**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31,2005**

 

**Commission File Number 000-51281**

 

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**TENNESSEECOMMERCE BANCORP,  INC.**

(Exact Name of Registrant As Specified in ItsCharter)

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

 

**(615) 599-2274**

(Registrant’s Telephone Number, IncludingArea Code)

 

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 o     NO ý

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act)

 

YES o     NO ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date : Common stock outstanding (par value$0.50 per share ) : 3,238,674 shares at June 30, 2005.

 

 

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**TennesseeCommerce Bancorp, Inc.**

 

Table of Contents

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

 

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1: FINANCIAL STATEMENTS**

 

TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATEDBALANCE SHEETS

MARCH 31, 2005(UNAUDITED)  AND DECEMBER 31, 2004

 

(dollarsin thousands except share data)

 
| ** **                                                                                                                                       | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                       |       |                     |       |                        |       |
| Cash and due  from financial institutions                                                                                                        |       | $                        | 10,135     |                        | $          | 3,838 |   |
| Federal  funds sold                                                                                                                              |       | 10,483                   |       | 6,582                       |       |
| Cash and  cash equivalents                                                                                                                       |       | 20,618                   |       | 10,420                      |       |
| Securities  available for sale                                                                                                                   |       | 20,820                   |       | 18,610                      |       |
| Loans                                                                                                                                            |       | 241,313                  |       | 216,167                     |       |
| Allowance  for loan losses                                                                                                                       |       | (3,173                   | )          | (2,841                      | )          |
| Net loans                                                                                                                                        |       | 238,140                  |       | 213,326                     |       |
|                                                                                                                                             |       |                     |       |                        |       |
| Premises and  equipment, net                                                                                                                     |       | 588                      |       | 609                         |       |
| Accrued  interest receivable                                                                                                                     |       | 1,272                    |       | 1,104                       |       |
| Restricted  equity securities                                                                                                                    |       | 324                      |       | 321                         |       |
| Deferred tax  asset                                                                                                                              |       | 725                      |       | 597                         |       |
| Other assets                                                                                                                                     |       | 1,763                    |       | 930                         |       |
|                                                                                                                                             |       |                     |       |                        |       |
| Total assets                                                                                                                                     |       | $                        | 284,250    |                        | $          | 245,917 |   |
|                                                                                                                                             |       |                     |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                   |       |                     |       |                        |       |
| Liabilities                                                                                                                                      |       |                     |       |                        |       |
| Deposits                                                                                                                                         |       |                     |       |                        |       |
| Noninterest-bearing                                                                                                                              |       | $                        | 13,879     |                        | $          | 15,239 |   |
| Interest-bearing                                                                                                                                 |       | 236,589                  |       | 206,155                     |       |
| Total  deposits                                                                                                                                  |       | 250,468                  |       | 221,394                     |       |
|                                                                                                                                             |       |                     |       |                        |       |
| Accrued  interest payable                                                                                                                        |       | 551                      |       | 445                         |       |
| Accrued  bonuses                                                                                                                                 |       | 125                      |       | 125                         |       |
| Long-term  subordinated debt                                                                                                                     |       | 8,248                    |       | —                      |       |
| Other  liabilities                                                                                                                               |       | 804                      |       | 353                         |       |
| Total  liabilities                                                                                                                               |       | 260,196                  |       | 222,317                     |       |
|                                                                                                                                             |       |                     |       |                        |       |
| Shareholders’  equity                                                                                                                       |       |                     |       |                        |       |
| Preferred  stock, no par value. Authorized 1,000,000 shares; none issued or outstanding  at March 31, 2005 and December 31, 2004       |       | —                   |       | —                      |       |
| Common  stock, $0.50 par value. Authorized 5,000,000 shares; Issued and outstanding  3,238,674 at March 31, 2005 and December 31, 2004 |       | 1,619                    |       | 1,619                       |       |
| Additional  paid-in capital                                                                                                                      |       | 21,401                   |       | 21,401                      |       |
| Retained  earnings                                                                                                                               |       | 1,376                    |       | 714                         |       |
| Accumulated  other comprehensive income (loss)                                                                                                   |       | (342                     | )          | (134                        | )          |
| Total shareholders’  equity                                                                                                                 |       | 24,054                   |       | 23,600                      |       |
|                                                                                                                                             |       |                     |       |                        |       |
| Total  liabilities and shareholders’ equity                                                                                                 |       | $                        | 284,250    |                        | $          | 245,917 |   |

 

1

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Note : The balance sheet presented above at December 31, 2004 hasbeen derived from the audited consolidated financial statements at that datebut does not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.

 

See accompanying notes to consolidated financial statements.

 

2

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31,2005 AND 2004

(UNAUDITED)

 

(dollars in thousandsexcept share data)

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Interest  income                                     |       |                                   |       |   |   |
| Loans,  including fees                               |       | $                                      | 4,463      |   | $ | 2,435 |   |
| Securities                                           |       | 194                                    |       | 128 |   |
| Federal  funds sold                                  |       | 16                                     |       | 9 |   |
| Total  interest income                               |       | 4,673                                  |       | 2,572 |   |
|                                                 |       |                                   |       |   |   |
| Interest  expense                                    |       |                                   |       |   |   |
| Deposits                                             |       | 1,618                                  |       | 843 |   |
| Other                                                |       | 7                                      |       | 1 |   |
| Total  interest expense                              |       | 1,625                                  |       | 844 |   |
|                                                 |       |                                   |       |   |   |
| Net interest  income                                 |       | 3,048                                  |       | 1,728 |   |
|                                                 |       |                                   |       |   |   |
| Provision  for loan losses                           |       | 650                                    |       | 480 |   |
|                                                 |       |                                   |       |   |   |
| Net interest  income after provision for loan losses |       | 2,398                                  |       | 1,248 |   |
|                                                 |       |                                   |       |   |   |
| Non interest  income                                 |       |                                   |       |   |   |
| Service  charges on deposit accounts                 |       | 26                                     |       | 30 |   |
| Mortgage  banking                                    |       | 19                                     |       | 25 |   |
| Securities  gains (losses)                           |       | (4                                     | )          | 11 |   |
| Gain on sale  of loans                               |       | 144                                    |       | 139 |   |
| Other                                                |       | 23                                     |       | 23 |   |
| Total non-interest  income                           |       | 208                                    |       | 228 |   |
|                                                 |       |                                   |       |   |   |
| Non interest  expense                                |       |                                   |       |   |   |
| Salaries and  employee benefits                      |       | 903                                    |       | 624 |   |
| Occupancy  and equipment                             |       | 127                                    |       | 78 |   |
| Data  processing fees                                |       | 112                                    |       | 82 |   |
| Professional  fees                                   |       | 87                                     |       | 43 |   |
| Other                                                |       | 296                                    |       | 239 |   |
| Total non-interest  expense                          |       | 1,525                                  |       | 1,066 |   |
|                                                 |       |                                   |       |   |   |
| Income  before income taxes                          |       | 1,081                                  |       | 410 |   |
|                                                 |       |                                   |       |   |   |
| Income tax  expense                                  |       | 419                                    |       | 160 |   |
|                                                 |       |                                   |       |   |   |
| Net income                                           |       | $                                      | 662        |   | $ | 250 |   |
|                                                 |       |                                   |       |   |   |
| Earnings per  share (EPS):                           |       |                                   |       |   |   |
| Basic EPS                                            |       | $                                      | 0.20       |   | $ | 0.10 |   |
| Diluted EPS                                          |       | 0.19                                   |       | 0.10 |   |
|                                                 |       |                                   |       |   |   |
| Weighted  average shares outstanding:                |       |                                   |       |   |   |
| Basic                                                |       | 3,238,674                              |       | 2,461,683 |   |
| Diluted                                              |       | 3,479,977                              |       | 2,603,928 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31,2005 and 2004

