract loans and deposits of local small to medium-sized businesses andnational and regional equipment vendors and financial services companies. Further, the rapid growth within the Nashville MSA, along with several bankmergers and acquisitions, has left many business owners without significant bankingrelationships. We seek to take advantage of this opportunity.

We do not competebased on the traditional definition of “convenience” and currently have noplans to develop a comprehensive branch bank network.  For us, convenienceis created by technology and by a free courier service for local customerswhich transports deposits directly from the business location to thebank.  We conduct business primarily from a single banking office with noteller line, drive-through window or extended banking hours.  We competeby providing responsive and personalized service to meet customer needs. We provide free electronic banking and cash management tools and on-sitetraining for business customers.  We compete for consumer business byproviding superior products, attractive deposit rates, free internet bankingservices, and access to a third party regional ATM network. We primarily targetservice, manufacturing, and professional customers and avoid retail businesseswith high transaction volume.

The business bankstrategy is highlighted by differences between the financial statements of ourbank and more traditional financial institutions. The business bank modelcreates a high degree of leverage.  By avoiding the investment andmaintenance costs of a typical branch network, we are able to maintain earningassets at a higher level than peer institutions.  Management targets aminimum earning asset ratio of 97% compared to the average of 85% to 90% forall FDIC-insured banks and at June 30, 2007 we had an earning asset ratio of96.51%.

The business bankmodel is also highly efficient.  We target the non-retail sector of thecommercial market, which is characterized by lower levels of transactions andprocessing costs.  The commercial customer mix and the strategic outsourcingof non-customer functions, such as data processing, information technology andinternal audit, allow us to operate with a smaller, more highly-trainedstaff.  Management targets an average asset per employee ratio of $7.5million, compared to the average ratio of approximately $4.3 million assets peremployee for middle Tennessee banks at the end of the first quarter of 2007. AtJune 30, 2007, assets per employee were $12.5 million.

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In addition to ourWilliamson County and Nashville MSA focus, we have also developed an expertisein indirect lending that allows us to access a national market. Thetransactions are fixed rate monthly installment loans originated through athird party equipment vendor or financial services company. Our national marketlending is divided into two programs based on loan size. In the first program,through an established network of vendors and financial service companies, wehave opportunities to finance business asset secured loan transactions fornational middle-market and investment grade companies. In the second program, adifferent network of vendors and financial service companies located inTennessee, Alabama, Georgia, California and Michigan partner with us infinancing smaller transactions (generally $150,000 or less per transaction).Both national market programs provide geographic and collateral diversity forthe portfolio.

**Our Market Area**

The Bank’s primary market area is Davidson County andWilliamson County in Tennessee.  In Davidson County, as of December 31,2006, there were 25 banks and no savings and loan institutions, with at least194 offices actively engaged in banking activities, including 10 majorstate-wide financial institutions.  Total deposits held by banks inDavidson County as of December 31, 2006, were approximately $15.9billion.  In Williamson County, as of December 31, 2006, there were 21banks and 2 savings and loan institutions, with at least 79 offices activelyengaged in banking activities, including 9 major state-wide financial institutions. Total deposits held by banks and savings and loan associations in WilliamsonCounty as of December 31, 2006, were approximately $4.1 billion.  Inaddition, there are numerous credit unions, finance companies, and otherfinancial services providers.

Demographic information published by SNL Financialshows a total estimated population of 159,022 for Williamson County in 2006.That is a 25.57% increase from 126,638 in 2000. The estimated number ofhouseholds in the county in 2006 is 56,994, up from 44,725 in 2000, averaging2.79 persons per household. In 2006, the median household income was $88,410,while per capita income was $44,023.  At the end of 2006, the unemploymentrate was 2.6%.

Demographic information published by SNL Financialshows an estimated population of 596,829 for Davidson County in 2006. That is a4.73% increase over the population of 569,891 in 2000. The estimated number ofhouseholds in the county in 2006 is 250,628, averaging 2.38 persons perhousehold. In 2006, the median household income was $50,420, while per capitaincome was $29,695.  At the end of 2006, the unemployment rate was 3.6%.

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**Overviewof Operating Results for the Three and Six Months ended June 30, 2007 and June30, 2006 and Financial Condition at June 30, 2007 and December 31, 2006.**

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

The results of operations for the quarter ended June30, 2007, compared to the quarter ended June 30, 2006 reflected a 72.85%increase in net income and a 25.93% increase in diluted earnings per share. Theincrease in earnings resulted primarily from a 49.58% increase in net interestincome due to higher average loan balances. The increased net interest incomewas partially offset by increases in non-interest expense. For the six monthsended June 30, 2007, net income was $3,017, an increase of $1,176 or 63.88%compared to net income of $1,841 for the same period in 2006. Diluted earningsper share increased $0.11 per share or 21.15% for the six months ended June 30,2007 compared to the same period in 2006. The six months ended June 30, 2007,reflected a continuation of the Bank’s trend of rapid asset growth, increasingby $127,874 or 20.51% from $623,518 at December 31, 2006 to $751,392 atJune 30, 2007. Net loans increased by 19.56% or $105,351 from December 31,2006 to June 30, 2007, while total deposits increased by 21.91% or $122,818during that same period.

**Comparison of Operating Results forthe Three Months ended June 30, 2007 and June 30, 2006**

**Net Income** -Net income for the quarter ended June 30, 2007 was $1,611, an increase of $679or 72.85%, compared to net income of $932 for the quarter ended June 30,2006.  The increase is attributable to a 49.58% increase in net interestincome from $4,443 for the quarter ended June 30, 2006 to $6,646 for the sameperiod in 2007. The increase of $2,203 in net interest income was the result ofour overall growth, including a 50.27% increase in net loan balances at June30, 2007 compared to the same date in 2006. The increase in net interest incomewas partially offset by increased non-interest expense. Non-interest expenseincreased by 39.76% to $3,097 for the three month period ended June 30, 2007compared to $2,216 for the same period in 2006. The increase in non-interestexpense was due to an increase in personnel and general operating expenses dueto our growth.

