**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

 

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

 

**FOR THE QUARTERLY PERIODENDED SEPTEMBER 30, 2006**

** **

**Commission File Number000-51281**

** **

**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 and Zip Code)

** **

**(615) 599-2274**

(Registrant’s Telephone Number, Including Area Code)

 

**Not Applicable**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x                        Noo

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                        Nox

 

Asof  November 8, 2006 therewere 4,451,674 shares of common stock, $0.50 par value per share, issuedand outstanding.

 

 

----

**Tennessee Commerce Bancorp, Inc.**

Table of Contents
| **Part I**  | **Financial Information**                                                                                                                                                  |   | 3      |   |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|             |                                                                                                                                                                       |   |   |   |
| Item 1.          | Financial Statements                                                                                                                                                       |   | 3      |   |
|             |                                                                                                                                                                       |   |   |   |
|             | Consolidated  Balance Sheets at September 30, 2006 (unaudited) and December 31,  2005                                                                            |   | 3      |   |
|             |                                                                                                                                                                       |   |   |   |
|             | Consolidated  Statements of Income (unaudited) for the Nine Months Ended September 30,  2006 and 2005 and for the Three Months Ended September 30, 2006 and 2005 |   | 4      |   |
|             |                                                                                                                                                                       |   |   |   |
|             | Consolidated Statements of Changes in Shareholders’ Equity  (unaudited) for the Nine Months Ended September 30, 2006 and 2005                                         |   | 5      |   |
|             |                                                                                                                                                                       |   |   |   |
|             | Consolidated  Statements of Cash Flows (unaudited) for the Nine Months Ended September 30,  2006 and 2005                                                                  |   | 6      |   |
|             |                                                                                                                                                                       |   |   |   |
|             | Notes to Consolidated Financial Statements (unaudited)                                                                                                                     |   | 7      |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                |   | 10     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                |   | 23     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 4.          | Controls and  Procedures                                                                                                                                                   |   | 26     |   |
|             |                                                                                                                                                                       |   |   |   |
| **Part II** | **Other Information**                                                                                                                                                      |   | 26     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 1.          | Legal Proceedings                                                                                                                                                          |   | 26     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 1A.         | Risk Factors                                                                                                                                                               |   | 26     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                               |   | 28     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 3.          | Defaults Upon  Senior Securities                                                                                                                                           |   | 28     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 4.          | Submission of  Matters to a Vote of Security Holders                                                                                                                       |   | 28     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 5.          | Other Information                                                                                                                                                          |   | 28     |   |
|             |                                                                                                                                                                       |   |   |   |
| Item 6.          | Exhibits                                                                                                                                                                   |   | 29     |   |
|             |                                                                                                                                                                       |   |   |   |
| Signatures       |                                                                                                                                                                       | 30     |   |

 

2

----

**PART I:FINANCIAL INFORMATION**

**ITEM 1: FINANCIALSTATEMENTS**

TENNESSEE COMMERCEBANCORP, INC.CONSOLIDATED BALANCE SHEETSSEPTEMBER 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005

(dollars in thousandsexcept share data)
| ** **                                                                                                                                                                                                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                |       |                         |       |                        |       |
| Cash and due from  financial institutions                                                                                                                                                                                 |       | $                            | 9,669      |                        | $          | 6,877 |   |
| Federal funds sold                                                                                                                                                                                                        |       | 19,168                       |       | 12,535                      |       |
| Cash and cash  equivalents                                                                                                                                                                                                |       | 28,837                       |       | 19,412                      |       |
| Securities available  for sale                                                                                                                                                                                            |       | 48,909                       |       | 31,992                      |       |
| Loans                                                                                                                                                                                                                     |       | 490,778                      |       | 348,586                     |       |
| Allowance for loan  losses                                                                                                                                                                                                |       | (6,199                       | )          | (4,399                      | )          |
| Net loans                                                                                                                                                                                                                 |       | 484,579                      |       | 344,187                     |       |
|                                                                                                                                                                                                                      |       |                         |       |                        |       |
| Premises and equipment,  net                                                                                                                                                                                              |       | 1,677                        |       | 769                         |       |
| Accrued interest  receivable                                                                                                                                                                                              |       | 3,398                        |       | 2,148                       |       |
| Restricted equity  securities                                                                                                                                                                                             |       | 623                          |       | 383                         |       |
| Deferred tax asset                                                                                                                                                                                                        |       | 685                          |       | 490                         |       |
| Other assets                                                                                                                                                                                                              |       | 5,856                        |       | 4,659                       |       |
|                                                                                                                                                                                                                      |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                                              |       | $                            | 574,564    |                        | $          | 404,040 |   |
|                                                                                                                                                                                                                      |       |                         |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                            |       |                         |       |                        |       |
| Liabilities                                                                                                                                                                                                               |       |                         |       |                        |       |
| Deposits                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Non-interest  bearing                                                                                                                                                                                                     |       | $                            | 22,236     |                        | $          | 33,372 |   |
| Interest-bearing                                                                                                                                                                                                          |       | 492,107                      |       | 334,333                     |       |
| Total deposits                                                                                                                                                                                                            |       | 514,343                      |       | 367,705                     |       |
|                                                                                                                                                                                                                      |       |                         |       |                        |       |
| Accrued interest  payable                                                                                                                                                                                                 |       | 1,469                        |       | 1,126                       |       |
| Long-term  subordinated debt                                                                                                                                                                                              |       | 8,248                        |       | 8,248                       |       |
| Other  liabilities                                                                                                                                                                                                        |       | 1,233                        |       | 531                         |       |
| Total  liabilities                                                                                                                                                                                                        |       | 525,293                      |       | 377,610                     |       |
| Shareholders’ equity                                                                                                                                                                                                 |       |                         |       |                        |       |
| Preferred stock,  no par value. Authorized 1,000,000 shares; none issued                                                                                                                                                  |       | —                       |       | —                      |       |
| Common stock, $0.50  par value. Authorized 10,000,000 shares at September 30, 2006 and 5,000,000  at December 31, 2005; Issued and outstanding 4,420,674 at September 30,  2006 and 3,238,674 December 31, 2005 |       | 2,210                        |       | 1,619                       |       |
| Additional  paid-in capital                                                                                                                                                                                               |       | 40,338                       |       | 21,401                      |       |
| Retained  earnings                                                                                                                                                                                                        |       | 6,952                        |       | 3,781                       |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                     |       | (229                         | )          | (371                        | )          |
| Total  shareholders’ equity                                                                                                                                                                                          |       | 49,271                       |       | 26,430                      |       |
|                                                                                                                                                                                                                      |       |                         |       |                        |       |
| Total liabilities and  shareholders’ equity                                                                                                                                                                          |       | $                            | 574,564    |                        | $          | 404,040 |   |

 

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

 

See accompanying notes to consolidated financialstatements.

3

----

 

TENNESSEE COMMERCEBANCORP, INC.CONSOLIDATED STATEMENTS OF INCOMENINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005(UNAUDITED)

(dollars in thousands except share data)
| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                | ** ** | **2005**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income                                      |       |                                                    |       |                                                     |       |   |   |   |   |
| Loans, including fees                                |       | $                                                       | 26,943     |                                                     | $          | 15,827 |   | $ | 10,284 |   | $ | 6,075 |   |
| Securities                                           |       | 1,529                                                   |       | 649                                                      |       | 586 |   | 243 |   |
| Federal funds sold                                   |       | 286                                                     |       | 118                                                      |       | 130 |   | 55 |   |
| Total interest income                                |       | 28,758                                                  |       | 16,594                                                   |       | 11,000 |   | 6,373 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Interest expense                                     |       |                                                    |       |                                                     |       |   |   |   |   |
| Deposits                                             |       | 14,421                                                  |       | 6,309                                                    |       | 5,698 |   | 2,628 |   |
| Other                                                |       | 513                                                     |       | 289                                                      |       | 176 |   | 139 |   |
| Total interest expense                               |       | 14,934                                                  |       | 6,598                                                    |       | 5,874 |   | 2,767 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Net interest  income                                 |       | 13,824                                                  |       | 9,996                                                    |       | 5,126 |   | 3,606 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Provision for  loan losses                           |       | 3,150                                                   |       | 2,800                                                    |       | 1,150 |   | 1,000 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 10,674                                                  |       | 7,196                                                    |       | 3,976 |   | 2,606 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Non-interest  income                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Service charges on deposit accounts                  |       | 80                                                      |       | 79                                                       |       | 58 |   | 25 |   |
| Mortgage banking                                     |       | 61                                                      |       | 75                                                       |       | 25 |   | 36 |   |
| Gain on sale of loans                                |       | 1,179                                                   |       | 624                                                      |       | 567 |   | 184 |   |
| Other                                                |       | (196                                                    | )          | 6                                                        |       | (60 | ) | (36 | ) |
| Total non-interest income                            |       | 1,124                                                   |       | 784                                                      |       | 590 |   | 209 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Non-interest  expense                                |       |                                                    |       |                                                     |       |   |   |   |   |
| Salaries and employee benefits                       |       | 3,853                                                   |       | 2,644                                                    |       | 1,348 |   | 856 |   |
| Occupancy and equipment                              |       | 628                                                     |       | 447                                                      |       | 238 |   | 159 |   |
| Data processing fees                                 |       | 507                                                     |       | 337                                                      |       | 177 |   | 111 |   |
| Professional fees                                    |       | 514                                                     |       | 275                                                      |       | 133 |   | 113 |   |
| Other                                                |       | 1,134                                                   |       | 828                                                      |       | 506 |   | 304 |   |
| Total non-interest expense                           |       | 6,636                                                   |       | 4,531                                                    |       | 2,402 |   | 1,543 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Income before  income taxes                          |       | 5,162                                                   |       | 3,449                                                    |       | 2,164 |   | 1,272 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Income tax  expense                                  |       | 1,991                                                   |       | 1,446                                                    |       | 834 |   | 552 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Net income                                           |       | $                                                       | 3,171      |                                                     | $          | 2,003 |   | $ | 1,330 |   | $ | 720 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Earnings per  share (EPS):                           |       |                                                    |       |                                                     |       |   |   |   |   |
| Basic EPS                                            |       | $                                                       | 0.88       |                                                     | $          | 0.62 |   | $ | 0.31 |   | $ | 0.22 |   |
| Diluted EPS                                          |       | 0.81                                                    |       | 0.57                                                     |       | 0.29 |   | 0.21 |   |
|                                                 |       |                                                    |       |                                                     |       |   |   |   |   |
| Weighted average  shares outstanding:                |       |                                                    |       |                                                     |       |   |   |   |   |
| Basic                                                |       | 3,611,077                                               |       | 3,238,674                                                |       | 4,339,913 |   | 3,238,674 |   |
| Diluted                                              |       | 3,928,473                                               |       | 3,485,719                                                |       | 4,662,978 |   | 3,497,201 |   |

 

Seeaccompanying notes to consolidated financial statements.