(UNAUDITED)

 

(dollars in thousandsexcept share data)

 
| ** **                                                                        | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Balance at December 31,  2003                                                |       | $                 | 1,230      |                             | $          | 13,245                            |       | $                                                    | (952       | )                                     | $          | (125 | ) | $ | 13,398 |   |
| Comprehensive  income                                                             |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Net income                                                                        |       | —            |       | —                           |       | 250                               |       | —                                               |       | 250                                   |       |
| Other  comprehensive income, net of income taxes                                  |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Unrealized  gains on securities available for sale during the period              |       | —            |       | —                           |       | —                            |       | 118                                                  |       | 118                                   |       |
| Reclassification  adjustment for gains included in net income, net of $4 in tax   |       | —            |       | —                           |       | —                            |       | 7                                                    |       | 7                                     |       |
|                                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Total  comprehensive income                                                       |       |              |       |                             |       |                              |       |                                                 |       | 375                                   |       |
|                                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Issuance of  91,822 common shares                                                 |       | 46                |       | 964                              |       | —                            |       | —                                               |       | 1,010                                 |       |
|                                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Balance at March 31,  2004                                                   |       | 1,276             |       | 14,209                           |       | (702                              | )          | —                                               |       | 14,783                                |       |
|                                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Balance at December 31,  2004                                                |       | 1,619             |       | 21,401                           |       | 714                               |       | (134                                                 | )          | 23,600                                |       |
| Comprehensive  income                                                             |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Net income                                                                        |       | —            |       | —                           |       | 662                               |       | —                                               |       | 662                                   |       |
| Other  comprehensive income, net of income taxes                                  |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Unrealized  gains on securities available for sale during the period              |       | —            |       | —                           |       | —                            |       | (205                                                 | )          | (205                                  | )          |
| Reclassification  adjustment for gains included in net income, net of ($1) in tax |       | —            |       | —                           |       | —                            |       | (3                                                   | )          | (3                                    | )          |
|                                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Total  comprehensive income                                                       |       |              |       |                             |       |                              |       |                                                 |       | 454                                   |       |
|                                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |
| Balance at March 31,  2005                                                   |       | $                 | 1,619      |                             | $          | 21,401                            |       | $                                                    | 1,376      |                                  | $          | (342 | ) | $ | 24,054 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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TENNESSEE COMMERCE BANCORP,INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31,2005 AND 2004

(UNAUDITED)

 

(dollars in thousandsexcept share data)

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| **Cash flows from operating activities**                                          |       |                                   |       |   |   |
| Net income                                                                        |       | $                                      | 662        |   | $ | 250 |   |
| Adjustments  to reconcile net income to net cash used by operating activities     |       |                                   |       |   |   |
| Depreciation                                                                      |       | 36                                     |       | 40 |   |
| Deferred  loan fees                                                               |       | (3                                     | )          | — |   |
| Provision  for loan losses                                                        |       | 650                                    |       | 480 |   |
| FHLB stock  dividends                                                             |       | (3                                     | )          | (2 | ) |
| Net  amortization of investment securities                                        |       | 9                                      |       | 11 |   |
| Gain on  sales of securities                                                      |       | 4                                      |       | (11 | ) |
| Change in:                                                                        |       |                                   |       |   |   |
| Accrued  interest receivable                                                      |       | (168                                   | )          | (87 | ) |
| Accrued  interest payable                                                         |       | 106                                    |       | (22 | ) |
| Other assets                                                                      |       | (585                                   | )          | (37 | ) |
| Other  liabilities                                                                |       | 450                                    |       | (105 | ) |
| Net cash  from operating activities                                               |       | 1,158                                  |       | 517 |   |
|                                                                              |       |                                   |       |   |   |
| **Cash flows from investing activities**                                          |       |                                   |       |   |   |
| Purchases of  securities available for sale                                       |       | (3,470                                 | )          | (3,522 | ) |
| Proceeds  from sales of securities available for sale                             |       | 496                                    |       | 1,478 |   |
| Proceeds  from maturities, prepayments and calls of securities available for sale |       | 416                                    |       | 428 |   |
| Investment  in unconsolidated subsidiary                                          |       | (248                                   | )          | — |   |
| Net change  in loans                                                              |       | (25,461                                | )          | (19,460 | ) |
| Net  purchases of premises and equipment                                          |       | (15                                    | )          | (20 | ) |
| Net cash  from investing activities                                               |       | (28,282                                | )          | (21,096 | ) |
|                                                                              |       |                                   |       |   |   |
| **Cash flows from financing activities**                                          |       |                                   |       |   |   |
| Net change  in deposits                                                           |       | 29,074                                 |       | 19,863 |   |
| Proceeds  from long-term subordinated debt                                        |       | 8,248                                  |       | — |   |
| Proceeds  from issuance of common stock                                           |       | —                                 |       | 1,010 |   |
| Net cash  from financing activities                                               |       | 37,322                                 |       | 20,873 |   |
|                                                                              |       |                                   |       |   |   |
| **Net change in cash and cash equivalents**                                       |       | 10,198                                 |       | 294 |   |
|                                                                              |       |                                   |       |   |   |
| Cash and  cash equivalents at beginning of period                                 |       | 10,420                                 |       | 7,722 |   |
|                                                                              |       |                                   |       |   |   |
| **Cash and cash equivalents at end of period**                                    |       | $                                      | 20,618     |   | $ | 8,016 |   |
|                                                                              |       |                                   |       |   |   |
| **Supplemental cash flow information:**                                           |       |                                   |       |   |   |
| Cash paid  during period for interest                                             |       | $                                      | 1,519      |   | $ | 866 |   |
| Cash paid  during period for income taxes                                         |       | 8                                      |       | 10 |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**TENNESSEE COMMERCE BANCORP, INC.**

 

Notes to Consolidated Financial Statements

 

Note 1 – Basis of Presentation

 

TennesseeCommerce Bancorp, Inc. (the “Corporation”) is a holding company forTennessee Commerce Bank (the “Bank”).  InMarch, 2005, the Corporation formed a wholly owned subsidiary, TennesseeCommerce Bank Statutory Trust I, (the “Trust I”). The Bank and the Trust I arethe only subsidiaries of the Corporation. The accompanying 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 unauditedconsolidated financial statements as of March 31, 2005 and for the threemonth periods ended March 31, 2005 and 2004 have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”),and in the opinion of management, include all adjustments, consisting of normalrecurring adjustments, to present fairly the information. They do not includeall the information and footnotes required by generally accepted accountingprinciples for complete financial statements. Operating results for the threemonth period ended March 31, 2005 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005. Forfurther information, refer to the 2004 consolidated financial statements andfootnotes thereto included in the Corporation’s Form 10.

 

Note 2 – Earnings per Share of Common Stock

The factors used in the earnings per sharecomputation follow.