(dollars in thousands)
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2007**                                        | ** ** | **2006**   | ** ** | **% Change** | ** ** |
|                                                |       |                                            |       |       |       |   |   |
| Interest income                                     |       | $                                               | 14,852     |       | $          | 9,354 |   | 58.78 | % |
| Interest expense                                    |       | 8,206                                           |       | 4,911      |       | 67.09 |   |
| Net interest income                                 |       | 6,646                                           |       | 4,443      |       | 49.58 |   |
| Provision for  loan losses                          |       | 1,500                                           |       | 1,000      |       | 50.00 |   |
| Net interest income after provision for loan losses |       | 5,146                                           |       | 3,443      |       | 49.46 |   |
| Non-interest  income                                |       | 610                                             |       | 289        |       | 111.07 |   |
| Non-interest  expense                               |       | 3,097                                           |       | 2,216      |       | 39.76 |   |
| Net income before taxes                             |       | 2,659                                           |       | 1,516      |       | 75.40 |   |
| Income tax  expense                                 |       | 1,048                                           |       | 584        |       | 79.45 |   |
| Net income                                          |       | $                                               | 1,611      |       | $          | 932 |   | 72.85 | % |

 

14

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**NetInterest Income** - Net interest income for the quarterended June 30, 2007 was $6,646 compared to $4,443 for the same period in 2006,a gain of $2,203 or 49.58%.  The increase of $2,203 in net interest incomewas the result of our overall growth, including a 50.27% increase in net loanbalances at June 30, 2007 compared to the same date in 2006.

**Provisionfor Loan Losses** - The provision for loan losses for thethree months ended June 30, 2007 was $1,500, an  increase of $500, or50.00%, above the provision of $1,000 expensed in the same period in2006.  This increase was primarily due to the increase in loan volume. Theprovision is discussed as it relates to the allowance for loan losses in thefollowing section titled “Comparison of Financial Condition at June 30, 2007and December 31, 2006.” At June 30, 2007, the loan loss reserve of $8,619was 1.32% of gross loans of $652,520.

**Non-interestIncome** - Non-interest income increased by 111.07% or$321, from $289 in the quarter ended June 30, 2006 to $610 for the sameperiod in 2007. The increase was primarily due to gain on loan sales.  Thegain on loan sales was $463 and $358 for the three month periods ended June 30,2007 and 2006, respectively.

**Non-interestExpense** - Non-interest expense for the three months endedJune 30, 2007 was $3,097, an increase of $881 or 39.76%, over the $2,216expensed in the same period in 2006.  Approximately 52.33% of the increasewas due to increases in personnel. At June 30, 2007, the Bank had 60 fulltime employees. For the three months ending June 30, 2007 our efficiency ratioimproved to 42.68% from 46.83% for the same period in 2006.

**Comparisonof Operating Results for the Six Months ended June 30, 2007 and June 30, 2006**

**NetIncome** - Net income for the six months ended June 30,2007 was $3,017 an increase of $1,176 or 63.88%, compared to net income of$1,841 for the six months ended June 30, 2006.  The increase isattributable to a 40.62% increase in net interest income from $8,698 for thesix months ended June 30, 2006 to $12,231 for the same period in 2007. Theincrease of $3,533 in net interest income was the result of our overall growth,including a 53.67% increase in average net loan balances at June 30, 2007compared to the same date in 2006. This positive effect was partially offset bya 50.00% increase in the provision for loan losses, from $2,000 during the sixmonths ended June 30, 2006 to $3,000 for the same period in 2007. Also,non-interest expense increased by 34.91% to $5,712 for the six month periodended June 30, 2007 compared to $4,234 for the same period in 2006. Theincrease in the provision for loan losses was primarily the result of fundingthe allowance for loan losses to match our significant loan growth. Theincrease in non-interest expense was due to the increase in personnel andgeneral operating expenses due to our growth.

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(dollars inthousands)
| ** **                                          | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2007**                                      | ** ** | **2006**   | ** ** | **% Change** | ** ** |
|                                                |       |                                          |       |       |       |   |   |
| Interest income                                     |       | $                                             | 27,823     |       | $          | 17,758 |   | 56.68 | % |
| Interest expense                                    |       | 15,592                                        |       | 9,060      |       | 72.10 |   |
| Net interest income                                 |       | 12,231                                        |       | 8,698      |       | 40.62 |   |
| Provision for loan losses                           |       | 3,000                                         |       | 2,000      |       | 50.00 |   |
| Net interest income after provision for loan losses |       | 9,231                                         |       | 6,698      |       | 37.82 |   |
| Non-interest income                                 |       | 1,432                                         |       | 534        |       | 168.16 |   |
| Non-interest expense                                |       | 5,712                                         |       | 4,234      |       | 34.91 |   |
| Net income before taxes                             |       | 4,951                                         |       | 2,998      |       | 65.14 |   |
| Income tax expense                                  |       | 1,934                                         |       | 1,157      |       | 67.16 |   |
| Net income                                          |       | $                                             | 3,017      |       | $          | 1,841 |   | 63.88 | % |

 

**NetInterest Income** - Net interest income for the six monthsended June 30, 2007 was $12,231 compared to $8,698 for the same period in 2006,a gain of $3,533 or 40.62%.  The increase in net interest income waslargely attributable to strong loan growth.  The average net loan balancefor the six months ended June 30 increased by 53.67% or $204,833 from $381,668for that period in 2006 to $586,501 for the same period in 2007. Loan growthwas matched by an increase in average interest bearing deposits from $383,217for the six months ended June 30, 2006 to $590,119 for the same period in 2007,an increase of $206,902 or 54.00%.

**NetInterest Margin**- The net interest margin decreased from4.08% for the six months ended June 30, 2006 to 3.76% for the same period in2007 due to an increase in the cost of funds which offset an increase in theyield on earning assets.  Interest income increased by $10,065 or 56.68%,from $17,758 during the six months ended June 30, 2006 to $27,823 during thesame period in 2007. The increase was primarily due to increased loanvolume.  Average earning assets increased from $428,762 in the six monthsended June 30, 2006 to $655,285 in the same period in 2007, an increase of$226,523 or 52.83%.  The increase in earning assets was primarily due toloan growth. Average loan balances increased by $204,833 or 53.67%.  Theaverage yield on earning assets increased from 8.34% in the six months endedJune 30, 2006 to 8.55% in the same period in 2007. The increase in the cost offunds, as a percentage of average balances was primarily due to increases inshort term interest rates paid for deposits in order to support our loangrowth. Between June 30, 2006 and June 30, 2007, the Federal Reserve OpenMarket Committee, or FOMC, did not raise the federal funds rate.