4

----

 

TENNESSEECOMMERCE BANCORP, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYNINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005(UNAUDITED)

 

(dollars in thousands except share data)
| ** **                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                          | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**              | ** ** | **Total**              | ** ** |
| ** **                                                                          | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Earnings**  | ** ** | **Comprehensive**      | ** ** | **Shareholders’** | ** ** |
| ** **                                                                          | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
| Balance at  December 31, 2004                                                  |       | $          | 1,619      |           | $          | 21,401        |       | $                      | 714        |                   | $          | (134 | ) | $ | 23,600 |   |
| Comprehensive  income                                                               |       |       |       |           |       |          |       |                   |       |                   |       |
| Net income                                                                          |       | —     |       | —         |       | 2,003         |       | —                 |       | 2,003                  |       |
| Other comprehensive income, net of income taxes                                     |       |       |       |           |       |          |       |                   |       |                   |       |
| Unrealized losses on securities available for sale  during the period               |       | —     |       | —         |       | —        |       | (91                    | )          | (91                    | )          |
| Reclassification adjustment for gains included in  net income, net of $1 in tax     |       | —     |       | —         |       | —        |       | 3                      |       | 3                      |       |
|                                                                                |       |       |       |           |       |          |       |                   |       |                   |       |
| Total  comprehensive income                                                         |       | —     |       | —         |       | —        |       | —                 |       | 1,915                  |       |
|                                                                                |       |       |       |           |       |          |       |                   |       |                   |       |
| Balance at  September 30, 2005                                                 |       | $          | 1,619      |           | $          | 21,401        |       | $                      | 2,717      |                   | $          | (222 | ) | $ | 25,515 |   |
|                                                                                |       |       |       |           |       |          |       |                   |       |                   |       |
| Balance at  December 31, 2005                                                  |       | $          | 1,619      |           | $          | 21,401        |       | $                      | 3,781      |                   | $          | (371 | ) | $ | 26,430 |   |
| Comprehensive  income                                                               |       |       |       |           |       |          |       |                   |       |                   |       |
| Net income                                                                          |       | —     |       | —         |       | 3,171         |       | —                 |       | 3,171                  |       |
| Other comprehensive income, net of income taxes                                     |       |       |       |           |       |          |       |                   |       |                   |       |
| Unrealized gains on securities available for sale  during the period                |       | —     |       | —         |       | —        |       | 142                    |       | 142                    |       |
|                                                                                |       |       |       |           |       |          |       |                   |       |                   |       |
| Total  comprehensive income                                                         |       |       |       |           |       |          |       |                   |       | 3,313                  |       |
|                                                                                |       |       |       |           |       |          |       |                   |       |                   |       |
| Issuance of  1,150,000 common shares                                                |       | 575        |       | 18,481         |       | —        |       | —                 |       | 19,056                 |       |
| Exercise of  stock options to purchase 32,000 common shares and related tax benefit |       | 16         |       | 373            |       | —        |       | —                 |       | 389                    |       |
| Stock based  compensation expense                                                   |       | —     |       | 83             |       | —        |       | —                 |       | 83                     |       |
|                                                                                |       |       |       |           |       |          |       |                   |       |                   |       |
| Balance at  September 30, 2006                                                 |       | $          | 2,210      |           | $          | 40,338        |       | $                      | 6,952      |                   | $          | (229 | ) | $ | 49,271 |   |

 

Seeaccompanying notes to consolidated financial statements.

5

----

 

TENNESSEE COMMERCEBANCORP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSNINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005(UNAUDITED)

(dollars in thousands except share data)
| ** **                                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities**                                         |       |                                                    |       |   |   |
| Net income                                                                        |       | $                                                       | 3,171      |   | $ | 2,003 |   |
| Adjustments to reconcile net income to net cash used  by operating activities     |       |                                                    |       |   |   |
| Depreciation                                                                      |       | 183                                                     |       | 124 |   |
| Deferred loan fees                                                                |       | 40                                                      |       | (3 | ) |
| Provision for loan losses                                                         |       | 3,150                                                   |       | 2,800 |   |
| FHLB stock dividends                                                              |       | (23                                                     | )          | (11 | ) |
| Stock-based compensation expense                                                  |       | 83                                                      |       | — |   |
| Deferred Income Tax                                                               |       | (285                                                    | )          | — |   |
| Net amortization of investment securities                                         |       | 16                                                      |       | 35 |   |
| Gain on sales of securities                                                       |       | —                                                  |       | (4 | ) |
| Change in:                                                                        |       |                                                    |       |   |   |
| Accrued interest payable                                                          |       | 343                                                     |       | 415 |   |
| Accrued interest receivable                                                       |       | (1,250                                                  | )          | (656 | ) |
| Other assets and liabilities                                                      |       | (495                                                    | )          | (1,183 | ) |
| Net cash from operating activities                                                |       | 4,933                                                   |       | 3,520 |   |
|                                                                              |       |                                                    |       |   |   |
| **Cash  flows from investing activities**                                         |       |                                                    |       |   |   |
| Purchases of securities available for sale                                        |       | (17,834                                                 | )          | (9,920 | ) |
| Proceeds from sales of securities available for sale                              |       | —                                                  |       | 1,489 |   |
| Proceeds from maturities, prepayments and calls of  securities available for sale |       | 1,133                                                   |       | 1,590 |   |
| Investment in unconsolidated subsidiary                                           |       | —                                                  |       | (248 | ) |
| Net change in loans                                                               |       | (143,582                                                | )          | (105,869 | ) |
| Purchases of Federal Home Loan Bank Stock                                         |       | (217                                                    | )          | (125 | ) |
| Net purchases of premises and equipment                                           |       | (1,091                                                  | )          | (293 | ) |
| Net cash from investing activities                                                |       | (161,591                                                | )          | (113,376 | ) |
|                                                                              |       |                                                    |       |   |   |
| **Cash  flows from financing activities**                                         |       |                                                    |       |   |   |
| Net change in deposits                                                            |       | 146,638                                                 |       | 99,618 |   |
| Proceeds from long-term subordinated debt                                         |       | —                                                  |       | 8,248 |   |
| Proceeds from issuance of common stock                                            |       | 19,056                                                  |       | — |   |
| Proceeds from exercise of common stock options                                    |       | 285                                                     |       | — |   |
| Excess tax benefit from option exercises                                          |       | 104                                                     |       | — |   |
| Net cash from financing activities                                                |       | 166,083                                                 |       | 107,866 |   |
|                                                                              |       |                                                    |       |   |   |
| **Net  change in cash and cash equivalents**                                      |       | 9,425                                                   |       | (1,990 | ) |
|                                                                              |       |                                                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 19,412                                                  |       | 10,420 |   |
|                                                                              |       |                                                    |       |   |   |
| **Cash  and cash equivalents at end of period**                                   |       | $                                                       | 28,837     |   | $ | 8,430 |   |
|                                                                              |       |                                                    |       |   |   |
| **Supplemental  cash flow information:**                                          |       |                                                    |       |   |   |
| Cash paid during period for interest                                              |       | $                                                       | 14,591     |   | $ | 6,182 |   |
| Cash paid during  period for income taxes                                         |       | 1,522                                                   |       | 1,789 |   |

 

Seeaccompanying notes to consolidated financial statements.

6

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TENNESSEE COMMERCE BANCORP, INC.

Notesto 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 March,2005, the Corporation formed a wholly owned subsidiary, Tennessee Commerce BankStatutory Trust I, (the “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 Iis not 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 ofSeptember 30, 2006 and for the nine and three month periods ended September 30,2006 and 2005 have been prepared in accordance with accounting principlesgenerally accepted 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. They do not include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Operating results for the nine and threemonth periods ended September 30, 2006 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2006. Forfurther information, refer to the 2005 consolidated financial statements andfootnotes thereto included in our Form 10K.

Note 2 — Earnings per Share of Common Stock

The factors used in the earnings per share computationfollow.