 

(dollars in thousandsexcept share data)

 
| ** **                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Basic                                                                           |       |                                   |       |   |   |
| Net income                                                                      |       | $                                      | 662        |   | $ | 250 |   |
|                                                                            |       |                                   |       |   |   |
| Weighted  average common shares outstanding                                     |       | 3,238,674                              |       | 2,461,683 |   |
|                                                                            |       |                                   |       |   |   |
| Basic  earnings per common share                                                |       | $                                      | 0.20       |   | $ | 0.10 |   |
|                                                                            |       |                                   |       |   |   |
| Diluted                                                                         |       |                                   |       |   |   |
| Net income                                                                      |       | $                                      | 662        |   | $ | 250 |   |
|                                                                            |       |                                   |       |   |   |
| Weighted  average common shares outstanding for basic earnings per common share |       | 3,238,674                              |       | 2,461,683 |   |
| Add:  Dilutive effects of assumed exercises of stock options                    |       | 241,303                                |       | 142,244 |   |
|                                                                            |       |                                   |       |   |   |
| Average  shares and dilutive potential common shares                            |       | 3,479,977                              |       | 2,603,928 |   |
|                                                                            |       |                                   |       |   |   |
| Diluted  earnings per common share                                              |       | $                                      | 0.19       |   | $ | 0.10 |   |

 

No options were antidilutive

 

6

----

 

Note 3 – Stock Compensation

 

Employee compensation expense under stockoptions is reported using the intrinsic value method.  No stock-based compensation cost is reflectedin net income, as all options granted had an exercise price equal to or greaterthan the market price of the underlying common stock at date of grant.

 

The Financial Accounting Standards Board(FASB) recently issued new accounting standards on share-based payments (FAS123R). FAS 123R requires all public companies to record compensation cost forstock options provided to employees in return for employee service. The cost ismeasured at the fair value of the options when granted, and this cost isexpensed over the employee service period, which is normally the vesting periodof the options. This will apply to awards granted or modified after the firstquarter or year beginning after December 15, 2005. Compensation cost willalso be recorded for prior option grants that vest after the date of adoption.The effect on results of operations will depend on the level of future optiongrants and the calculation of the fair value of the options granted at suchfuture date, as well as the vesting periods provided, and so cannot becurrently predicted. Existing options that will vest after adoption date areexpected to result in additional compensation expense of approximately $4,125in 2006. There will be no significant effect on the Corporation’s financialposition as total equity will not change.

 

The following table illustrates the effect onnet income and earnings per share if expense was measured using the fair valuerecognition provisions of FASB Statement No. 123, Accounting forStock-Based Compensation.

 

(dollars in thousandsexcept share data)

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net income  as reported                                                            |       | $                                      | 662        |   | $ | 250 |   |
| Deduct:  Stock-based compensation expense determined under fair value based method |       | 13                                     |       | 35 |   |
|                                                                               |       |                                   |       |   |   |
| Pro forma  net income                                                              |       | $                                      | 649        |   | $ | 215 |   |
|                                                                               |       |                                   |       |   |   |
| Basic  earnings per share as reported                                              |       | $                                      | 0.20       |   | $ | 0.10 |   |
| Pro forma  basic earnings per share                                                |       | 0.20                                   |       | 0.09 |   |
|                                                                               |       |                                   |       |   |   |
| Diluted  earnings per share as reported                                            |       | 0.19                                   |       | 0.10 |   |
| Proforma  diluted earnings per share                                               |       | 0.19                                   |       | 0.08 |   |

 

7

----

 

The pro forma effects are computed using option pricing models, usingthe following weighted-average assumptions as of grant date.

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

 

No options were granted during the three month period ending March 31,2005. The weighted average fair value of options granted during the three monthperiod ending March 31, 2004 was $ 2.23.

 

Note 4 – Trust Preferred Securities

 

In March 2005, the Corporation formed afinancing subsidiary, Tennessee Commerce Statutory Trust I, a Delawarestatutory trust ( the “Trust I”). In March 2005, Trust I issued and sold8,000 of  Trust I’s Fixed/Floating ratecapital securities, with a liquidation amount of $1,000 per capital security,to First Tennessee Bank National Association. At the same time, the Corporationissued to Trust I $8,248,000 of Fixed/Floating rate junior subordinateddeferrable interest debentures due 2035. The debentures pay a  6.73% fixed rate payable quarterly for thefirst five years and a floating rate based on a 3 month Libor rate plus amargin thereafter.

 

In accordance with FASB Interpretation No. 46 (revised December 2003)Consolidation of Variable Interest Entities (FIN46R), the Trust I is notconsolidated. The Corporation will report as liabilities the subordinateddebentures issued by the Corporation and held by Trust I.

 

8

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

 

**Forward-Looking Statements**

 

Management’sdiscussion of the Corporation and management’s analysis of the Corporation’soperations and prospects, and other matters, may include forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 and other provisions of federal and state securities laws.  Although the Corporation believes that theassumptions underlying such forward-looking statements contained in this Reportare reasonable, any of the assumptions could be inaccurate and, accordingly,there can be no assurance that the forward-looking statements included hereinwill prove to be accurate.  The use ofsuch words as expect, anticipate, forecast, and comparable terms should beunderstood by the reader to indicate that the statement is “forward-looking”and thus subject to change in a manner that can be unpredictable.  Factors that could cause actual results todiffer 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 the Corporation’s customers, as well as otherrisks that cannot be accurately quantified or completely identified.  Many factors affecting the Corporation’sfinancial condition and profitability, including changes in economicconditions, the volatility of interest rates, political events and competitionfrom other providers of financial services simply cannot be predicted.  Because these factors are unpredictable andbeyond the Corporation’s control, earnings may fluctuate from period toperiod.  The purpose of this type ofinformation is to provide readers with information relevant to understandingand assessing the financial condition and results of operations of theCorporation, and not to predict the future or to guarantee results.  The Corporation is unable to predict thetypes of circumstances, conditions, and factors that can cause anticipatedresults to change.  The Corporationundertakes no obligation to publish revised forward-looking statements toreflect the occurrence of changes or unanticipated events, circumstances, orresults.

 

**Corporation Overview**

 

Tennessee Commerce Bancorp, Inc.(the “Corporation”) is a one-bank holding company formed as a Tennesseecorporation to own the shares of Tennessee Commerce Bank (the “Bank”).  The Corporation was incorporated on March 22,2000, for the purpose of acquiring 100% of the shares of the Bank and the shareexchange was completed on May 31, 2000. The Bank commencedoperations as a Tennessee state chartered bank on January 14, 2000, andboth the Bank’s and Corporation’s principal executive offices are located at381 Mallory Station Road, Suite 207, Franklin, Tennessee 37067.  On March 29, 2005, theCorporation formed a wholly owned subsidiary, Tennessee Commerce Bank StatutoryTrust I, (the “Trust I”). The Bank and the Trust I are the only subsidiaries ofthe Corporation.

 

The Bank offers a full rangeof competitive retail and commercial banking services.  The deposit services offered include varioustypes of checking accounts, savings accounts, money market investment accounts,certificates of deposits, and retirement accounts.  Lending services include consumer installmentloans, various types of mortgage loans, personal lines of credit, home equity

 

9

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loans,credit cards, real estate construction loans, commercial loans to small andmedium size businesses and professionals, and letters of credit. The Bankissues VISA credit cards and is a merchant depository for cardholder draftsunder VISA credit cards.  The Bank alsooffers check cards and debit cards.  TheBank offers its customers courier services, access to third-party automatedteller machines (“ATMs”), and state of the art electronic banking. The Bank hastrust powers but does not have a trust department.