Interest expenseincreased from $9,060 in the six months ended June 30, 2006, to $15,592 in thesix months ended June 30, 2007. The $6,532, or 72.10%, increase in expense wasdue to increases in the volume of deposits as well as rate increases. Averageinterest earning liabilities increased by $206,305 or 52.43%.  The cost offunds increased from 4.64% in the six months ended June 30, 2006 to 5.24%during the same six months in 2007, an increase of 60 basis points.

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*AverageBalance Sheets, Net Interest Income, and Changes in Interest Income andInterest Expense*

The following table shows the average daily balancesof each principal category of our assets, liabilities and stockholders’ equity,and an analysis of net interest income, and the change in interest income andinterest expense segregated into amounts attributable to changes in volume andchanges in rates for the six month periods ended June 30, 2007 and 2006. Thetable is presented on a tax equivalent basis, if applicable.
| ** **                           | ** ** | **Six Months Ended June 30,  2007** | ** ** | **Six Months Ended June 30,  2006** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **Average**                                             | ** ** | ** **                                              | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(dollars in thousands)** | ** ** | **Balance**                                             | ** ** | **Interest**                                            | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                           |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
|                                 |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest earning assets              |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Securities (taxable) (1)             |       | $                                                       | 59,423     |                                                    | $          | 1,587 |   | 5.33 | % | $ | 39,298 |   | $ | 943 |   | 4.74 | % |
| Loans (2) (3)                   |       | 586,501                                                 |       | 25,985                                                  |       | 8.93 | % | 381,668 |   | 16,659 |   | 8.80 | % |
| Federal funds sold                   |       | 9,361                                                   |       | 251                                                     |       | 5.41 | % | 7,796 |   | 156 |   | 4.04 | % |
| Total interest earning assets        |       | 655,285                                                 |       | 27,823                                                  |       | 8.55 | % | 428,762 |   | 17,758 |   | 8.34 | % |
|                                 |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Non-interest earning assets          |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Cash and due from banks              |       | 5,529                                                   |       |                                                    |       |   |   | 3,978 |   |   |   |   |   |
| Net fixed assets and equipment       |       | 1,593                                                   |       |                                                    |       |   |   | 813 |   |   |   |   |   |
| Accrued interest and other assets    |       | 14,183                                                  |       |                                                    |       |   |   | 8,578 |   |   |   |   |   |
|                                 |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total assets                         |       | $                                                       | 676,590    |                                                    |       |   |   |   | $ | 442,131 |   |   |   |   |   |
|                                      |            |                                                         |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |   |    |    |   |   |   |   |    |   |    |    |   |   |
|-------------------------------------------------|--------|---------|---------|--------|--------|--------|--------|---------|--------|---------|---------|--------|--------|
|                                            |   |    |    |   |   |   |   |    |   |    |    |   |   |
| Interest bearing liabilities                    |   |    |    |   |   |   |   |    |   |    |    |   |   |
| Deposits (other than demand)                    |   | $       | 590,119 |   | $      | 15,273 |   | 5.22    | %      | $       | 383,217 |   | $      | 8,723 |   | 4.59 | % |
| Federal funds purchased                         |   | 1,430   |    | 41     |   | 5.78   | %      | 1,414   |   | 38      |    | 5.42   | %      |
| Subordinated debt                               |   | 8,248   |    | 278    |   | 6.80   | %      | 8,861   |   | 299     |    | 6.80   | %      |
| Total interest bearing liabilities              |   | 599,797 |    | 15,592 |   | 5.24   | %      | 393,492 |   | 9,060   |    | 4.64   | %      |
|                                            |   |    |    |   |   |   |   |    |   |    |    |   |   |
| Non-interest bearing liabilities                |   |    |    |   |   |   |   |    |   |    |    |   |   |
| Non-interest bearing demand deposits            |   | 19,957  |    |   |   |   |   | 18,999  |   |    |    |   |   |
| Other liabilities                               |   | 3,159   |    |   |   |   |   | 2,464   |   |    |    |   |   |
| Shareholders’ equity                       |   | 53,677  |    |   |   |   |   | 27,176  |   |    |    |   |   |
|                                            |   |    |    |   |   |   |   |    |   |    |    |   |   |
| Total liabilities and shareholders’ equity |   | $       | 676,590 |   |   |   |   |    | $      | 442,131 |    |   |   |   |   |
|                                            |   |    |    |   |   |   |   |    |   |    |    |   |   |
| Net Interest Spread                             |   | 3.31    | %       |   |   |   |   | 3.70    | %      |    |    |   |   |
|                                            |   |    |    |   |   |   |   |    |   |    |    |   |   |
| Net Interest Margin                             |   | 3.76    | %       |   |   |   |   | 4.08    | %      |    |    |   |   |
|                                                 |        |         |         |        |        |        |        |         |        |         |         |        |        |  |  |  |  |

 

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(1)         Unrealizedloss of $579 and $820 is excluded from yield calculation for the six monthsended June 30, 2007 and 2006, respectively.

(2)         Non-accrualloans are included in average loan balances and loan fees of $1,928 and $1,196are included in interest income for the six months ended June 30, 2007 and2006, respectively.