(dollarsin thousands except share data)
| ** **                                                                      | ** ** | **Nine Months Ended  September 30,** | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                            | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                            |       |                                                |       |                                                 |       |   |   |   |   |
| Basic                                                                           |       |                                                |       |                                                 |       |   |   |   |   |
| Net income                                                                      |       | $                                                   | 3,171      |                                                 | $          | 2,003 |   | $ | 1,330 |   | $ | 720 |   |
|                                                                            |       |                                                |       |                                                 |       |   |   |   |   |
| Weighted average  common shares outstanding                                     |       | 3,611,077                                           |       | 3,238,674                                            |       | 4,339,913 |   | 3,238,674 |   |
|                                                                            |       |                                                |       |                                                 |       |   |   |   |   |
| Basic earnings  per common share                                                |       | $                                                   | 0.88       |                                                 | $          | 0.62 |   | $ | 0.31 |   | $ | 0.22 |   |
|                                                                            |       |                                                |       |                                                 |       |   |   |   |   |
| Diluted                                                                         |       |                                                |       |                                                 |       |   |   |   |   |
| Net income                                                                      |       | $                                                   | 3,171      |                                                 | $          | 2,003 |   | $ | 1,330 |   | $ | 720 |   |
|                                                                            |       |                                                |       |                                                 |       |   |   |   |   |
| Weighted average  common shares outstanding for basic earnings per common share |       | 3,611,077                                           |       | 3,238,674                                            |       | 4,339,913 |   | 3,238,674 |   |
| Add: Dilutive  effects of assumed exercises of stock options                    |       | 317,396                                             |       | 247,045                                              |       | 323,065 |   | 258,527 |   |
|                                                                            |       |                                                |       |                                                 |       |   |   |   |   |
| Average shares  and dilutive potential common shares                            |       | 3,928,473                                           |       | 3,485,719                                            |       | 4,662,978 |   | 3,497,201 |   |
|                                                                            |       |                                                |       |                                                 |       |   |   |   |   |
| Diluted earnings per common share                                               |       | $                                                   | 0.81       |                                                 | $          | 0.57 |   | $ | 0.29 |   | $ | 0.21 |   |

 

Nooptions were antidilutive.

7

----

 

Note 3 —Stock Compensation

On January 1, 2006, we adoptedSFAS No. 123(R), that addresses the accounting for share-basedpayment transactions in which a company receives employee services in exchangefor equity instruments. SFAS No. 123(R) eliminates the ability to accountfor share-based compensation transactions, as we formerly did, using theintrinsic value method as prescribed by Accounting Principles Board, or APB,Opinion No. 25, “Accounting for Stock Issued to Employees,” and generallyrequires that such transactions be accounted for using a fair-value-basedmethod and recognized as expense in the accompanying consolidated statement ofincome.

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 September 30, 2006 reflect theimpact of adopting SFAS No. 123(R). In accordance with the modifiedprospective method, the consolidated financial statements for prior periodshave not been restated to reflect, and do not include, the impact 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 endingSeptember 30, 2006 included compensation expense for stock-based payment awardsgranted prior to, but not yet vested, as of September 30, 2006 based on thegrant date fair value estimated in accordance with SFAS No. 123(R). Asstock-based compensation expense recognized in the accompanying statement ofincome for the period ending September 30, 2006 is based on awards ultimatelyexpected to vest, it has been reduced for estimated forfeitures.SFAS No. 123(R) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates.

Stock-based expense recognized for the nine monthsended September 30, 2006 was $82,816. The options vesting in that period weregranted in 2003 and 2005. The 30,000 options granted in 2003, vested inFebruary and had an estimated fair value of $1.65 per share. The optionsgranted in 2005 were granted in July, August and November and had anestimated fair value of $3.96, $4.07 and $4.26 respectively.

The impact on our results of operations (compensationand employee benefits expense) and earnings per share of recording stock-basedcompensation in accordance with SFAS No. 123(R) (related to stock optionawards) for the nine-month period ended September 30, 2006 was as follows:
| Stock-based  compensation expense                                             |   | $       | 82,816 |   |
|-------------------------------------------------------------------------------|--------|---------|--------|--------|
| Deferred income  tax benefit                                                  |   | (31,710 | )      |
| Impact of  stock-based compensation expense after deferred income tax benefit |   | $       | 51,106 |   |
| Impact on  earnings per share:                                                |   |    |   |
| Basic —  3,611,077 weighted average shares outstanding                   |   | $       | 0.014  |   |
| Fully diluted —  3,928,473 weighted average shares outstanding           |   | $       | 0.013  |   |

 

8

----

 

A summary of the activity in the stock option plan isas follows :
| ** **                                              | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**       | ** ** | ** **         | ** ** |
|---------------------------------------------------------|------------|------------|------------|---------------|------------|---------------------|------------|--------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **    | ** ** | **Average**         | ** ** | ** **         | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Contractual**     | ** ** | **Aggregate**      | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**       | ** ** | **Intrinsic**      | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Term**            | ** ** | **Value (1)** | ** ** |
| ** **                                              | ** ** | **Number** | ** ** | **Price**     | ** ** | **(in years)** | ** ** | **(000’s)**   | ** ** |
| Outstanding at  December 31, 2005                       |       | 937,842    |       | $             | 8.85       |                |       |               |       |   |
| Granted                                                 |       | —     |       | —        |       |                |       |               |       |
| Exercised                                               |       | (32,000    | )          | 8.44          |       |                |       |               |       |
| Forfeited or  expired                                   |       | (3,750     | )          | 16.00         |       |                |       |               |       |
| Outstanding at  September 30, 2006                      |       | 902,092    |       | $             | 8.84       |                | 5.9        |               | $          | 11,964 |   |
| Outstanding and  expected to vest at September 30, 2006 |       | 902,092    |       | $             | 8.84       |                | 5.9        |               | $          | 11,964 |   |
| Options exercisable at  September 30, 2006              |       | 902,092    |       | $             | 8.84       |                | 5.9        |               | $          | 11,964 |   |

----

(1)            Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying options and the quoted price of our stock of $22.10 percommon share for the 902,092 options that were in-the-money at September 30,2006.

The estimated fair values are computed using theBlack-Scholes option valuation model, using the following weighted-averageassumptions as of grant date shown below. No options were granted during thenine months ending September 30, 2006. The options granted in 2005 were grantedin July, August and November and had an estimated fair value of $3.96,$4.07 and $4.26 respectively.
| ** **               | ** ** | **2005**     | ** ** | **2004**     | ** ** | **2003**     | ** ** |
|--------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                     |       |         |       |         |       |         |       |
| Risk-free  interest rate |       | 3.96         | %          | 3.23         | %          | 3.82         | %          |
| Expected option  life    |       | 5 years |       | 7 years |       | 7 years |       |
| Dividend yield           |       | 0.0          | %          | 0.0          | %          | 0.0          | %          |

 

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

Note 4 —Trust Preferred Securities

In March 2005, we formed a financing subsidiary,Tennessee Commerce Statutory Trust I, a Delaware statutory trust, or the TrustI. In March 2005, Trust I issued and sold 8,000 of Trust I’sFixed/Floating rate capital securities, with a liquidation amount of $1,000 percapital security, to First Tennessee Bank National Association. At the sametime, we issued to Trust I $8,248,000 of Fixed/Floating rate juniorsubordinated deferrable interest debentures due 2035. The debentures pay a6.73% fixed rate payable quarterly for the first five years and a floating ratebased on a 3 month Libor rate plus a margin thereafter. In accordance with FASBInterpretation No. 46 (revised December 2003) Consolidation ofVariable Interest Entities (FIN46R), the Trust I is not consolidated. We reportas liabilities the subordinated debentures issued by the Corporation and heldby Trust I.

Note 5 —Stock issuance

On July 3, 2006 and on July 28, 2006, we issued1,000,000 and 150,000 shares respectively of our common stock. After theissuance, there were 4,390,674 shares of common stock outstanding.

9

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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, forecast, andcomparable terms should be understood by the reader to indicate that thestatement is “forward-looking” and thus subject to change in a manner that canbe unpredictable.  Factors that could cause actual results to differmaterially from the results anticipated, but not guaranteed, in this report,include (without limitation) economic and social conditions, competition forloans, mortgages, and other financial services and products, changes ininterest rates, unforeseen changes in liquidity, results of operations, andfinancial conditions affecting our customers, as well as other risks thatcannot be accurately quantified or completely identified.  Many factorsaffecting our financial condition and profitability, including changes ineconomic conditions, the volatility of interest rates, political events andcompetition from other providers of financial services simply cannot bepredicted.  Because these factors are unpredictable and beyond ourcontrol, earnings may fluctuate from period to period.  The purpose ofthis type of information is to provide readers with information relevant tounderstanding and assessing our financial condition and results of operations,and not to predict the future or to guarantee results.  We are unable topredict the types of circumstances, conditions, and factors that can causeanticipated results to change.  We undertake no obligation to publishrevised forward-looking statements to reflect the occurrence of changes orunanticipated events, circumstances, or results.

**Corporation Overview**

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.

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 significantbanking relationships. We seek to take advantage of this opportunity.

10

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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 September 30, 2006 we had an earning asset ratioof 96.54%.

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 strategicoutsourcing of non-customer functions, such as data processing, information technologyand internal audit, allow us to operate with a smaller, more highly-trainedstaff.  Management targets an average assets per employee ratio of $7.5million, compared to the average ratio of approximately $3.5 million assets peremployee for middle Tennessee banks at the end of the second quarter 2006. AtSeptember 30, 2006, assets per employee were $11.7 million.

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, throughan established network of vendors and financial service companies, we haveopportunities to finance business asset secured loan transactions for nationalmiddle-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 $125,000 or less per transaction).Both national market programs provide geographic and collateral diversity forthe portfolio.

**Our Market Area**

We considerWilliamson county and the Nashville MSA our primary market.  Growth inthis market has been supported by the creation of the Nashville EconomicMarket, which is a regional economic development initiative comprising 10 ofthe counties within the Nashville MSA.  According to SNL Financial, orSNL, the population and median household income of the Nashville MSA grewapproximately 10% and 15%, respectively, from 2000 to 2005 to reach a total of1,444,066 in population and $50,043 in median household income. According toSNL, from 2005 to 2010, population and median household income are expected toincrease approximately 10% and 15%, respectively.  FDIC insured depositsincreased by approximately 46% to $25.2 billion from 2000 to 2005 in theNashville MSA.