 

The Bank is located inFranklin, Tennessee, fifteen miles south of Nashville. Franklin is inWilliamson County, one of the most affluent and rapidly growing counties in thenation and the Bank conducts business from a single location in the CoolSprings commercial area of Franklin. Although the Bank offers a full range ofbanking services and products, it operates with a focused “Business Bank”strategy.  The “Business Bank” strategyemphasizes banking services for small to medium sized businesses,entrepreneurs, and professionals.  TheBank competes by combining the personal service and appeal of a community bankinstitution with the sophistication and flexibility of a larger bank.  This strategy distinguishes the Bank from itscompetitors in efforts to attract loans and deposits of local businesses.

 

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

 

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

 

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

 

10

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**Overview of Operating Results for the ThreeMonths ended March 31, 2005 and March 31, 2004 and FinancialCondition at March 31, 2005 and December 31, 2004.**

 

(dollars in thousands except share data in the remainder of this Item2)

 

The results ofoperations for the quarter ended March 31, 2005 compared to the quarterended March 31, 2004 reflected a 164.80% increase in net income and a90.00% increase in earnings per share, assuming dilution. The increase inearnings resulted primarily from a 76.38% increase in net interest income dueto higher average loan balances. The increased net interest income was partiallyoffset by increases in non-interest expense and the provision for loan losses.The quarter ended March 31, 2005, reflected a continuation of the Bank’strend of rapid asset growth increasing by $38,333 or 15.59% from $245,917 at December 31,2004 to 284,250 at March 31, 2005. Net loans increased by 11.63% or$24,814 from December 31, 2004 to March 31, 2005, while totaldeposits increased by 13.13% or $29,074 during that same period.

 

**Comparison of Operating Results for the ThreeMonths ended March 31, 2005 and March 31, 2004**

 

**Net Income** - Netincome for the quarter ended March 31, 2005 was $662 an increase of $412or 164.80%, compared to the net income of $250 for the quarter ended March 31,2004.  The increase is attributable to a76.38% increase in net interest income from $1,728 for the quarter ended March 31,2004 to $3,048 for the same period in 2005. The increase of $1,320 in netinterest income was the result of overall growth of the Corporation , includinga 60.82% increase in average loan balances in the three months ended March 31,2005 compared to the same period in 2004. This positive effect was partiallyoffset by a 35.42% increase in the provision for loan losses, from $480 duringthe three months ended March 31, 2004 to $650 for the same period in 2005.Also, non-interest expense increased by 43.05% to $1,525 for the three monthperiod ended March 31, 2005 compared to $1,066 for the same period in2004. The increase in the provision for loan losses was the result of fundingthe allowance for loan losses to match the significant loan growth. Theincrease in non-interest expense was due to the increase in personnel andgeneral operating expenses due to the Corporation’s growth.

 

(dollars in thousands)

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2005**                               | ** ** | **2004**   | ** ** | **% Increase** | ** ** |
|                                          |       |                                   |       |       |       |   |   |
| Interest  income                              |       | $                                      | 4,673      |       | $          | 2,572 |   | 81.68 | % |
| Interest  expense                             |       | 1,625                                  |       | 844        |       | 92.53 |   |
| Net interest  income                          |       | 3,048                                  |       | 1,728      |       | 76.38 |   |
| Provision  for loan losses                    |       | 650                                    |       | 480        |       | 35.42 |   |
| Net interest  after provision for loan losses |       | 2,398                                  |       | 1,248      |       | 92.15 |   |
| Noninterest  income                           |       | 208                                    |       | 228        |       | (8.77 | ) |
| Noninterest  expense                          |       | 1,525                                  |       | 1,066      |       | 43.05 |   |
| Net income  before taxes                      |       | 1,081                                  |       | 410        |       | 163.65 |   |
| Income tax  expense                           |       | 419                                    |       | 160        |       | 161.88 |   |
| Net income                                    |       | $                                      | 662        |       | $          | 250 |   | 164.80 | % |

 

11

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**Net Interest Income**- Net interest income for the quarter ended March 31, 2005 was $3,048compared to $1,728 for the same period in 2004, a gain of $1,320 or76.38%.  The increase in net interestincome was largely attributable to strong loan growth.  The average loan balance for the three monthsended March 31 increased by 60.82% or $86,934 from $142,946 for thatperiod in 2004 to $229,880 for the same period in 2005. Loan growth was matchedby an increase in average deposits from $140,512 for the three months ended March 31,2004 to $218,594 for the same period in 2005 – an increase of $78,082 or55.56%.

 

**Net Interest Margin**-The net interest margin improved from 4.34% for the three months ended March 31,2004 to 4.90% for the same period in 2005 due to an improved yield on earningassets offset to a lesser degree by an increase in the cost of funding.Interest income increased by $2,101 or 81.68%, from $2,572 during the quarterended March 31, 2004 to $4,673 during the same period in 2005. Theincrease was primarily due to increased volume. Average earning assets increased from $160,193 in the three months endedMarch 31, 2004 to $252,085 in the same period in 2005, an increase of$91,892 or 57.36%.  The increase inearning assets was due to loan growth. Average loan balances increased by$86,934 or 60.82%.  The average yield onearning assets increased from 6.45% in the quarter ended March 31, 2004 to7.51% in the same period in 2005. The increase in yield on earning assets andcost of funds, as a percentage of average balances was primarily due to recentincreases in short term interest rates by the Federal Reserve Open MarketCommittee (FOMC).

 

Interestexpense increased from $844 in the quarter ended March 31, 2004 to $1,625in the quarter ended March 31, 2005. The $781 or 92.53%, increase inexpense was due primarily to increases in the volume of deposits. Averagedeposits increased by $78,082 or 55.56%. The cost of funds increased from 2.41% in the quarter ended March 31,2004 to 3.00% in the same quarter in 2005, an increase of 59 basis points.

 

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

 

The followingtable shows the average daily balances of each principal category of assets,liabilities and stockholders’ equity of the Corporation, and an analysis of netinterest income, and the change in interest income and interest expensesegregated into amounts attributable to changes in volume and changes in ratesfor the three month periods ended March 31, 2004 and 2005. The table ispresented on a tax equivalent basis if applicable.

 