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

18

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The following tableoutlines the components of the net interest margin for the six month periodsended June 30, 2007 and 2006 and identifies the impact of changes in volume andthe changes in rate.
| ** **                           | ** ** | **June 30, 2007 change from  June 30, 2006 due to:** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Volume**                                                                                   | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                                 |       |                                                                                         |       |   |   |   |   |
| Interest income                      |       |                                                                                         |       |   |   |   |   |
| Loans                                |       | $                                                                                            | 9,071      |   | $ | 255 |   | $ | 9,326 |   |
| Securities — taxable (1)        |       | 521                                                                                          |       | 123 |   | 644 |   |
| Federal funds sold                   |       | 35                                                                                           |       | 60 |   | 95 |   |
| Total interest income                |       | 9,627                                                                                        |       | 438 |   | 10,065 |   |
|                                 |       |                                                                                         |       |   |   |   |   |
| Interest expense                     |       |                                                                                         |       |   |   |   |   |
| Deposits (other than demand)         |       | 5,224                                                                                        |       | 1,326 |   | 6,550 |   |
| Federal funds purchased              |       | —                                                                                       |       | 3 |   | 3 |   |
| Subordinated debt                    |       | (21                                                                                          | )          | — |   | (21 | ) |
| Total interest expense               |       | 5,203                                                                                        |       | 1,329 |   | 6,532 |   |
|                                 |       |                                                                                         |       |   |   |   |   |
| Net interest income                  |       | $                                                                                            | 4,424      |   | $ | (891 | ) | $ | 3,533 |   |

 

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(1)          Unrealizedloss of $529 and $820 is excluded from yield calculation for the six monthsended June 30, 2007 and 2006, respectively.

**Provisionfor Loan Losses** - The provision for loan losses for thesix months ended June 30, 2007 was $3,000, an increase of $1,000, or 50.00%,above the provision of $2,000 expensed in the same period in 2006.  Thisincrease was primarily due to significant loan growth. The provision is discussedas it relates to the allowance for loan losses in the following section titled “Comparisonof Financial Condition at June 30, 2007 and December 31, 2006.” At June 30,2007, the loan loss reserve of $8,619 was 1.32% of gross loans of $652,520.

**Non-interestIncome** - We earned $49 in mortgage origination feesduring the six months ended June 30, 2007 compared to $36 earned during thesame period in 2006, an increase of $13 or 36.11%.  We recognized $10 onthe sale of securities in the six months ended June 30, 2007 compared with nogain for the same period in 2006.

The Bank earned $1,280 onloan sale transactions in the six months ended June 30, 2007, a 109.15%increase compared to $612 during the same period in 2006. This increase wasprimarily due to demand from purchasers. Management will continue to considerloan sale transactions if the opportunity for a reasonable return is available.

19

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**Non-interestExpense** - Non-interest expense for the six months endedJune 30, 2007, was $5,712, an increase of $1,478 or 34.91%, over the $4,234expensed in the same period in 2006.  Approximately 49.59% of the increasewas due to the additional employee expenses. At June 30, 2007, we had 60 fulltime employees. Assets per employee were $10.5 million at June 30, 2006and $12.5 million at June 30, 2007. Management targets $7.5 million per fulltime employee as a measure of staffing efficiency.

Our efficiency ratio forthe six months ending June 30, 2007 and 2006 was 41.81% and 45.86%,respectively, an improvement of 405 percentage points.

Efficiency Ratio

(dollars in thousands )
| ** **           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|
| ** **           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Non-interest expense |       | $                                             | 5,712      |   | $ | 4,234 |   |
|                 |       |                                          |       |   |   |
| Net interest income  |       | 12,231                                        |       | 8,698 |   |
| Non-interest income  |       | 1,432                                         |       | 534 |   |
| Total Revenues       |       | $                                             | 13,663     |   | $ | 9,232 |   |
|                 |       |                                          |       |   |   |
| Efficiency Ratio     |       | 41.81                                         | %          | 45.86 | % |

 

**IncomeTaxes** - Our effective tax rate for the six months endedJune 30, 2007 was 39.06% compared to 38.59% for the six months ended June 30,2006. Management anticipates that tax rates in future periods will approximatethe rates paid in 2006.

**Comparisonof Financial Condition at June 30, 2007 and December 31, 2006**

**Assets-**Total assets at June 30, 2007 were $751,392, an increase of $127,874, or20.51%, over total assets of $623,518 at December 31, 2006. Loan growthwas the primary reason for the increase.  At June 30, 2007, net loansequaled $643,901, up $105,351, or 19.56% over the December 31, 2006 totalnet loans of $538,550. The cash and cash equivalents balance increased by$11,426 between  December 31, 2006 andJune 30, 2007, primarily as a result of higher “due from” balances and anincrease in Federal funds sold.

Our business bank modelof operation results in a higher level of earning assets than our peerbanks.  Earning assets are defined as assets which earn interestincome.  Earning assets include short-term investments, the investmentportfolio, and net loans.  We maintain a higher level of earning assetsbecause fewer assets are allocated to facilities, cash, and “due from” bankaccounts used for transaction processing.  Earning assets at June 30, 2007were $725,200, or 96.51% of total assets of $751,392.  Earning assets atDecember 31, 2006 were $610,322, or 97.88% of total assets of $623,518.

20

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**Loans**- We had total net loans of $643,901 at June 30, 2007. The following table setsforth the composition of our loan portfolio at June 30, 2007 andDecember 31, 2006:
| **(dollars in thousands)**   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real estate:                           |       |                    |       |                        |       |
| Construction                           |       | $                       | 88,103     |                        | $          | 74,482 |   |
| 1 to 4 family residential              |       | 28,620                  |       | 22,873                      |       |
| Other                                  |       | 108,644                 |       | 83,985                      |       |
| Commercial, financial and agricultural |       | 415,286                 |       | 353,996                     |       |
| Consumer                               |       | 3,685                   |       | 3,246                       |       |
| Other                                  |       | 8,182                   |       | 6,936                       |       |
|                                   |       |                    |       |                        |       |
| Total loans                            |       | 652,520                 |       | 545,518                     |       |
| Less: allowance for loan losses        |       | (8,619                  | )          | (6,968                      | )          |
|                                   |       |                    |       |                        |       |
| Net loans                              |       | $                       | 643,901    |                        | $          | 538,550 |   |

 

The following table sets forth the percentagecomposition of our loan portfolio by type at June 30, 2007 andDecember 31, 2006:
| ** **                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real estate:                           |       |                    |       |                        |       |
| Construction                           |       | 13.50                   | %          | 13.65                       | %          |
| 1 to 4 family residential              |       | 4.39                    | %          | 4.19                        | %          |
| Other                                  |       | 16.65                   | %          | 15.40                       | %          |
| Commercial, financial and agricultural |       | 63.65                   | %          | 64.89                       | %          |
| Consumer                               |       | 0.56                    | %          | 0.60                        | %          |
| Other                                  |       | 1.25                    | %          | 1.27                        | %          |
|                                   |       |                    |       |                        |       |
| Total                                  |       | 100.00                  | %          | 100.00                      | %          |