Williamson Countyand the Nashville MSA possess a diverse and growing economy.  Majoremployment is supported by sectors including government, education, financialservices, healthcare, manufacturing, distribution and entertainment.  TheNashville MSA is home to 19 colleges and universities educating over 94,000students.  As a result, employers are provided with a relativelywell-educated workforce capable of serving a wide variety of industries. Centrally located within the eastern half of the United States and directlyconnected to three major interstate highways, the Nashville area is also anideal distribution center for many companies.

11

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**Overviewof Operating Results for the Three  and Nine Months ended September 30,2006 and September 30, 2005 and Financial Condition at September 30, 2006 andDecember 31, 2005.**

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

The results of operations for the quarter endedSeptember 30, 2006, compared to the quarter ended September 30, 2005 reflecteda 84.72% increase in net income and a 38.10% increase in diluted earnings pershare. The increase in earnings resulted primarily from a 42.15% increase innet interest income due to higher average loan balances. The increased netinterest income was partially offset by increases in non-interest expense. Forthe nine months ended September 30, 2006, net income was $3,171, an increase of$1,168 or 58.31% compared to net income of $2,003 for the same period in 2005.Diluted earnings per share increased $0.24 per share or 42.11% for the ninemonths ended September 30, 2006 compared to the same period in 2005. The ninemonths ended September 30, 2006, reflected a continuation of the Bank’s trendof rapid asset growth increasing by $170,524 or 42.20% from $404,040 atDecember 31, 2005 to $574,564 at September 30, 2006. Net loans increasedby 40.79% or $140,392 from December 31, 2005 to September 30, 2006, whiletotal deposits increased by 39.88% or $146,638 during that same period.

**Comparison of Operating Results forthe Three Months ended September 30, 2006 and September 30, 2005**

**Net Income** -Net income for the quarter ended September 30, 2006 was $1,330 an increase of$610 or 84.72%, compared to the net income of $720 for the quarter endedSeptember 30, 2005.  The increase is attributable to a 42.15% increase innet interest income from $3,606 for the quarter ended September 30, 2005 to $5,126for the same period in 2006. The increase of $1,520 in net interest income wasthe result of our overall growth, including a 53.15% increase in net loanbalances at September 30, 2006 compared to the same date in 2005. This increasein net interest income was partially offset by increased non-interest expense.Non-interest expense increased by 55.67% to $2,402 for the three month periodended September 30, 2006 compared to $1,543 for the same period in 2005. Theincrease in non-interest expense was due to an increase in personnel andgeneral operating expenses due to our growth.

(dollars in thousands)
| ** **                                   | ** ** | **Three Months Ended**

**September 30,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2006**                                                 | ** ** | **2005**   | ** ** | **% Change** | ** ** |
|                                         |       |                                                     |       |       |       |   |   |
| Interest income                              |       | $                                                        | 11,000     |       | $          | 6,373 |   | 72.60 | % |
| Interest expense                             |       | 5,874                                                    |       | 2,767      |       | 112.29 |   |
| Net interest income                          |       | 5,126                                                    |       | 3,606      |       | 42.15 |   |
| Provision for  loan losses                   |       | 1,150                                                    |       | 1,000      |       | 15.00 |   |
| Net interest after provision for loan losses |       | 3,976                                                    |       | 2,606      |       | 52.57 |   |
| Non-interest  income                         |       | 590                                                      |       | 209        |       | 182.30 |   |
| Non-interest  expense                        |       | 2,402                                                    |       | 1,543      |       | 55.67 |   |
| Net income before taxes                      |       | 2,164                                                    |       | 1,272      |       | 70.13 |   |
| Income tax  expense                          |       | 834                                                      |       | 552        |       | 51.09 |   |
| Net income                                   |       | $                                                        | 1,330      |       | $          | 720 |   | 84.72 | % |

 

12

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**Net Interest Income**- Net interest income for the quarter ended September 30, 2006 was $5,126compared to $3,606 for the same period in 2005, a gain of $1,520 or42.15%.  The increase of $1,520 in net interest income was the result ofour overall growth, including a 53.15% increase in net loan balances atSeptember 30, 2006 compared to the same date in 2005.

**Provision for Loan Losses**- The provision for loan losses for the three months ended September 30,2006 was $1,150, an  increase of $150, or15.00%, above the provision of $1,000 expensed in the same period in2005.  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 Comparison of Financial Condition section. At September 30,2006, the loan loss reserve of $6,199 was 1.26% of gross loans of $490,778.

**Non-interest Income**- Non-interest income increased by 182.30% or $381, from $209 in the quarterended September 30, 2005 to $590 for the same period in 2006. The increasewas primarily due to gain on loan sales. The gain on loan sales was $567 and $184 for the three month periodsended September 30, 2006 and 2005 respectively.

**Non-interest Expense**- Non-interest expense for the three months ended September 30, 2006 was$2,402, an increase of $859 or 55.67%, over the $1,543 expensed in the sameperiod in 2005.  Approximately 57.28% of the increase was due to theaddition of 9 new employees during the period between the two quarter enddates. At September 30, 2006, the Corporation had 49 full time employees.

**Comparison of Operating Results forthe Nine Months ended September 30, 2006 and September 30, 2005**

**Net Income** -Net income for the nine months ended September 30, 2006 was $3,171 an increaseof $1,168 or 58.31%, compared to the net income of $2,003 for the nine monthsended September 30, 2005.  The increase is attributable to a 38.30%increase in net interest income from $9,996 for the three quarters endedSeptember 30, 2005 to $13,824 for the same period in 2006. The increase of$3,828 in net interest income was the result of our overall growth, including a54.93% increase in average net loan balances at September 30, 2006 compared tothe same date in 2005. This positive effect was partially offset by an 12.50%increase in the provision for loan losses, from $2,800 during the threequarters ended September 30, 2005 to $3,150 for the same period in 2006. Also,non-interest expense increased by 46.46% to $6,636 for the nine month periodended September 30, 2006 compared to $4,531 for the same period in 2005. Theincrease in the provision for loan losses was primarily the result of fundingthe allowance for loan losses to match the significant loan growth. Theincrease in non-interest expense was due to the increase in personnel andgeneral operating expenses due to our growth.

(dollars in thousands)
| ** **                                   | ** ** | **Nine Months Ended**

**September 30,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **% Increase** | ** ** |
|                                         |       |                                                    |       |       |       |   |   |
| Interest income                              |       | $                                                       | 28,758     |       | $          | 16,594 |   | 73.30 | % |
| Interest expense                             |       | 14,934                                                  |       | 6,598      |       | 126.34 |   |
| Net interest income                          |       | 13,824                                                  |       | 9,996      |       | 38.30 |   |
| Provision for  loan losses                   |       | 3,150                                                   |       | 2,800      |       | 12.50 |   |
| Net interest after provision for loan losses |       | 10,674                                                  |       | 7,196      |       | 48.33 |   |
| Non-interest  income                         |       | 1,124                                                   |       | 784        |       | 43.37 |   |
| Non-interest  expense                        |       | 6,636                                                   |       | 4,531      |       | 46.46 |   |
| Net income before taxes                      |       | 5,162                                                   |       | 3,449      |       | 49.67 |   |
| Income tax  expense                          |       | 1,991                                                   |       | 1,446      |       | 37.69 |   |
| Net income                                   |       | $                                                       | 3,171      |       | $          | 2,003 |   | 58.31 | % |

 

**Net Interest Income**- Net interest income for the three quarters ended September 30, 2006 was$13,824 compared to $9,996 for the same period in 2005, an increase of $3,828or 38.30%.  The increase in net interest income was largely attributableto strong loan growth.  The average net loan balance for the nine monthsended September 30 increased by 54.93% or $143,537 from $261,319 for thatperiod in 2005 to $404,856 for the same period in 2006. Loan growth was matchedby an increase in average interest bearing deposits from $249,034 for the ninemonths ended September 30, 2005 to $404,338 for the same period in 2006 — anincrease of $155,304 or 62.36%.

13

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**Net Interest Margin**- The net interest margin decreased from 4.63% for the three quarters endedSeptember 30, 2005 to 4.05% for the same period in 2006 due to an increase inthe cost of funds which offset an increase in the yield on earningassets.  Interest income increased by $12,164 or 73.30%, from $16,594during the three quarters ended September 30, 2005 to $28,758 during the same periodin 2006. The increase was primarily due to increased volume.  Averageearning assets increased from $288,151 in the nine months ended September 30,2005 to $455,567 in the same period in 2006, an increase of $167,416 or58.10%.  The increase in earning assets was primarily due to loan growth.Average loan balances increased by $143,537 or 54.93%.  The average yieldon earning assets increased from 7.69% in the three quarters ended September30, 2005 to 8.42% in the same period in 2006. The increase in yield on earningassets and cost of funds, as a percentage of average balances was primarily dueto increases in short term interest rates by the Federal Reserve Open MarketCommittee, or FOMC. Between September 30, 2005 and September 30, 2006, the FOMCraised the federal funds rate by 150 basis points.

Interest expense increased from $6,598 in the threequarters ended September 30, 2005, to $14,934 in the three quarters endedSeptember 30, 2006. The $8,336 or 126.34%, increase in expense was due toincreases in the volume of deposits as well as rate increases. Average interestearning liabilities increased by $159,667 or 62.62%.  The cost of fundsincreased from 3.46% in the nine months ended September 30, 2005 to 4.82% inthe same three quarters in 2006, an increase of 136 basis points.