12

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| ** **                                        | ** ** | **Three Months Ended March 31,  2005** | ** ** | **Three Months Ended March 31,  2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| **(dollars in thousands)**                        | ** ** | **Average  Balance**                        | ** ** | **Interest**                                | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **ASSETS**                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest  earning assets                          |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Securities  (taxable) (1)                         |       | $                                           | 19,075     |                                        | $          | 194 |   | 4.07 | % | $ | 13,789 |   | $ | 128 |   | 3.71 | % |
| Loans (2) (3)                                |       | 229,880                                     |       | 4,463                                       |       | 7.87 | % | 142,946 |   | 2,435 |   | 6.85 | % |
| Federal  funds sold                               |       | 3,130                                       |       | 16                                          |       | 2.06 | % | 3,458 |   | 9 |   | 1.07 | % |
| Total  interest earning assets                    |       | 252,085                                     |       | 4,673                                       |       | 7.51 | % | 160,193 |   | 2,572 |   | 6.45 | % |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest  earning assets                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                          |       | 3,197                                       |       |                                        |       |   |   | 2,678 |   |   |   |   |   |
| Net fixed  assets and equipment                   |       | 601                                         |       |                                        |       |   |   | 670 |   |   |   |   |   |
| Accrued interest  and other assets                |       | 3,380                                       |       |                                        |       |   |   | 1,545 |   |   |   |   |   |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                           | 259,263    |                                        |       |   |   |   | $ | 165,086 |   |   |   |   |   |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND****SHAREHOLDERS’  EQUITY** |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities                     |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Deposits  (other than demand)                     |       | $                                           | 218,594    |                                        | 1,618      |   | 3.00 | % | $ | 140,512 |   | 843 |   | 2.41 | % |
| Federal  funds purchased                          |       | 817                                         |       | 6                                           |       | 3.84 | % | 81 |   | 1 |   | 5.52 | % |
| Subordinated  debt                                |       | 92                                          |       | 1                                           |       | 6.73 | % | — |   | — |   | — |   |
| Total  interest bearing liabilities               |       | 219,503                                     |       | 1,625                                       |       | 3.00 | % | 140,593 |   | 844 |   | 2.41 | % |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing liabilities                  |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing demand deposits              |       | 14,586                                      |       |                                        |       |   |   | 10,561 |   |   |   |   |   |
| Other  liabilities                                |       | 1,304                                       |       |                                        |       |   |   | 360 |   |   |   |   |   |
| Shareholders’  equity                        |       | 23,870                                      |       |                                        |       |   |   | 13,572 |   |   |   |   |   |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity  |       | $                                           | 259,263    |                                        |       |   |   |   | $ | 165,086 |   |   |   |   |   |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net Interest  Spread                              |       | 4.51                                        | %          |                                        |       |   |   | 4.04 | % |   |   |   |   |
|                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net Interest  Margin                              |       | 4.90                                        | %          |                                        |       |   |   | 4.34 | % |   |   |   |   |
|                                                   |            |                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Unrealized loss of $273 and $113 is excluded from yield calculation forthe quarter ended March 31, 2005 and 2004 respectively.

(2)          Non-accrual loans are included in average loan balances and loan fees of$140 and $104 are included in interest income for the quarter ended March 31,2005 and 2004 respectively.

(3)          Loans are presented net of allowance for loan loss.

 

The following table outlines the components of the net interest marginfor the three month periods ended March 31, 2005 and 2004 and identifiesthe impact of changes in volume and the changes in rate.

 
| ** **                     | ** ** | **March 31, 2005 change from  March 31, 2004 due to:** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------|------------|
| **(dollars in thousands)**     | ** ** | **Volume**                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                           |       |                                                             |       |   |   |   |   |
| Interest  income               |       |                                                             |       |   |   |   |   |
| Loans                          |       | $                                                                | 1,649      |   | $ | 379 |   | $ | 2,028 |   |
| Securities –  taxable (1) |       | 52                                                               |       | 14 |   | 66 |   |
| Federal  funds sold            |       | (1                                                               | )          | 8 |   | 7 |   |
| Total  interest income         |       | $                                                                | 1,700      |   | $ | 401 |   | $ | 2,101 |   |
|                           |       |                                                             |       |   |   |   |   |
| Interest  expense              |       |                                                             |       |   |   |   |   |
| Deposits  (other than demand)  |       | $                                                                | 545        |   | $ | 230 |   | $ | 775 |   |
| Federal  funds purchased       |       | 7                                                                |       | (2 | ) | 5 |   |
| Subordinated  debt             |       | 1                                                                |       | — |   | 1 |   |
| Total  interest expense        |       | $                                                                | 553        |   | $ | 228 |   | $ | 781 |   |
|                           |       |                                                             |       |   |   |   |   |
| Net interest  income           |       | $                                                                | 1,147      |   | $ | 173 |   | $ | 1,320 |   |

 

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(1)Unrealized loss of $273 and $113 is excluded from yield calculation for thequarter ended March 31, 2005 and 2004 respectively.

 

**Provision for Loan Losses**- The provision for loan losses for the quarter ended March 31, 2005 was$650, an increase of $170, or 35.42%, above the provision of $480 expensed inthe same period in 2004.  This increasewas primarily due to significant loan growth.

 

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The provision is discussed as it relates to the allowance for loanlosses in the following Comparison of Financial Condition section. At March 31,2005, the loan loss reserve of $3,173 was 1.31% of gross loans of $241,313.

 

**Noninterest Income**- The Bank earned $19 in mortgage origination fees during the quarter ended March 31,2005 compared to $25 earned in 2004, a decline of $6 or 24.00%.  The decline in mortgage origination income isattributed to rising interest rates in mid-2004 and the slowing of refinancingactivity. Management believes that rates will continue to rise and that themortgage unit will provide a value-added service with modest revenue results.Income earned in the form of service charges on deposits totaled $26 for thequarter ended March 31, 2005, a decrease of $4 compared to the same period in 2004. Sale of securitiesshowed a loss of $4 for the three months ended March 31, 2005, comparedwith a gain of $11 for the same period in 2004. The Bank earned $144 on loansale transactions in the quarter ended March 31, 2005, a 3.59% increasecompared to $139 during the same period in 2004. Management will continue toconsider loan sale transactions if the opportunity for a reasonable return isavailable.

 

**Noninterest Expense**- Noninterest expense for the three months ended March 31, 2005 was$1,525, an increase of $459 or 43.05%, over the $1,066 expensed in the sameperiod in 2004.  Approximately 60.00% ofthe increase was due to the addition of eight new employees during the periodbetween the two quarters. At March 31, 2005, the Corporation had 35 fulltime employees. Assets per employee were $6.5 million at March 31, 2004 and $8.1 million at March 31,2005. Management targets $7 million per full time employee as a measure ofstaffing efficiency.

 

Efficiency Ratio

(dollars  in thousands )

 
| ** **           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Noninterest  expense |       | $                                      | 1,525      |   | $ | 1,066 |   |
| Net interest  income |       | 3,048                                  |       | 1,728 |   |
| Noninterest  income  |       | 208                                    |       | 228 |   |
| Total  Revenues      |       | $                                      | 3,256      |   | $ | 1,956 |   |
|                 |       |                                   |       |   |   |
| Efficiency  Ratio    |       | 46.84                                  | %          | 54.49 | % |

 

**Income Taxes** -The Corporation’s effective tax rate for the quarter ended March 31, 2005was 38.47% compared to 39.02% for the quarter ended March 31, 2004.Management anticipates that tax rates in future periods will approximate therates paid in 2005.

 

**Comparison of Financial Condition at March 31,2005 and December 31, 2004**

 

**Assets -**Totalassets at March 31, 2005 were $284,250, an increase of $38,333 or 15.59%,over total assets of $245,917 at December 31, 2004. Loan growth was theprimary reason for the increase.  March 31,2005 net loans were $238,140, up $24,814, or 11.63% over the December 31, 2004total net loans of $213,326. Cash and due from financial institutions balancesincreased by 

 

14

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$6,297 from December 31, 2004 to March 31, 2005 primarily asa result of the issuance of $8 million in Trust Preferred Securities.

 

The Bank’s Business Bank model of operation results in a higher levelof earning assets than peer banks. Earning assets are defined as assets which earn interest income.  Earning assets include short-terminvestments, the investment portfolio, and net loans.  The Bank maintains a higher level of earningassets because fewer assets are allocated to facilities, cash, and due-frombank accounts used for transaction processing. Earning assets at March 31, 2005 were $269,443, or 94.79% of totalassets of $284,250.  Earning assets at December 31,2004 were $238,518, or 96.99% of total assets of $245,917.