 

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The following table setsforth the composition of our commercial loan portfolio by source at June 30,2007 and December 31, 2006:
| ** **                           | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)** | ** ** | **Amount**              | ** ** | **%**                       | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                 |       |                    |       |                        |       |   |   |   |   |
| Direct funding                       |       | $                       | 174,262    |                        | 41.97      | % | $ | 151,692 |   | 42.85 | % |
| Indirect funding:                    |       |                    |       |                        |       |   |   |   |   |
| Large                                |       | 105,750                 |       | 25.46                       | %          | 88,569 |   | 25.02 | % |
| Small                                |       | 135,274                 |       | 32.57                       | %          | 113,735 |   | 32.13 | % |
| Total                                |       | $                       | 415,286    |                        | 100.00     | % | $ | 353,996 |   | 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 as non-accrual, any unpaid interest is reversed against currentincome.  Interest is included in income thereafter only to the extentreceived in cash.  The loan remains in a non-accrual classification untilsuch time as the loan is brought current, when it may be returned to accrualclassification.

The following tablepresents information regarding non-accrual, past due and restructured loans atJune 30, 2007 and December 31, 2006:
| **(dollars in thousands)**                                                                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Non-accrual  loans:                                                                                      |       |                    |       |                        |       |
| Number                                                                                                   |       | 83                      |       | 60                          |       |
| Amount                                                                                                   |       | $                       | 3,877      |                        | $          | 2,689 |   |
|                                                                                                     |       |                    |       |                        |       |
| Accruing loans  which are contractually past due 90 days or more as to principal and interest  payments: |       |                    |       |                        |       |
| Number                                                                                                   |       | 37                      |       | 18                          |       |
| Amount                                                                                                   |       | $                       | 1,408      |                        | $          | 940 |   |
|                                                                                                     |       |                    |       |                        |       |
| Loans defined as  “troubled debt restructurings”:                                              |       |                    |       |                        |       |
| Number                                                                                                   |       | 3                       |       | 3                           |       |
| Amount                                                                                                   |       | $                       | 1,104      |                        | $          | 1,144 |   |

 

As of June 30, 2007 and December 31, 2006, thereare no loans classified for regulatory purposes as doubtful or substandard thathave not been disclosed in the above table, which (i) represent or resultfrom trends or uncertainties which management reasonably expects willmaterially impact future operating results, liquidity, or capital resources, or(ii) represent material credits about which management is aware of anyinformation which causes management to have serious doubts as to the ability ofsuch borrowers to comply with the loan repayment terms.

22

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**Allowance for loan losses** -The maintenance of an adequate allowance for loan losses, “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 principles (GAAP), our stated policies and procedures, andregulatory guidance.

It ismanagement’s intent to maintain an ALL which is adequate to absorb current andestimated losses which are inherent in a loan portfolio.  The historicalloss ratio (net charge-offs as a percentage of average loans) was 0.23% for thesix months ended June 30, 2007 and 0.23% for the six months ended June 30,2006. The ALL as a percentage of the outstanding loans at the end of the periodwas 1.32% at June 30, 2007 and 1.27% at June 30, 2006.

Ananalysis of our loss experience is furnished in the following table for the sixmonths ended June 30, 2007 and the same period ended June 30, 2006:
| **(dollars in thousands)**              | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Allowance for  loan losses at beginning of period |       | $                       | 6,968      |                    | $          | 4,399 |   |
| Charge-offs:                                      |       |                    |       |                    |       |
| Real estate:                                      |       |                    |       |                    |       |
| Construction                                      |       | —                  |       | —                  |       |
| 1 to 4 family residential                         |       | —                  |       | —                  |       |
| Other                                             |       | —                  |       | —                  |       |
| Commercial, financial and agricultural            |       | 1,516                   |       | 1,027                   |       |
| Consumer                                          |       | 11                      |       | 6                       |       |
| Total Charge-offs                                 |       | 1,527                   |       | 1,033                   |       |
|                                              |       |                    |       |                    |       |
| Recoveries:                                       |       |                    |       |                    |       |
| Real estate:                                      |       |                    |       |                    |       |
| Construction                                      |       | —                  |       | —                  |       |
| 1 to 4 family residential                         |       | —                  |       | —                  |       |
| Other                                             |       | —                  |       | —                  |       |
| Commercial, financial and agricultural            |       | 178                     |       | 121                     |       |
| Consumer                                          |       | —                  |       | 21                      |       |
| Total Recoveries                                  |       | 178                     |       | 142                     |       |
|                                              |       |                    |       |                    |       |
| Net Charge-offs                                   |       | 1,349                   |       | 891                     |       |
|                                              |       |                    |       |                    |       |
| Provision for  loans charged to expense           |       | 3,000                   |       | 2,000                   |       |
| Allowance for loan  losses at end of period       |       | $                       | 8,619      |                    | $          | 5,508 |   |

 

23

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| ** **                                                                                        | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net charge-offs  as a percentage of average total loans outstanding during the period             |       | 0.23                    | %          | 0.23                    | %          |
|                                                                                              |       |                    |       |                    |       |
| Ending allowance for  loan losses as a percentage of total loans outstanding at end of the period |       | 1.32                    | %          | 1.27                    | %          |

 

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.

**Securities**- The securities portfolio at June 30, 2007 was $61,699 compared to $56,943 atDecember 31, 2006.  We view the securities portfolio as a source ofincome and liquidity.  The securities portfolio was 8.21% of total assetsat June 30, 2007 and 9.13% of total assets at December 31, 2006.

**Liabilities-** We depend on a growing deposit base to fund loan and other asset growth.We compete for local deposits by offering attractive products with premiumrates.  We also obtain funding in the wholesale deposit market which isaccessed by means of an electronic bulletin board.  This electronic marketlinks banks and acquirers of funds to credit unions, school districts, laborunions, and other organizations with excess liquidity. The process is highlyefficient and the average rate is generally less than rates paid in the localmarket. Wholesale deposits are categorized as “Purchased Time Deposits” on thedetail of deposits shown in the table below.