**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 nine month periods ended September 30, 2006 and 2005.The table is presented on a tax equivalent basis if applicable.
| ** **                                       | ** ** | **Nine Months Ended September 30,**

**2006** | ** ** | **Nine Months Ended September 30,**

**2005** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                                       | ** ** | ** **                                                        | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(dollars in thousands)**             | ** ** | **Balance**                                                       | ** ** | **Interest**                                                      | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest earning  assets                         |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Securities  (taxable) (1)                        |       | $                                                                 | 41,363     |                                                              | $          | 1,529 |   | 4.83 | % | $ | 21,244 |   | $ | 657 |   | 4.08 | % |
| Loans  (2) (3)                              |       | 404,856                                                           |       | 26,943                                                            |       | 8.90 | % | 261,319 |   | 15,827 |   | 8.10 | % |
| Federal funds  sold                              |       | 9,348                                                             |       | 286                                                               |       | 4.09 | % | 5,588 |   | 110 |   | 2.63 | % |
| Total interest  earning assets                   |       | 455,567                                                           |       | 28,758                                                            |       | 8.42 | % | 288,151 |   | 16,594 |   | 7.69 | % |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Non-interest  earning assets                     |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                          |       | 3,787                                                             |       |                                                              |       |   |   | 3,994 |   |   |   |   |   |
| Net fixed assets and equipment                   |       | 974                                                               |       |                                                              |       |   |   | 715 |   |   |   |   |   |
| Accrued interest and other assets                |       | 8,965                                                             |       |                                                              |       |   |   | 3,944 |   |   |   |   |   |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total assets                                     |       | $                                                                 | 469,293    |                                                              |       |   |   |   | $ | 296,804 |   |   |   |   |   |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**    |       |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Deposits (other than demand)                     |       | $                                                                 | 404,338    |                                                              | $          | 14,421 |   | 4.77 | % | $ | 249,034 |   | $ | 6,309 |   | 3.39 | % |
| Federal funds purchased                          |       | 1,324                                                             |       | 55                                                                |       | 5.55 | % | 394 |   | 12 |   | 4.07 | % |
| Subordinated debt                                |       | 8,992                                                             |       | 458                                                               |       | 6.81 | % | 5,559 |   | 277 |   | 6.66 | % |
| Total interest bearing liabilities               |       | 414,654                                                           |       | 14,934                                                            |       | 4.82 | % | 254,987 |   | 6,598 |   | 3.46 | % |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Non-interest bearing demand deposits             |       | 18,499                                                            |       |                                                              |       |   |   | 15,881 |   |   |   |   |   |
| Other liabilities                                |       | 2,616                                                             |       |                                                              |       |   |   | 1,432 |   |   |   |   |   |
| Shareholders’ equity                        |       | 33,524                                                            |       |                                                              |       |   |   | 24,504 |   |   |   |   |   |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                                 | 469,293    |                                                              |       |   |   |   | $ | 296,804 |   |   |   |   |   |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net Interest  Spread                             |       | 3.60                                                              | %          |                                                              |       |   |   | 4.23 | % |   |   |   |   |
|                                             |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net Interest Margin                              |       | 4.05                                                              | %          |                                                              |       |   |   | 4.63 | % |   |   |   |   |

----

(1)             Unrealized loss of$928 and $307 is excluded from yield calculation for the three quarters endedSeptember 30, 2006 and 2005, respectively.

(2)             Non-accrual loans areincluded in average loan balances and loan fees of $1,917 and $1,212 areincluded in interest income for the three quarters ended September 30, 2006 and2005 respectively.

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

14

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The following table outlines the components of the netinterest margin for the nine month periods ended September 30, 2006 and 2005and identifies the impact of changes in volume and the changes in rate.
| ** **                           | ** ** | **September 30, 2006 change from**

**September 30, 2005 due to:** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Volume**                                                                                                 | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                                 |       |                                                                                                       |       |   |   |   |   |
| Interest income                      |       |                                                                                                       |       |   |   |   |   |
| Loans                                |       | $                                                                                                          | 9,421      |   | $ | 1,695 |   | $ | 11,116 |   |
| Securities — taxable (1)        |       | 709                                                                                                        |       | 163 |   | 872 |   |
| Federal funds sold                   |       | 97                                                                                                         |       | 79 |   | 176 |   |
| Total interest income                |       | 10,227                                                                                                     |       | 1,937 |   | 12,164 |   |
|                                 |       |                                                                                                       |       |   |   |   |   |
| Interest expense                     |       |                                                                                                       |       |   |   |   |   |
| Deposits (other than demand)         |       | 4,905                                                                                                      |       | 3,207 |   | 8,112 |   |
| Federal funds purchased              |       | 37                                                                                                         |       | 6 |   | 43 |   |
| Subordinated debt                    |       | 175                                                                                                        |       | 6 |   | 181 |   |
| Total interest  expense              |       | 5,117                                                                                                      |       | 3,219 |   | 8,336 |   |
|                                 |       |                                                                                                       |       |   |   |   |   |
| Net interest income                  |       | $                                                                                                          | 5,110      |   | $ | (1,282 | ) | $ | 3,828 |   |

----

(1)             Unrealizedloss of $928 and $307 is excluded from yield calculation for the nine monthsended September 30, 2006 and 2005 respectively.

**Provision for Loan Losses**- The provision for loan losses for the nine months ended September 30, 2006was $3,150, an increase of $350, or 12.50%, above the provision of $2,800expensed in the same period in 2005.  This increase was primarily due tosignificant loan growth. The provision is discussed as it relates to the allowancefor loan losses in the following Comparison of Financial Condition section. AtSeptember 30, 2006, the loan loss reserve of $6,199 was 1.26% of gross loans of$490,778.

**Non-interest Income**- We earned $61 in mortgage origination fees during the three quarters endedSeptember 30, 2006 compared to $75 earned in 2005, a decrease of $14 or18.67%.  No gain or loss was recognized on the sale of securities in thethree quarters ended September 30, 2006 compared with a gain of $4 for the sameperiod in 2005.

The Bank earned $1,179 on loan sale transactions inthe three quarters ended September 30, 2006, a 88.94% increase compared to $624during the same period in 2005. This increase was primarily due to demand frompurchasers. Management will continue to consider loan sale transactions if theopportunity for a reasonable return is available.

**Non-interest Expense**- Non-interest expense for the nine months ended September 30, 2006, was$6,636, an increase of $2,105 or 46.46%, over the $4,531 expensed in the sameperiod in 2005.  Approximately 57.43% of the increase was due to theaddition of 9 new employees during the period between the two quarter enddates. At September 30, 2006, we had 49 full time employees. Assets peremployee were $8.9 million at September 30, 2005 and $11.7 million atSeptember 30, 2006. Management targets $7.5 million per full time employee as ameasure of staffing efficiency.

Our efficiency ratio for the nine months endingSeptember 30, 2006 and 2005 was 44.39% and 42.03% respectively. Although itincreased 5.61%, it is below the 45% that management targets as another measureof efficiency.

 

15

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Efficiency Ratio

(dollars in thousands )

 
| ** **           | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|----------------------|------------|---------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Non-interest expense |       | $                                                       | 6,636      |   | $ | 4,531 |   |
|                 |       |                                                    |       |   |   |
| Net interest income  |       | 13,824                                                  |       | 9,996 |   |
| Non-interest income  |       | 1,124                                                   |       | 784 |   |
| Total Revenues       |       | $                                                       | 14,948     |   | $ | 10,780 |   |
|                 |       |                                                    |       |   |   |
| Efficiency Ratio     |       | 44.39                                                   | %          | 42.03 | % |

 

**Income Taxes** -Our effective tax rate for the nine months ended September 30, 2006 was 38.57%compared to 41.93% for the nine months ended September 30, 2005. Managementanticipates that tax rates in future periods will approximate the rates paid in2006.

**Comparison of Financial Condition atSeptember 30, 2006 and December 31, 2005**

**Assets -**Totalassets at September 30, 2006 were $574,564, an increase of $170,524, or 42.20%,over total assets of $404,040 at December 31, 2005. Loan growth was theprimary reason for the increase.  September 30, 2006 net loans were$484,579, up $140,392, or 40.79% over the December 31, 2005 total netloans of $344,187. The cash and cash equivalents balance increased by $9,425between December 31, 2005 and September 30, 2006 primarily as a result ofour stock offering closed in July 2006.

Our business bank model of operation results in ahigher level of earning assets than peer banks.  Earning assets aredefined as assets which earn interest income.  Earning assets includeshort-term investments, the investment portfolio, and net loans.  Wemaintain a higher level of earning assets because fewer assets are allocated tofacilities, cash, and due-from bank accounts used for transaction processing. Earning assets at September 30, 2006, were $554,677, or 96.54% of total assetsof $574,564.  Earning assets at December 31, 2005, were $388,714, or96.21% of total assets of $404,040.