 

**Loans** -The Bank had total net loans of $238 million at March 31, 2005. Thefollowing table sets forth the composition of the Bank’s loan portfolio at March 31,2005 and December 31, 2004 (dollars in thousands) :

 
| ** **                              | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Real estate                             |       |                     |       |                        |       |
| Construction                            |       | $                        | 25,317     |                        | $          | 22,813 |   |
| 1-4 family  residential                 |       | 16,081                   |       | 15,963                      |       |
| Other                                   |       | 34,791                   |       | 33,694                      |       |
| Commercial,  financial and agricultural |       | 161,315                  |       | 139,799                     |       |
| Consumer                                |       | 3,809                    |       | 3,898                       |       |
|                                    |       |                     |       |                        |       |
| Total loans                             |       | $                        | 241,313    |                        | $          | 216,617 |   |
| Less:  allowance for loan losses        |       | (3,173                   | )          | (2,841                      | )          |
|                                    |       |                     |       |                        |       |
| Net loans                               |       | $                        | 238,140    |                        | $          | 213,326 |   |

 

Composition of loan portfolio by type

(dollars in thousands)

 
| ** **                              | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Real estate:                            |       |                     |       |                        |       |
| Construction                            |       | 10.49                    | %          | 10.55                       | %          |
| 1 to 4  family residential              |       | 6.66                     | %          | 7.38                        | %          |
| Other                                   |       | 14.42                    | %          | 15.59                       | %          |
| Commercial,  financial and agricultural |       | 66.85                    | %          | 64.67                       | %          |
| Consumer                                |       | 1.58                     | %          | 1.80                        | %          |
|                                    |       |                     |       |                        |       |
| Total                                   |       | 100                      | %          | 100                         | %          |

 

Managementof the Bank periodically reviews the loan portfolio, particularly non-accrualand renegotiated loans.  The review mayresult in a determination that a loan should be placed on a non-accrual statusfor income recognition. When a loan is classified as

 

15

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non-accrual,any unpaid interest is reversed against current income.  Interest is included in income thereafteronly to the extent received in cash.  Theloan remains in a non-accrual classification until such time as the loan isbrought current, when it may be returned to accrual classification.

 

Thefollowing table presents information regarding non-accrual, past due andrestructured loans at March 31, 2005 and December 31, 2004:

 
| **(dollars in thousands)**                                                                               | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Non-accrual  loans                                                                                       |       |                     |       |                        |       |
| Number                                                                                                   |       | 16                       |       | 17                          |       |
| Amount                                                                                                   |       | $                        | 1,896      |                        | $          | 2,161 |   |
|                                                                                                     |       |                     |       |                        |       |
| Accruing  loans which are contractually past due 90 days or more as to principal and  interest payments: |       |                     |       |                        |       |
| Number                                                                                                   |       | 5                        |       | 4                           |       |
| Amount                                                                                                   |       | $                        | 1,442      |                        | $          | 111 |   |
|                                                                                                     |       |                     |       |                        |       |
| Loans  defined as “troubled debt restructurings”                                               |       |                     |       |                        |       |
| Number                                                                                                   |       | 2                        |       | 2                           |       |
| Amount                                                                                                   |       | $                        | 1,541      |                        | $          | 1,544 |   |

 

Asof March 31, 2005 and December 31, 2004, there are no loansclassified for regulatory purposes as doubtful or substandard that have notbeen disclosed in the above table, which (i) represent or result fromtrends or uncertainties which management reasonably expects will materiallyimpact future operating results, liquidity, or capital resources, or (ii) representmaterial credits about which management is aware of any information whichcauses management to have serious doubts as to the ability of such borrowers tocomply with the loan repayment terms.

 

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

 

It is management’s intent to maintain an ALLwhich is adequate to absorb current and estimated losses which are inherent ina loan portfolio.  The historical lossratio (net charge-offs as a percentage of average loans) was .14% for the threemonths ended March 31, 2005 and .21% for the three months ended March 31,2004. The ALL as a percentage of the outstanding loans at the end of the periodwas 1.31% at March 31, 2005 and 1.41% at March 31, 2004. Inmanagement’s opinion, the commercial emphasis of the bank’s operation and thetypically larger size and greater risk in commercial credits justify a reservelevel in excess of historical results.

 

16

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Ananalysis of the Bank’s loss experience is furnished in the following table forthe quarter ended March 31, 2005 and the same period ended March 31,2004:

 

(dollarsin thousands)

 
| ** **                                        | ** ** | **March 31,****2005** | ** ** | **March 31,****2004** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Allowance for loan losses  at beginning of period |       | $                          | 2,841      |                       | $          | 1,999 |   |
| Less: net loan  charge-offs:                      |       |                       |       |                       |       |
| Real estate:                                      |       |                       |       |                       |       |
| Construction                                      |       | —                     |       | —                     |       |
| 1 to 4 family residential                         |       | —                     |       | —                     |       |
| Other                                             |       | —                     |       | 131                        |       |
| Commercial, financial and  agricultural           |       | 353                        |       | 182                        |       |
| Consumer                                          |       | 4                          |       | 13                         |       |
|                                              |       |                       |       |                       |       |
| Recoveries:                                       |       |                       |       |                       |       |
| Real estate:                                      |       |                       |       |                       |       |
| Construction                                      |       | —                     |       | —                     |       |
| 1 to 4 family residential                         |       | 1                          |       | —                     |       |
| Other                                             |       | —                     |       | —                     |       |
| Commercial, financial and  agricultural           |       | 15                         |       | 13                         |       |
| Consumer                                          |       | 23                         |       | 5                          |       |
|                                              |       |                       |       |                       |       |
| Net Charge-offs                                   |       | $                          | 318        |                       | $          | 308 |   |
|                                              |       |                       |       |                       |       |
| Provision for loans  charged to expense           |       | 650                        |       | 480                        |       |
| Allowance for loan losses  at end of period       |       | $                          | 3,173      |                       | $          | 2,171 |   |

 
| ** **                                                                                        | ** ** | **March 31,****2005** | ** ** | **March 31,****2004** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Net charge-offs as a  percentage of average total loans outstanding during the period             |       | 0.14                       | %          | 0.21                       | %          |
|                                                                                              |       |                       |       |                       |       |
| Ending allowance for loan  losses as a percentage of total loans outstanding at end of the period |       | 1.31                       | %          | 1.41                       | %          |

 

Theallowance for loan losses is established by charges to operations based onmanagement’s evaluation of the loan portfolio, past due loan experience,collateral values, current economic conditions and other factors considerednecessary to maintain the allowance at an adequate level.

 

**Securities** - Thesecurities portfolio at March 31, 2005 was $20,820 compared to $18,610 at December 31,2004.  The Corporation views thesecurities portfolio as a source of income and liquidity.  Management has maintained the portfolio at7.32% of total assets at March 31, 2005 and 7.56% of total assets at December 31,2004.

 

**Liabilities -** TheBank relies on a growing deposit base to fund loan and other asset growth. TheBank competes for local deposits by offering attractive products with premiumrates.  The Bank also obtains funding inthe wholesale deposit market which is accessed by means of an electronic bulletinboard.  This electronic market linksbanks and acquirers of funds to credit unions, school districts,

 

17

----

 

labor unions, and other organizations with excess liquidity. Theprocess is highly efficient and the average rate is generally less than ratespaid in the local market. Wholesale deposits are categorized as “Purchased TimeDeposits” on the detail of deposits shown in the table below.