Total deposits at June30, 2007 were $683,385, up $122,818 or 21.91% over the December 31,2006  total deposits of $560,567. Totalaverage deposits during the six months ending June 30, 2007, were $610,076, anincrease of $207,860, or 51.68% over the total average deposits of $402,216during the six months ending June 30, 2006. Average non-interest bearing depositsincreased by $958, or 5.04%, from $18,999 in the six months ending June 30,2006, to $19,957 in the six months ending June 30, 2007.

24

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The following table setsforth average deposit balances for the six months ended June 30, 2007 and 2006and the average rates paid on those balances:

Deposits
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **(dollars in thousands)**  | ** ** | **Average  Balance**                              | ** ** | **Average  Rate  Paid (1)** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid (1)** | ** ** |
| Types of Deposits:                    |       |                                              |       |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                                 | 19,957     |   | — |   | $ | 18,999 |   | — |   |
| Interest-bearing demand  deposits     |       | 6,316                                             |       | 3.85 | % | 5,544 |   | 3.50 | % |
| Money market accounts                 |       | 114,915                                           |       | 5.21 | % | 55,102 |   | 5.04 | % |
| Savings accounts                      |       | 7,777                                             |       | 2.70 | % | 15,084 |   | 2.66 | % |
| IRA accounts                          |       | 13,221                                            |       | 5.18 | % | 4,628 |   | 4.79 | % |
| Purchased time deposits               |       | 224,472                                           |       | 5.25 | % | 165,921 |   | 4.43 | % |
| Time deposits                         |       | 223,418                                           |       | 5.32 | % | 136,938 |   | 4.85 | % |
| Total  deposits                       |       | $                                                 | 610,076    |   |   |   | $ | 402,216 |   |   |   |

 

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(1)             Rateis annualized

**SubordinatedDebt** - In March 2005, we formed a financingsubsidiary, Tennessee Commerce Statutory Trust I, a Delaware statutory trust,or 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), Trust I is not consolidated. We report asliabilities the subordinated debentures issued by us and held by Trust I.

**Off-BalanceSheet Arrangements**

We are a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of our customers. At June 30, 2007, we hadunfunded loan commitments outstanding of $109 million and standby letters ofcredit and financial guarantees of $10.4 million. Those instruments involve, tovarying degrees, elements of credit risk in excess of the amount recognized inthe balance sheet.  The contract or notional amounts of those instrumentsreflect the extent of our involvement in those particular financialinstruments. We use the same credit policies in making commitments andconditional obligations as we do for on-balance sheet instruments.

Because these commitmentsgenerally have fixed expiration dates and many will expire without being drawnupon, the total commitment level does not necessarily represent future cashrequirements. If needed, we can liquidate Federal funds sold or securitiesavailable for sale or borrow and purchase Federal funds from other financialinstitutions where we have available federal fund lines totaling $27 million.

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# **Liquidity/ Capital Resources**

**Liquidity**- Of primary importance to depositors, creditors and regulators is the abilityto have readily available funds sufficient to repay fully maturingliabilities.  We are subject to general FDIC guidelines which do notrequire a minimum level of liquidity. Liquidity requirements can also be metthrough short-term borrowings or the disposition of short-term assets which aregenerally matched to correspond to the maturity of liabilities. Managementbelieves its liquidity ratios meet the general FDIC guidelines and we haveassets and borrowing capacity to provide adequate liquidity. Management doesnot know of any trends or demands which are reasonably likely to result inliquidity increasing or decreasing in any material manner.

**CapitalResources -**Our objective is to maintain a level ofcapitalization that is sufficient to take advantage of profitable growthopportunities while meeting regulatory requirements.****To continue to grow, we must increase capital by generatingearnings, issuing equities, borrowing funds, or a combination of thoseactivities. In 2004, we issued equity securities increasing capital by $8.5million.  In March 2005, our subsidiary Trust I issued $8 million inTrust Preferred Securities that meet the capital guidelines to be classified asTier I capital as explained below. On July 3, 2006, and July 28, 2006, weissued 1,000,000 shares and 150,000 shares respectively of our common stock inorder to raise $19.1 million in capital 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 of Tier Icapital which is generally common stockholders’ equity less goodwill and TierII capital which is primarily a portion of the allowance for loan losses andcertain qualifying debt instruments. In determining risk-based capitalrequirements, assets are assigned risk-weights of 0% to 100%, dependingprimarily on the regulatory assigned levels of credit risk associated with suchassets. Off-balance sheet items are considered in the calculation ofrisk-adjusted assets through conversion factors established by the regulators.The framework for calculating risk-based capital requires banks and bankholding companies to meet the regulatory minimums of 4% Tier I and 8%total risk-based capital. In 1990, regulators added a leveraged computation tothe capital requirements, comparing Tier I capital to total average assetsless goodwill.

The Federal DepositInsurance Corporation Improvement Act of 1991 (“FDICIA”) established fivecapital categories for banks and bank holding companies. The bank regulatorsadopted regulations defining these five capital categories inSeptember 1992. Under these new regulations each bank is classified intoone of the five categories based on its level of risk-based capital as measuredby Tier I capital, total risk-based capital, and Tier I leverageratios and its supervisory ratings.

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At June 30, 2007 andDecember 31, 2006, the Bank’s and our 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 to**    | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                              | ** ** | ** **        | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **be considered** | ** ** |
| ** **                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **well-**              | ** ** |
| ** **                                              | ** ** | **2007**          | ** ** | **2006**              | ** ** | **adequacy**         | ** ** | **capitalized**        | ** ** |
|                                                    |       |              |       |                  |       |                 |       |                   |       |
| Tier 1 leverage ratio                                   |       |              |       |                  |       |                 |       |                   |       |
| Tennessee Commerce Bank                                 |       | 8.74              | %          | 8.78                  | %          | 4.00                 | %          | 5.00                   | %          |
| Tennessee Commerce Bancorp, Inc.                   |       | 9.33              | %          | 9.94                  | %          | 4.00                 | %          | n/a                    |       |
|                                                    |       |              |       |                  |       |                 |       |                   |       |
| Tier 1 “core” capital to risk-weighted assets |       |              |       |                  |       |                 |       |                   |       |
| Tennessee Commerce Bank                                 |       | 9.05              | %          | 9.23                  | %          | 4.00                 | %          | 6.00                   | %          |
| Tennessee Commerce Bancorp, Inc.                   |       | 9.67              | %          | 10.45                 | %          | 4.00                 | %          | n/a                    |       |
|                                                    |       |              |       |                  |       |                 |       |                   |       |
| Total capital to risk-weighted assets                   |       |              |       |                  |       |                 |       |                   |       |
| Tennessee Commerce Bank                                 |       | 10.30             | %          | 10.45                 | %          | 8.00                 | %          | 10.00                  | %          |
| Tennessee Commerce Bancorp, Inc.                   |       | 10.92             | %          | 11.68                 | %          | 8.00                 | %          | n/a                    |       |

 

Based solely on our analysis of federal bankingregulatory categories, it appears on June 30, 2007 and December 31, 2006 thatwe and the Bank fall within the “well capitalized” categories under theregulations.