16

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**Loans** - We hadtotal net loans of $484.6 million at September 30, 2006. The following tablesets forth the composition of our loan portfolio at September 30, 2006 andDecember 31, 2005:
| **(dollars in thousands)**    | ** ** | **September 30,**

**2006** | ** ** | **December 31,**

**2005** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Real estate                             |       |                             |       |                            |       |
| Construction                            |       | $                                | 64,397     |                            | $          | 38,279 |   |
| 1 to 4 family residential               |       | 21,846                           |       | 18,358                          |       |
| Other                                   |       | 64,120                           |       | 50,371                          |       |
| Commercial,  financial and agricultural |       | 329,798                          |       | 233,948                         |       |
| Consumer                                |       | 3,557                            |       | 3,149                           |       |
| Other                                   |       | 7,060                            |       | 4,481                           |       |
|                                    |       |                             |       |                            |       |
| Total loans                             |       | 490,778                          |       | 348,586                         |       |
| Less: allowance  for loan losses        |       | (6,199                           | )          | (4,399                          | )          |
|                                    |       |                             |       |                            |       |
| Net loans                               |       | $                                | 484,579    |                            | $          | 344,187 |   |

 

Composition of loan portfolio by type
| ** **                              | ** ** | **September 30,**

**2006** | ** ** | **December 31,**

**2005** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Real estate:                            |       |                             |       |                            |       |
| Construction                            |       | 13.12                            | %          | 10.98                           | %          |
| 1 to 4 family residential               |       | 4.45                             | %          | 5.27                            | %          |
| Other                                   |       | 13.07                            | %          | 14.45                           | %          |
| Commercial,  financial and agricultural |       | 67.20                            | %          | 67.11                           | %          |
| Consumer                                |       | 0.72                             | %          | 0.90                            | %          |
| Other                                   |       | 1.44                             | %          | 1.29                            | %          |
|                                    |       |                             |       |                            |       |
| Total                                   |       | 100                              | %          | 100                             | %          |

 

17

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The following table sets forth the composition of ourloan portfolio by source at September 30, 2006 and December 31, 2005:
| ** **                           | ** ** | **September 30,**

**2006** | ** ** | **December 31,**

**2005** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Amount**                       | ** ** | **%**                           | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Direct funding                       |       | $                                | 311,996    |                            | 63.57      | % | $ | 200,333 |   | 57.47 | % |
| Indirect funding                     |       |                             |       |                            |       |   |   |   |   |
| Large                                |       | 70,252                           |       | 14.32                           | %          | 61,693 |   | 17.70 | % |
| Small                                |       | 108,530                          |       | 22.11                           | %          | 86,560 |   | 24.83 | % |
| Total                                |       | $                                | 490,778    |                            | 100.00     | % | $ | 348,586 |   | 100.00 | % |

 

Management periodically reviews the loan portfolio,particularly non-accrual and renegotiated loans.  The review may result ina determination that a loan should be placed on a non-accrual status for incomerecognition. When a loan is classified as non-accrual, any unpaid interest isreversed against current income.  Interest is included in incomethereafter only to the extent received in cash.  The loan remains in anon-accrual classification until such time as the loan is brought current, whenit may be returned to accrual classification.

The following table presents information regardingnon-accrual, past due and restructured loans at September 30, 2006 andDecember 31, 2005:
| **(dollars in thousands)**                                                                     | ** ** | **September 30,**

**2006** | ** ** | **December 31,**

**2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Non-accrual  loans                                                                                       |       |                             |       |                            |       |
| Number                                                                                                   |       | 51                               |       | 46                              |       |
| Amount                                                                                                   |       | $                                | 2,808      |                            | $          | 2,928 |   |
|                                                                                                     |       |                             |       |                            |       |
| Accruing loans  which are contractually past due 90 days or more as to principal and  interest payments: |       |                             |       |                            |       |
| Number                                                                                                   |       | 9                                |       | 9                               |       |
| Amount                                                                                                   |       | $                                | 324        |                            | $          | 352 |   |
|                                                                                                     |       |                             |       |                            |       |
| Loans defined as  “troubled debt restructurings”                                               |       |                             |       |                            |       |
| Number                                                                                                   |       | 3                                |       | 3                               |       |
| Amount                                                                                                   |       | $                                | 1,119      |                            | $          | 1,144 |   |

 

As of September 30, 2006 and December 31, 2005,there are no loans classified for regulatory purposes as doubtful orsubstandard that have not been disclosed in the above table, which(i) represent or result from trends or uncertainties which managementreasonably expects will materially impact future operating results, liquidity,or capital resources, or (ii) represent material credits about whichmanagement is aware of any information which causes management to have seriousdoubts as to the ability of such borrowers to comply with the loan repaymentterms.

18

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

It is management’s intent to maintain an ALL which isadequate to absorb current and estimated losses which are inherent in a loanportfolio.  The historical loss ratio (net charge-offs as a percentage ofaverage loans) was 0.33% for the nine months ended September 30, 2006 and 0.55%for the nine months ended September 30, 2005. The ALL as a percentage of theoutstanding loans at the end of the period was 1.26% at September 30, 2006 and1.30% at September 30, 2005.

An analysis of our loss experience is furnished in thefollowing table for the nine months ended September 30, 2006 and the sameperiod ended September 30, 2005:
| **(dollars in thousands)**              | ** ** | **September 30,**

**2006** | ** ** | **September 30,**

**2005** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Allowance for  loan losses at beginning of period |       | $                                | 4,399      |                             | $          | 2,841 |   |
| Charge-offs:                                      |       |                             |       |                             |       |
| Real estate:                                      |       |                             |       |                             |       |
| Construction                                      |       | —                           |       | —                           |       |
| 1 to 4 family residential                         |       | —                           |       | —                           |       |
| Other                                             |       | —                           |       | —                           |       |
| Commercial, financial and agricultural            |       | 1,580                            |       | 1,709                            |       |
| Consumer                                          |       | 10                               |       | 15                               |       |
| Total Charge-offs                                 |       | 1,590                            |       | 1,724                            |       |
|                                              |       |                             |       |                             |       |
| Recoveries:                                       |       |                             |       |                             |       |
| Real estate:                                      |       |                             |       |                             |       |
| Construction                                      |       | —                           |       | —                           |       |
| 1 to 4 family residential                         |       | —                           |       | 1                                |       |
| Other                                             |       | —                           |       | —                           |       |
| Commercial, financial and agricultural            |       | 219                              |       | 234                              |       |
| Consumer                                          |       | 21                               |       | 23                               |       |
| Total Recoveries                                  |       | 240                              |       | 258                              |       |
|                                              |       |                             |       |                             |       |
| Net Charge-offs                                   |       | 1,350                            |       | 1,466                            |       |
|                                              |       |                             |       |                             |       |
| Provision for  loans charged to expense           |       | 3,150                            |       | 2,800                            |       |
| Allowance for loan  losses at end of period       |       | $                                | 6,199      |                             | $          | 4,175 |   |

 
| ** **                                                                                        | ** ** | **September 30,**

**2006** | ** ** | **September 30,**

**2005** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Net charge-offs  as a percentage of average total loans outstanding during the period             |       | 0.33                             | %          | 0.55                             | %          |
|                                                                                              |       |                             |       |                             |       |
| Ending allowance for  loan losses as a percentage of total loans outstanding at end of the period |       | 1.26                             | %          | 1.30                             | %          |

 

The allowance for loan losses is established bycharges to operations based on management’s evaluation of the loan portfolio,past due loan experience, collateral values, current economic conditions andother factors considered necessary to maintain the allowance at an adequatelevel.

19

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**Securities** -The securities portfolio at September 30, 2006 was $48,909 compared to $31,992at December 31, 2005.  We view the securities portfolio as a sourceof income and liquidity.  The securities portfolio was 8.51% of totalassets at September 30, 2006 and 7.92% of total assets at December 31,2005.

**Liabilities -**We depend on a growing deposit base to fund loan and other asset growth. Wecompete 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 September 30, 2006 were $514,343, up$146,638 or 39.88% over the December 31, 2005, total deposits of $367,705.Total average deposits during the three quarters ending September 30, 2006,were $422,837, an increase of $157,922, or 59.61% over the total averagedeposits of $264,915 during the three quarters ending September 30, 2005.Average non-interest bearing deposits increased by $2,618, or 16.49%, from$15,881 in the nine months ending September 30, 2005, to $18,499 in the ninemonths ending September 30, 2006. Average deposit balances for the nine monthsended September 30, 2006 and 2005 and the average rates paid on those balancesare shown below.

Deposits
| ** **                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **(dollars in thousands)**  | ** ** | **Average  Balance**                                    | ** ** | **Average  Rate  Paid (1)** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid (1)** | ** ** |
| Types of  Deposits                    |       |                                                    |       |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                                       | 18,499     |   | — |   | $ | 15,881 |   | — |   |
| Interest-bearing  demand deposits     |       | 5,192                                                   |       | 3.60 | % | 2,519 |   | 1.42 | % |
| Money market  accounts                |       | 62,904                                                  |       | 5.18 | % | 35,340 |   | 3.57 | % |
| Savings accounts                      |       | 13,795                                                  |       | 2.66 | % | 24,018 |   | 2.60 | % |
| IRA accounts                          |       | 4,788                                                   |       | 4.82 | % | 1,535 |   | 4.07 | % |
| Purchased time deposits               |       | 179,413                                                 |       | 4.65 | % | 144,868 |   | 3.39 | % |
| Time deposits                         |       | 138,246                                                 |       | 4.98 | % | 40,754 |   | 3.76 | % |
| Total deposits                        |       | $                                                       | 422,837    |   |   |   | $ | 264,915 |   |   |   |

----

(1)             Rateis annualized

20

----

 

**Short-TermDebt -**In May and June 2006, we borrowed $2,000 and$3,000 respectively on a $5,000 line of credit with First Tennessee Bank,National Association. The balance owed at June 30, 2006 of $5,000 was repaid onJuly 19, 2006. This line of credit expired on September 30, 2006.

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

In accordance with FASB Interpretation No. 46(revised December 2003) Consolidation of Variable Interest Entities(FIN46R), the Trust I is not consolidated. We report as liabilities the subordinateddebentures issued by us and held by Trust I.

**Off-balance Sheet Arrangements**

We are a party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of our customers. At September 30, 2006, we had unfunded loan commitmentsoutstanding of $76 million and standby letters of credit of $5.9 million. Thoseinstruments involve, to varying degrees, elements of credit risk in excess ofthe amount recognized in the balance sheet.  The contract or notionalamounts of those instruments reflect the extent of our involvement in thoseparticular financial instruments. We use the same credit policies in makingcommitments and conditional obligations as we do for on-balance sheetinstruments.