 

Total deposits at March 31, 2005 were$250,468, up $29,074 or 13.13% over the December 31, 2004 total depositsof $221,394. Total average deposits during the quarter ending March 31,2005 were $233,180, an increase of $82,107, or 54.34% over the total averagedeposits of $151,073 during the quarter ending March 31, 2004. Averagenoninterest bearing deposits increased by $4,025, or 38.11%, from $10,561 inthe quarter ending March 31, 2004 to $14,586 in the quarter ending March 31,2005. Average deposit balances for the three months ended March 31, 2005and 2004 and the average rates paid on those balances are shown below.

 

Deposits

(dollars in thousands)

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** **                            | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                           | ** ** | **Average  Balance**                  | ** ** | **Rate  Paid (1)** | ** ** | **Average  Balance** | ** ** | **Rate  Paid (1)** | ** ** |
| Types of Deposits                    |       |                                  |       |   |   |   |   |   |   |
| Noninterest-bearing  demand deposits |       | $                                     | 14,586     |   | — |   | $ | 10,561 |   | — |   |
| Interest-bearing  demand deposits    |       | 2,122                                 |       | 0.89 | % | 1,310 |   | 0.00 | % |
| Money market  accounts               |       | 31,583                                |       | 3.17 | % | 12,399 |   | 1.48 | % |
| Savings  accounts                    |       | 27,476                                |       | 2.54 | % | 36,056 |   | 2.41 | % |
| IRA accounts                         |       | 1,022                                 |       | 3.61 | % | 1,040 |   | 3.69 | % |
| Purchased  time deposits             |       | 135,874                               |       | 3.07 | % | 75,486 |   | 2.54 | % |
| Time  deposits                       |       | 20,517                                |       | 3.22 | % | 14,221 |   | 2.72 | % |
| Total  deposits                      |       | $                                     | 233,180    |   |   |   | $ | 151,073 |   |   |   |

 

----

(1) Rateis annualized

 

**Subordinated Debt**- In March 2005, the Corporation formed a financing subsidiary, TennesseeCommerce Statutory Trust I, a Delaware statutory trust ( the “Trust I”). In March 2005,Trust I issued and sold 8,000 of Trust I’s Fixed/Floating rate capitalsecurities, with a liquidation amount of $1,000 per capital security, to FirstTennessee Bank National Association. At the same time, the Corporation issuedto Trust I $8,000,000 of Fixed/Floating rate junior subordinated deferrableinterest debentures due 2035. The debentures pay a  6.73% fixed rate payable quarterly for thefirst five years and a floating rate based on a 3 month Libor rate plus amargin thereafter. In accordance with FASB Interpretation No. 46 (revised December 2003)Consolidation of Variable Interest Entities (FIN46R), the Trust I is notconsolidated. The subordinated debentures are reported as a liability on thebalance sheet of the Corporation.

 

18

----

 

**Off-balance Sheet Arrangements**

 

The Bank is a party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of its customers. At March 31, 2005, the Bank had unfundedloan commitments outstanding of $31 million and unfunded lines of credit andletters of credit of $7.4 million. These financial instruments includecommitments to extend credit and standby letters of credit.  Those instruments involve, to varyingdegrees, elements of credit risk in excess of the amount recognized in thebalance sheet.  The contract or notionalamounts of those instruments reflect the extent of involvement the Bank has inthose particular financial instruments. The Bank uses the same credit policiesin making commitments and conditional obligations as it does for on-balancesheet instruments.

 

Because these commitments generally havefixed expiration dates and many will expire without being drawn upon, the totalcommitment level does not necessarily represent future cash requirements. Ifneeded, the Bank can liquidate Federal funds sold or securities available forsale or borrow and purchase Federal funds from other financial institutionswhere the Bank has available federal fund lines totaling $5.5 million.

 

# **Capital Resources/Liquidity**

# ** **

**Liquidity** - Of primary importance to depositors, creditorsand regulators is the ability to have readily available funds sufficient torepay fully maturing liabilities.  TheBank is subject to general FDIC guidelines which do not require a minimum levelof liquidity. Liquidity requirements can also be met through short-termborrowings or the disposition of short-term assets which are generally matchedto correspond to the maturity of liabilities. Management believes its liquidityratios meet the general FDIC guidelines and the Corporation has assets andborrowing capacity to provide adequate liquidity. Management does not know ofany trends or demands which are reasonably likely to result in liquidityincreasing or decreasing in any material manner.

 

**Capital Adequacy**-The objective of the Bank’s management is to maintain a level of capitalizationthat is sufficient to take advantage of profitable growth opportunities whilemeeting regulatory requirements.****To continue to grow, the Bank must increasecapital by generating earnings, issuing equities, borrowing funds, or acombination of those activities. If growth exceeds expectations, The Bank mayneed to raise capital in the capital markets. For example, in 2004 theCorporation issued equity securities increasing capital by $8.5 million.  In March 2005, the Corporation’ssubsidiary Trust I issued $8 million in Trust Preferred Securities that meetthe capital guidelines to be classified as Tier I capital as explained below.

 

The Federal Reserve Boardhas adopted capital guidelines governing the activities of bank holdingcompanies.  These guidelines require themaintenance of an amount of capital based on risk-adjusted assets so thatcategories of assets with potentially higher credit risk will require morecapital backing than assets with lower risk. 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.

 

The capital guidelinesclassify capital into two tiers, referred to as Tier I and Tier II.  Under risk-based capital requirements, totalcapital consists of Tier I capital which is generally common stockholders’equity less goodwill and Tier II capital which is primarily a portion of the allowancefor loan losses and certain qualifying debt instruments.  In determining risk-based capital 

 

19

----

 

requirements, assets are assigned risk-weights of 0% to 100%, dependingprimarily on the regulatory assigned levels of credit risk associated with suchassets.  Off-balance sheet items areconsidered in the calculation of risk-adjusted assets through conversionfactors established by the regulators. The framework for calculating risk-based capital requires banks and bankholding companies to meet the regulatory minimums of 4% Tier I and 8%total risk-based capital.  In 1990regulators added a leveraged computation to the capital requirements, comparingTier I capital to total average assets less goodwill.

 

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

 

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

 
| ** **                                               | ** ** | ** **         | ** ** | ** **            | ** ** | **Minimum to**       | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **be considered**    | ** ** |
| ** **                                               | ** ** | **2005**           | ** ** | **2004**              | ** ** | **well-capitalized** | ** ** |
|                                                     |       |               |       |                  |       |                 |       |
| Tier 1  “core” capital to risk-weighted assets |       |               |       |                  |       |                 |       |
| Tennessee  Commerce Bank                                 |       | 11.64              | %          | 10.71                 | %          | 6.00                 | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 12.92              | %          | 10.81                 | %          | 6.00                 | %          |
|                                                     |       |               |       |                  |       |                 |       |
| Total  capital to risk-weighted assets                   |       |               |       |                  |       |                 |       |
| Tennessee  Commerce Bank                                 |       | 12.89              | %          | 11.96                 | %          | 10.00                | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 14.17              | %          | 12.06                 | %          | 10.00                | %          |
|                                                     |       |               |       |                  |       |                 |       |
| Tier 1  leverage ratio                                   |       |               |       |                  |       |                 |       |
| Tennessee  Commerce Bank                                 |       | 11.26              | %          | 9.73                  | %          | 5.00                 | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 12.50              | %          | 9.83                  | %          | 5.00                 | %          |

 

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

 

**Impact of Inflation and Changing Prices** - The financial statements and relatedfinancial data presented herein have been prepared in accordance with U.S.generally accepted accounting principles which require the measurement offinancial position and operating results in terms of historical dollars withoutconsidering the changes in the relative purchasing power of money over time anddue to inflation.  The impact ofinflation on operations of the Bank is reflected in increased operatingcosts.  Unlike most industrial companies,virtually all of the assets and liabilities of the Bank are monetary innature.  As a result, interest rates havea more significant impact on the Bank’s performance than the effects of generallevels of inflation.  Interest rates do notnecessarily move in the same direction or in the same magnitude as the price ofgoods and services.