**Impactof Inflation and Changing Prices** - The financialstatements and related financial data presented herein have been prepared inaccordance with U.S. generally accepted accounting principles which require themeasurement of financial position and operating results in terms of historicaldollars without considering the changes in the relative purchasing power ofmoney over time and due to inflation. The impact of inflation on operations ofthe Bank is reflected in increased operating costs. Unlike most industrialcompanies, virtually all of the assets and liabilities of the Bank are monetaryin nature. As a result, interest rates have a more significant impact on theBank’s performance than the effects of general levels of inflation. Interestrates do not necessarily move in the same direction or in the same magnitude asthe price of goods and services.

27

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**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

Like all financialinstitutions, we are subject to market risk from changes in interest rates.Interest rate risk is inherent in the balance sheet 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 ofeconomists and other experts, and understanding the current status of our balancesheet. Our annual budget reflects the anticipated rate environment for the nexttwelve months. The asset liability committee conducts a quarterly analysis ofthe rate sensitivity position and reports its results to our board ofdirectors.

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, and the balance sheetis “asset sensitive”. Conversely, if the value of liabilities exceeds the valueof assets, the ratio is less than one and the balance sheet is “liabilitysensitive”. Our internal policy requires management to maintain the gap withina range of 0.75 to 1.25.

The model measuresscheduled maturities in periods of three months, four to twelve months, one tofive years and over five years. The chart below illustrates our rate sensitiveposition at June 30, 2007. Management uses the one year gap as the appropriatetime period for setting strategy.

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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                                               |       | $            | 19,600     |       | $          | —     |       | $          | —     |             | $          | —     |       | $ | — |   | $ | 19,600 |   |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |       |       |             |       |       |       |
| U.S. government agencies                                         |       | —       |       | —     |       | —     |       | 13,582     |       | 42,017           |       | 55,599     |       |
| Mortgage-backed securities                                       |       | —       |       | 863        |       | 2,396      |       | 2,003      |       | 838              |       | 6,100      |       |
| Total securities                                                 |       |         |       | 863        |       | 2,396      |       | 15,585     |       | 42,855           |       | 61,699     |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Total loans                                                      |       | 203,535      |       | 65,406     |       | 175,011    |       | 193,644    |       | 14,925           |       | 652,521    |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Total Interest Earning Assets                                    |       | 223,135      |       | 66,269     |       | 177,407    |       | 209,229    |       | 57,780           |       | 733,820    |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Other Assets                                                     |       | —       |       | —     |       | —     |       | —     |       | 17,572           |       | 17,572     |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Total Assets                                                     |       | $            | 223,135    |       | $          | 66,269     |       | $          | 177,407    |             | $          | 209,229    |       | $ | 75,352 |   | $ | 751,392 |   |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Interest Bearing Liabilities                                     |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Interest checking                                                |       | $            | 5,358      |       | $          | —     |       | $          | —     |             | $          | 1,021      |       | $ | — |   | $ | 6,379 |   |
| Money market and savings                                         |       | 90,147       |       | —     |       | —     |       | 38,634     |       | —           |       | 128,781    |       |
| Time deposits                                                    |       | —       |       | 91,642     |       | 346,685    |       | 87,033     |       | —           |       | 525,360    |       |
| Total deposits                                                   |       | 95,505       |       | 91,642     |       | 346,685    |       | 126,688    |       | —           |       | 660,520    |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Subordinated Debt                                                |       | —       |       | —     |       | —     |       | —     |       | 8,248            |       | 8,248      |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Total Interest Bearing Liabilities                               |       | 95,505       |       | 91,642     |       | 346,685    |       | 126,688    |       | 8,248            |       | 668,768    |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Other Liabilities                                                |       | —       |       | —     |       | —     |       | —     |       | 25,409           |       | 25,409     |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Shareholders’ Equity                                        |       | —       |       | —     |       | —     |       | —     |       | 57,215           |       | 57,215     |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Total Liabilities and Shareholders’ Equity                  |       | $            | 95,505     |       | $          | 91,642     |       | $          | 346,685    |             | $          | 126,688    |       | $ | 90,872 |   | $ | 751,392 |   |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Rate Sensitive Gap by period                                     |       | $            | 127,630    |       | $          | (25,373    | )          | $          | (169,278   | )                | $          | 82,541     |       | $ | 49,532 |   |   |   |
| Cumulative Gap                                                   |       |         |       | $          | 102,257    |       | $          | (67,021    | )          | $                | 15,520     |       | $          | 65,052 |   |   |   |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Cumulative Gap as a percent of Total Assets                      |       |         |       | 13.61      | %          | -8.92      | %          | 2.07       | %          | 8.66             | %          |       |       |
|                                                             |       |         |       |       |       |       |       |       |       |             |       |       |       |
| Rate sensitive assets / Rate sensitive liabilities  (cumulative) |       | 2.34         |       | 1.55       |       | 0.87       |       | 1.02       |       | 1.10             |       |       |       |

 

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From June 30, 2006 toJune 30, 2007, the Federal Reserve Open Market Committee has not raisedinterest rates. Management has positioned the balance sheet to be essentiallyneutral for asset and liability sensitivity. At June 30, 2007, our one year GAPwas 0.87.

The interest rate risk model that defines the GAPposition also performs a “rate shock” test of the balance sheet using anearnings simulation model and an economic value of equity model. The rate shocktest measures the impact on the net interest margin and the economic value ofequity of an immediate shift in interest rates in either direction.