Because these commitments generally have fixedexpiration dates and many will expire without being drawn upon, the totalcommitment level does not necessarily represent future cash requirements. Ifneeded, we can liquidate Federal funds sold or securities available for sale orborrow and purchase Federal funds from other financial institutions where wehave available federal fund lines totaling $15.4 million.

# **Capital Resources/Liquidity**

**Liquidity** - Ofprimary importance to depositors, creditors and regulators is the ability tohave 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.

**Capital Adequacy -**Ourobjective is to maintain a level of capitalization that is sufficient to takeadvantage of profitable growth opportunities while meeting regulatoryrequirements.****To continue to grow,we must increase capital by generating earnings, issuing equities, borrowingfunds, or a combination of those activities. In 2004, we issued equitysecurities increasing capital by $8.5 million.  In March 2005, oursubsidiary Trust I issued $8 million in Trust Preferred Securities that meetthe capital guidelines to be classified as Tier I capital as explained below.On July 3, 2006, and July 28, 2006, we issued 1,000,000 shares and 150,000shares respectively of our common stock in order to raise $19.1 million incapital in 2006.

The Federal Reserve Board has adopted capitalguidelines governing the activities of bank holding companies.  Theseguidelines require the maintenance of an amount of capital based onrisk-adjusted assets so that categories of assets with potentially highercredit risk will require more capital backing than assets with lowerrisk.  In addition, banks and bank holding companies are required to maintaincapital to support, on a risk-adjusted basis, certain off-balance sheetactivities such as loan commitments.

 

21

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The capital guidelinesclassify capital into two tiers, referred to as Tier I and Tier II. Underrisk-based capital requirements, total capital consists of Tier I capitalwhich is generally common stockholders’ equity less goodwill and Tier IIcapital 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. Theframework for calculating risk-based capital requires banks and bank holdingcompanies to meet the regulatory minimums of 4% Tier I and 8% totalrisk-based capital. In 1990, regulators added a leveraged computation to thecapital requirements, comparing Tier I capital to total average assetsless goodwill.

The Federal Deposit InsuranceCorporation Improvement Act of 1991 (“FDICIA”) established five capitalcategories for banks and bank holding companies. The bank regulators adoptedregulations defining these five capital categories in September 1992. Underthese new regulations each bank is classified into one of the five categoriesbased on its level of risk-based capital as measured by Tier I capital,total risk-based capital, and Tier I leverage ratios and its supervisoryratings.

At September 30, 2006 andDecember 31, 2005, the Bank’s and the Corporation’s risk-based capitalratios and the minimums for capital adequacy and to be consideredwell-capitalized under the Federal Reserve Board’s prompt corrective actionguidelines were as follows:
| ** **                                               | ** ** | ** **             | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **Minimum to**    | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **be considered** | ** ** |
| ** **                                               | ** ** | **2006**               | ** ** | **2005**              | ** ** | **adequacy**         | ** ** | **well-capitalized**   | ** ** |
|                                                     |       |                   |       |                  |       |                 |       |                   |       |
| Tier 1 leverage ratio                                    |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 9.67                   | %          | 9.08                  | %          | 4.00                 | %          | 5.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 10.99                  | %          | 9.33                  | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |                   |       |                  |       |                 |       |                   |       |
| Tier 1 “core” capital  to risk-weighted assets |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 9.84                   | %          | 9.30                  | %          | 4.00                 | %          | 6.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 11.19                  | %          | 9.56                  | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |                   |       |                  |       |                 |       |                   |       |
| Total capital to  risk-weighted assets                   |       |                   |       |                  |       |                 |       |                   |       |
| Tennessee Commerce  Bank                                 |       | 11.05                  | %          | 10.51                 | %          | 8.00                 | %          | 10.00                  | %          |
| Tennessee Commerce  Bancorp, Inc.                   |       | 12.40                  | %          | 10.77                 | %          | 8.00                 | %          | n/a                    |       |

 

On September 30, 2006 andDecember 31, 2005, both the Bank and the Corporation exceeded theregulatory minimum capital requirements to be considered well-capitalized.

**Impact of Inflation and ChangingPrices** - The financial statements and related financialdata presented herein have been prepared in accordance with U.S. generallyaccepted accounting principles which require the measurement of financial positionand operating results in terms of historical dollars without considering thechanges in the relative purchasing power of money over time and due toinflation. The impact of inflation on operations of the Bank is reflected inincreased operating costs. Unlike most industrial companies, virtually all ofthe assets and liabilities of the Bank are monetary in nature. As a result,interest rates have a more significant impact on the Bank’s performance thanthe effects of general levels of inflation. Interest rates do not necessarilymove in the same direction or in the same magnitude as the price of goods andservices.

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** **

**ITEM 3: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 committee developsits view of future rate trends and strives to manage rate risk within atargeted range by monitoring economic indicators, examining the views ofeconomists and other experts, and understanding the current status of ourbalance sheet. Our annual budget reflects the anticipated rate environment forthe next twelve months. The asset liability committee conducts a quarterlyanalysis of the rate sensitivity position and reports its results to our boardof directors.

The asset liabilitycommittee uses a computer model to analyze the maturities of rate sensitiveassets and liabilities. The model measures the “gap” which is defined as thedifference between the dollar amount of rate sensitive assets repricing duringa period and the volume of rate sensitive liabilities repricing during the sameperiod. Gap is also expressed as the ratio of rate sensitive assets divided byrate sensitive liabilities. If the ratio is greater than “one”, the dollarvalue of assets exceeds the dollar value of liabilities, 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 September 30, 2006. Management uses the one year gap as theappropriate time period for setting strategy.

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Rate SensitivityGap 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                                              |       | $            | 19,168     |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 19,168 |   |
| Interest bearing  deposits in banks                              |       |         |       |       |       | 2,021      |       |      |       |             |       | 2,021      |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |             |       |       |       |
| U.S. government agencies                                         |       | —       |       | —     |       | 497        |       | 12,557    |       | 28,793           |       | 41,847     |       |
| Mortgage-backed securities                                       |       | —       |       | 789        |       | 2,402      |       | 2,842     |       | 1,029            |       | 7,062      |       |
| Total securities                                                 |       |         |       | 789        |       | 2,899      |       | 15,399    |       | 29,822           |       | 48,909     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total loans                                                      |       | 141,781      |       | 52,680     |       | 132,377    |       | 155,460   |       | 8,481            |       | 490,779    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total Interest  Earning Assets                                   |       | 160,949      |       | 53,469     |       | 137,297    |       | 170,859   |       | 38,303           |       | 560,877    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other Assets                                                     |       | —       |       | —     |       | —     |       | —    |       | 13,687           |       | 13,687     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total Assets                                                     |       | $            | 160,949    |       | $          | 53,469     |       | $         | 137,297    |             | $          | 170,859    |       | $ | 51,990 |   | $ | 574,564 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest Bearing  Liabilities                                    |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest checking                                                |       | $            | 4,381      |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 4,381 |   |
| Money market and savings                                         |       | 80,137       |       | —     |       | —     |       | 26,712    |       | —           |       | 106,849    |       |
| Time deposits                                                    |       | —       |       | 58,054     |       | 226,446    |       | 96,377    |       | —           |       | 380,877    |       |
| Total deposits                                                   |       | 84,518       |       | 58,054     |       | 226,446    |       | 123,089   |       | —           |       | 492,107    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Subordinated Debt                                                |       | —       |       | —     |       | —     |       | —    |       | 8,248            |       | 8,248      |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total Interest  Bearing Liabilities                              |       | 84,518       |       | 58,054     |       | 226,446    |       | 123,089   |       | 8,248            |       | 500,355    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  Liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 24,938           |       | 24,938     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Shareholders’  Equity                                       |       | —       |       | —     |       | —     |       | —    |       | 49,271           |       | 49,271     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  Liabilities and Shareholders’ Equity                 |       | $            | 84,518     |       | $          | 58,054     |       | $         | 226,446    |             | $          | 123,089    |       | $ | 82,457 |   | $ | 574,564 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate Sensitive  Gap by period                                    |       | $            | 76,431     |       | $          | (4,585     | )          | $         | (89,149    | )                | $          | 47,770     |       | $ | 30,055 |   |   |   |
| Cumulative Gap                                                   |       |         |       | $          | 71,846     |       | $          | (17,303   | )          | $                | 30,467     |       | $          | 60,522 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Cumulative Gap  as a percent of Total Assets                     |       |         |       | 12.50      | %          | -3.01      | %          | 5.30      | %          |             |       |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate sensitive assets /  Rate sensitive liabilities (cumulative) |       | 1.90         |       | 1.50       |       | 0.95       |       | 1.06      |       | 1.12             |       |       |       |

 

24

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From September 30, 2005to September 30, 2006, the Federal Reserve Open Market Committee has raisedinterest rates by 150 basis points. Management has positioned the balance sheetto be essentially neutral for asset and liability sensitivity. At September 30,2006, our one year GAP was .95.

The interest rate riskmodel that defines the GAP position also performs a “rate shock” test of thebalance sheet. The rate shock test measures the impact on the net interestmargin of an immediate shift in interest rates in either direction. Althoughthis test is a static model that provides information only at a certain pointin time, it is useful in assessing the impact of an unanticipated movement ininterest rates. As shown below, the net interest dollar amount decreaseassuming a 300 basis point drop in interest rates is 0.18% of the averageassets for 2006.

The chart belowidentifies the net interest margin impact of a shift in rates of 100, 200 and300 basis points in either direction.