Our earnings simulation model measures the impact ofchanges in interest rates on net interest income. To limit interest rate risk,we have a guideline for our earnings at risk which set a limit on the varianceof net interest income to less than a 5% percent decline for a  100 basis point change up or down in ratesfrom management’s flat interest rate forecast over the next twelve months. AtJune 30, 2007, we are in compliance with our current guidelines.

Our economic value of equity model measures the extentthat estimated economic values of our assets, liabilities and off-balance sheetitems will change as a result of interest rate changes. To help limit interestrate risk, we have a guideline stating that for an instantaneous 100 basispoint change in interest rates up or down, the economic value of equity willnot decrease by more than 10 percent from the base case. At June 30, 2007,we are in compliance with our current guidelines.

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

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**ITEM4. CONTROLS AND PROCEDURES.**

Evaluation of DisclosureControls 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 are effective toallow timely decisions regarding disclosure in the reports that we file orsubmit to the Securities and Exchange Commission under the Exchange Act.

Changes in InternalControls and Procedures

There were no changes inour internal controls over financial reporting during the quarter ended June30, 2007, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**PART II:OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS.**

None.

**ITEM1A. RISK FACTORS.**

There were no materialchanges to our risk factors included in Part I, Item 1A of our annualreport on  Form 10-K for the yearended December 31, 2006, as filed with the Securities and ExchangeCommission on April 2, 2007.

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**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

(a)   None.

(b)   None.

(c)   None.

Our ability to declareand pay dividends on our common stock is limited by law and we may be unable topay future dividends. We derive our income solely from dividends on the sharesof common stock of the bank. The bank’s ability to declare and pay dividends tous is limited by its obligations to maintain sufficient capital and by othergeneral restrictions on its dividends that are applicable to banks that areregulated by the FDIC and the Tennessee Department of Financial Institutions.In addition, the Federal Reserve Board may impose restrictions on our abilityto pay dividends on our common stock. As a result, we cannot assure ourshareholders that we will declare or pay dividends on shares of our commonstock in the future.

**ITEM3. DEFAULTS UPON SENIOR SECURITIES.**

(a)   None.

(b)   None.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

(a)          Theannual meeting of shareholders (the”Annual Meeting”) of the Corporation washeld June 8, 2007. In addition to the election of directors, the proposals describedin section “ (c) “ below were considered by shareholders at the Annual Meeting.

(b)         Notapplicable.

(c)          Thefollowing proposals were considered by shareholders at the Annual Meeting:

Proposal 1– Approval of the Tennessee Commerce Bancorp, Inc. 2007 Equity Plan

|           | ** ** | **Votes**   | ** ** | **Broker**  | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 1,508,807 |       | 361,204     |       | 22,980      |       | 1,220,585 |   |

 

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Proposal 2– Election of Class II Directors

The following Directorswere re-elected:
|                         | ** ** | **Votes** | ** ** |
|-------------------------|------------|-----------|------------|
| ** **              | ** ** | **For**   | ** ** | **Withheld** | ** ** |
| H. Lamar Cox            |       | 2,944,380 |       | 169,196 |   |
| William W. McInnes      |       | 3,067,151 |       | 46,425 |   |
| Paul W. Dierksen        |       | 3,067,151 |       | 46,425 |   |
| Thomas R. Miller        |       | 3,062,891 |       | 50,685 |   |
| Dennis L. Grimaud       |       | 3,067,151 |       | 46,425 |   |
| Darrel E. Reifschneider |       | 3,067,151 |       | 46,425 |   |

 

Proposal 3– Ratification of the appointment of KraftCPA’s, PLLC as the Corporation’sindependent accountants and auditors for the fiscal year 2007
|           | ** ** | **Votes**   | ** ** | **Broker**  | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 3,109,436 |       | 940         |       | 3,200       |       | — |   |

 

(d)   None.

**ITEM5. OTHER INFORMATION.**

(a)   None.

(b)   None.

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**ITEM6. EXHIBITS.**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                           |
| 2.1              |       | Articles of  Share Exchange of Tennessee Commerce Bank and Tennessee Commerce  Bancorp, Inc. (1)                                                                          |
|             |       |                                                                                                                                                                           |
| 2.2              |       | Plan of Share Exchange  of Tennessee Commerce Bank and Tennessee Commerce Bancorp, Inc. (1)                                                                               |
|             |       |                                                                                                                                                                           |
| 3.1              |       | Charter of  Tennessee Commerce Bancorp, Inc. (1)                                                                                                                          |
|             |       |                                                                                                                                                                           |
| 3.2              |       | Bylaws of  Tennessee Commerce Bancorp, Inc. (1)                                                                                                                           |
|             |       |                                                                                                                                                                           |
| 10.1             |       | Tennessee  Commerce Bancorp, Inc. 2007 Equity Plan *                                                                                                                           |
|             |       |                                                                                                                                                                           |
| 31.1             |       | Certification of  Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 * |
|             |       |                                                                                                                                                                           |
| 31.2             |       | Certification of  Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Exchange  Act, as adopted 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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| (1)    | Previously filed as an Exhibit to Tennessee  Commerce Bancorp, Inc.’s Form 10 as filed with the Securities and  Exchange Commission on April 29, 2005 and incorporated by reference  herein. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                  |
| *      | Filed herewith.                                                                                                                                                                                                       |

 

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SIGNATURES

In accordance with the requirements of the ExchangeAct, the Registrant caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                      | Tennessee  Commerce  Bancorp, Inc. |                                  |
|----------------------|-----------------------------------------|---------------------------------------|
|                 | (Registrant)                            |                                  |
|                 |                                    |                                  |
|                 |                                    |                                  |
| August 14, 2007 |                                    | /s/ Arthur F.  Helf                   |   |
| (Date)               |                                    | Arthur F. Helf                        |   |
|                 |                                    | Chairman and  Chief Executive Officer |   |
|                 |                                    |                                  |   |
|                 |                                    |                                  |   |
| August 14, 2007      |                                    | /s/ George W.  Fort                   |   |
| (Date)               |                                    | George W. Fort                        |   |
|                 | Chief Financial  Officer                |                                  |

 

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