Interest Incomeand Expense Under Rate ShockAt September 30, 2006(dollars in thousands)
| **Rate Change**       | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
| Net Interest  Income       |       | $          | 20,807     |       | $          | 21,250     |       | $       | 21,664     |       | $          | 22,026     |       | $          | 22,288     |   | $ | 22,504 |   | $ | 22,697 |   |
| Actual dollar  risk        |       | (1,219     | )          | (776       | )          | (362       | )          | —  |       | 262        |       | 478        |       | 671        |       |
| Percent of risk            |       | 5.53       | %          | 3.52       | %          | 1.64       | %          | —  |       | 1.19       | %          | 2.17       | %          | 3.05       | %          |
| Percent of average  assets |       | 0.18       | %          | 0.12       | %          | 0.05       | %          | —  |       | 0.04       | %          | 0.07       | %          | 0.10       | %          |
|                            |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

The chart belowidentifies the net income impact of a shift in rates of 100, 200 and 300 basispoints in either direction.

Net Income UnderRate ShockAt September 30, 2006(dollars in thousands)
| **Rate Change**       | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
| Net Income                 |       | $          | 5,339      |       | $          | 5,612      |       | $       | 5,867      |       | $          | 6,091      |       | $          | 6,252      |   | $ | 6,386 |   | $ | 6,505 |   |
| Actual dollar  risk        |       | (752       | )          | (479       | )          | (224       | )          | —  |       | 161        |       | 295        |       | 414        |       |
| Percent of risk            |       | 12.35      | %          | 7.86       | %          | 3.68       | %          | —  |       | 2.64       | %          | 4.84       | %          | 6.80       | %          |
| Percent of average  assets |       | 0.11       | %          | 0.07       | %          | 0.03       | %          | —  |       | 0.02       | %          | 0.04       | %          | 0.06       | %          |
|                            |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

As shown above, netinterest income and net income should benefit from an increase in marketinterest rates. The model simulates activity so that maturing balances arereplaced with new balances at the new rate level and repricing balances areadjusted to the new rate shock level. In a rising rate environment, earlywithdrawal and repricing levels may increase. Because the balance sheet isessentially asset neutral as shown by the one year GAP ratio of .95, the neteffect of the early withdrawals of the liabilities and the repricing of theassets will only be a small increase in net interest income and net income.

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

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** **

**ITEM 4: CONTROLSAND PROCEDURES**

Evaluation of Disclosure Controls and Procedures

We maintain disclosurecontrols and procedures, as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. We carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this report. Based on the evaluation of these disclosure controlsand procedures, the Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective.

Changes in Internal Controls and Procedures

There were no changes inour internal controls over financial reporting during the quarter endedSeptember 30, 2006, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II:OTHER INFORMATION**

**ITEM 1:LEGAL PROCEEDINGS**

None

**ITEM 1A:RISK FACTORS**

There were no materialchanges to our risk factors included in Part I, Item 1A of ourForm 10-K as filed with the Securities and Exchange Commission onMarch 28, 2006, except as set forth below as related to the issuance of1,150,000 shares of common stock.

***Even though our common stock is currently traded on theNasdaq Global Market, the trading volume in our common stock has been thin andthe sale of substantial amounts of our common stock in the public market coulddepress the price of our common stock.***

While we believe thatsince we are listed on the Nasdaq Global Market, the trading volume of ourcommon stock should increase, we cannot be certain when a more active andliquid trading market for our common stock will develop or be sustained.Because of this, our shareholders may not be able to sell their shares at thevolumes, prices or times that they desire.

We cannot predict theeffect, if any, that future sales of our common stock in the market, oravailability of shares of our common stock for sale in the market, will have onthe market price of our common stock. We, therefore, can give no assurance thatsales of substantial amounts of our common stock in the market, or thepotential for large amounts of sales in the market, would not cause the priceof our common stock to decline or impair our ability to raise capital throughsales of our common stock.

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

***We may issue additionalcommon stock or other equity securities in the future which could dilute theownership interest of existing shareholders.***

In order to maintain ourcapital at desired levels or required regulatory levels, or to fund futuregrowth, our board of directors may decide from time to time to issue additionalshares of common stock, or securities convertible into, exchangeable for orrepresenting rights to acquire shares of our common stock. The sale of thesesecurities may significantly dilute our shareholders’ ownership interest as ashareholder and the per share book value of our common stock. New investors inthe future may also have rights, preferences and privileges senior to ourcurrent shareholders which may adversely impact our current shareholders.

***Holders of oursubordinated debentures have rights that are senior to those of our commonshareholders.***

We have supported ourcontinued growth through the issuance of trust preferred securities from anaffiliated special purpose trust and accompanying subordinated debentures. AtSeptember 30, 2006, we had outstanding trust preferred securities andaccompanying subordinated debentures totaling $8.2 million. We conditionallyguarantee payments of the principal and interest on the trust preferredsecurities. Further, the accompanying subordinated debentures we issued to thetrust are senior to our shares of common stock. As a result, we must makepayments on the subordinated debentures before any dividends can be paid on ourcommon stock and, in the event of our bankruptcy, dissolution or liquidation,the holders of the subordinated debentures must be satisfied before anydistributions can be made on our common stock. We have the right to deferdistributions on our subordinated debentures (and the related trust preferredsecurities) for up to five years (from the date of issuance) during which timewe may not pay dividends on our common stock.

***Our ability todeclare and pay dividends on our common stock is limited by law and we may beunable to pay future dividends.***

We derive our incomesolely from dividends on the shares of common stock of the bank. The bank’sability to declare and pay dividends to us is limited by its obligations tomaintain sufficient capital and by other general restrictions on its dividends thatare applicable to banks that are regulated by the FDIC and the TennesseeDepartment of Financial Institutions, or TDFI. The Federal Reserve Board may alsoimpose restrictions on our ability to pay dividends on our common stock. Inaddition, we must make payments on the subordinated debentures before anydividends can be paid on our common stock, and we may not pay dividends whilewe are deferring interest payments on our trust preferred securities and therelated subordinated debentures. As a result, we cannot assure our shareholdersthat we will declare or pay dividends on shares of our common stock in thefuture.

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** **

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

(a)   None

(b)

On June 27, 2006, theCorporation’s Registration Statement on Form S-1 (File No. 333-133539) wasdeclared effective by the SEC. Pursuant to the Registration Statement, theCorporation registered 1,150,000 shares of its common stock at a price of$18.00 per share. On July 3, 2006, the Corporation received $16,920,000 of netproceeds from the sale of 1,000,000 shares of its common stock in connectionwith its public offering, and on July 28, the Corporation received $2,538,000of net proceeds from the sale of 150,000 additional shares of its common stockissued in connection with the underwriters’ over-allotment option. As of July28, 2006, all 1,150,000 shares offered under the Registration Statement hadbeen fully subscribed. FTN Midwest Securities Corp. and Sterne, Agee &Leach, Inc. were the managing underwriters for the offering. The total expensesincurred for the Corporation’s account in connection with the issuance anddistribution of the securities were $431,000. These expenses were not direct orindirect payments to directors, officers, general partners of the Corporationor their associates; to persons owning ten (10) percent or more of any class ofequity securities of the Corporation or to affiliates of the Corporation. Thenet offering proceeds to the Corporation after deducting the total expenses were$19,027,000. These net proceeds were used to repay the $5,000,000 outstandingbalance on our revolving line of credit, to fund the continued expansion of ourfranchise and for general corporate purposes in accordance with theCorporation’s Registration Statement on Form S-1 as amended.

(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 TDFI. In addition, the Federal Reserve Board may imposerestrictions on our ability to pay dividends on our common stock. As a result,we cannot assure our shareholders that we will declare or pay dividends onshares of our common stock in the future.

**ITEM 3: DEFAULTSUPON SENIOR SECURITIES**

(a)   None

(b)   None

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

None

**ITEM 5: OTHERINFORMATION**

(a)   None

(b)   None

28

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**ITEM 6:EXHIBITS**

| Exhibit No. | ** ** | **Description**                                                                                           | ** ** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
|             |       |                                                                                                      |       |
| 2.1*             |       | Articles of Share  Exchange of Tennessee Commerce Bank and Tennessee Commerce Bancorp, Inc.          |       |
|             |       |                                                                                                      |       |
| 2.2*             |       | Plan of Share Exchange  of Tennessee Commerce Bank and Tennessee Commerce Bancorp, Inc.              |       |
|             |       |                                                                                                      |       |
| 3.1*             |       | Charter of Tennessee  Commerce Bancorp, Inc.                                                         |       |
|             |       |                                                                                                      |       |
| 3.2*             |       | Bylaws of Tennessee  Commerce Bancorp, Inc.                                                          |       |
|             |       |                                                                                                      |       |
| 31.1             |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |       |
|             |       |                                                                                                      |       |
| 31.2             |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |       |
|             |       |                                                                                                      |       |
| 32.1             |       | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |       |
|             |       |                                                                                                      |       |
| 32.2             |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002  |       |
|             |       |                                                                                                      |       |

----

| * | Previously filed as an Exhibit to Tennessee  Commerce Bancorp, Inc.’s Form 10 as filed with the Securities  Exchange Commission on April 29, 2005 and incorporated by reference  herein. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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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)                           |
|                    |   |                                   |
| November 13,  2006 |   |                                   | /s/ Arthur F. Helf |
| (Date)                  |   |                                   | Arthur F. Helf |
|                    |   | Chairman and Chief Executive Officer   |
|                    |   |                                   |
| November 13, 2006       |   |                                   | /s/ George W. Fort |
| (Date)                  |   |                                   | George W. Fort |
|                    |   | Chief Financial Officer                |

 

 

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