 

20

----

 

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

 

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

 

Managementuses a computer model to analyze the maturities of rate sensitive assets andliabilities.  The model measures the“GAP” which is defined as the difference between the dollar amount of ratesensitive assets repricing during a period and the volume of rate sensitiveliabilities repricing during the same period. GAP is also expressed as theratio of rate sensitive assets divided by rate sensitive liabilities.  If the ratio is greater than “one”, thedollar value of assets exceeds the dollar value of liabilities; the balancesheet is “asset sensitive”.  Conversely,if the value of liabilities exceeds the value of assets, the ratio is less thanone and the balance sheet is “liability sensitive”. The model measures scheduledmaturities in periods of three months, four to twelve months, one to fiveyears, and over five years.

 

The tablebelow illustrates the rate sensitive position of the Corporation at March 31,2005. Management uses the one year GAP as the appropriate time period forsetting strategy.

 

Rate Sensitivity Gap Analysis

(dollars in thousands)

 
| ** **                                                       | ** ** | ** **   | ** ** | **1-3**    | ** ** | **4-12**   | ** ** | **1-5**   | ** ** | **Over**    | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|-----------|------------|-------------|------------|------------|------------|
| ** **                                                       | ** ** | **Floating** | ** ** | **Months** | ** ** | **Months** | ** ** | **Years** | ** ** | **5 years** | ** ** | **Total**  | ** ** |
| Maturities :                                                     |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  Earnings Assets                                        |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Federal  funds sold                                              |       | $            | 10,483     |       | $          | —     |       | $         | —     |        | $          | —     |       | $ | — |   | $ | 10,483 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |        |       |       |       |
| U.S.  government agencies                                        |       | —       |       | —     |       | —     |       | 4,369     |       | 8,564       |       | 12,933     |       |
| Mortgage-backed  securities                                      |       | —       |       | 813        |       | 2,460      |       | 2,140     |       | 2,473       |       | 7,887      |       |
| Total  securities                                                |       |         |       | 813        |       | 2,460      |       | 6,509     |       | 11,037      |       | 20,820     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total loans                                                      |       | 71,922       |       | 35,335     |       | 63,168     |       | 68,193    |       | 2,694       |       | 241,313    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Interest Earning Assets                                   |       | 82,405       |       | 36,148     |       | 65,629     |       | 74,703    |       | 13,731      |       | 272,616    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Other Assets                                                     |       | —       |       | —     |       | —     |       | —    |       | 11,634      |       | 11,634     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total Assets                                                     |       | $            | 82,405     |       | $          | 36,148     |       | $         | 65,629     |        | $          | 74,703     |       | $ | 25,365 |   | $ | 284,250 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  Bearing Liabilities                                    |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Interest  checking                                               |       | $            | 2,203      |       | $          | —     |       | $         | —     |        | $          | —     |       | $ | — |   | $ | 2,203 |   |
| Money market  and savings                                        |       | 59,873       |       | —     |       | —     |       | —    |       | —      |       | 59,873     |       |
| Time  deposits                                                   |       | —       |       | 24,798     |       | 90,184     |       | 59,531    |       | —      |       | 174,513    |       |
| Total  deposits                                                  |       | 62,076       |       | 24,798     |       | 90,184     |       | 59,531    |       | —      |       | 236,589    |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Subordinated  Debt                                               |       | —       |       | —     |       | —     |       | —    |       | 8,248       |       | $          | 8,248      |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Interest Bearing Liabilities                              |       | 62,076       |       | 24,798     |       | 90,184     |       | 59,531    |       | 8,248       |       | $          | 244,837    |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Other  Liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 15,359      |       | 15,359     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Shareholders’  Equity                                       |       | —       |       | —     |       | —     |       | —    |       | 24,054      |       | 24,054     |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Total  Liabilities and Shareholders’ Equity                 |       | $            | 62,076     |       | $          | 24,798     |       | $         | 90,184     |        | $          | 59,531     |       | $ | 47,661 |   | $ | 284,250 |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Rate  Sensitive Gap by period                                    |       | $            | 20,329     |       | $          | 11,350     |       | $         | (24,555    | )           | $          | 15,172     |       | $ | 13,731 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Cumulative  Gap                                                  |       |         |       | $          | 31,679     |       | $          | 7,124     |       | $           | 22,296     |       |       |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Cumulative  Gap as a percent of Total Assets                     |       |         |       | 11.14      | %          | 2.50       | %          | 7.84      | %          |        |       |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |        |       |       |       |
| Rate sensitive  assets / Rate sensitive liabilities (cumulative) |       | 1.33         |       | 1.36       |       | 1.04       |       | 1.09      |       | 1.15        |       |       |       |

 

21

----

 

In mid-2004,the Federal Reserve Open Market Committee began a series of interest rateincreases which the FOMC indicated would continue “at a measured pace”.  By year-end 2004, short term interest rateshad been increased by 100 basis points. Management has positioned the Bank for a rising rate environment bymaintaining an “asset sensitive” balance sheet in which more assets willreprice than liabilities.  Managementachieved this position during fourth quarter, 2004, by offering higher rates ofinterest on deposit liabilities in the two to three year maturity range.  At March 31, 2005, the Corporation’s oneyear GAP was 1.04.

 

The interestrate risk model that defines the GAP position also performs a “rate shock” testof the balance sheet.  The rate shockprocedure measures the impact on the net interest margin of an immediate shiftin interest rates in either direction. Although this is a static model which provides information only at acertain point in time, it is useful is assessing the impact of an unanticipatedmovement in interest rates. As shown below, the net interest dollar amountdecrease assuming a 300 basis point drop in interest rates is .07% of theaverage assets for the quarter ended March 31, 2005.

 

The chartbelow identifies the net interest margin impact of a shift in rates of 100,200, and 300 basis points in either direction.

 

InterestIncome and Expense Under Rate Shock

(dollarsin thousands)

 

AtMarch 31, 2005

 
| **Rate Change**            | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Net Interest  Income       |       | $          | 12,501     |       | $          | 12,602     |       | $       | 12,688     |       | $          | 12,742     |       | $          | 12,744     |   | $ | 12,712 |   | $ | 12,668 |   |
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Actual  dollar risk        |       | (242       | )          | (140       | )          | (54        | )          | —  |       | 2          |       | (31        | )          | (74        | )          |
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Percent of  risk           |       | 1.90       | %          | 1.10       | %          | .43        | %          | —  |       | .01        | %          | .24        | %          | .58        | %          |
|                       |       |       |       |       |       |       |       |    |       |       |       |       |       |       |       |
| Percent of  average assets |       | .07        | %          | .04        | %          | .02        | %          | —  |       | 0.00       | %          | .01        | %          | .02        | %          |
|                            |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

22

----

 

**ITEM 4****: CONTROLS AND PROCEDURES**

 

A. Evaluationof Disclosure Controls and Procedures

 

The Corporation maintains disclosure controlsand procedures, as defined in Rule 13a-15(e) promulgated under theSecurities Exchange Act of 1934 (the “Exchange Act”), that are designed toensure that information required to be disclosed by it in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and that such information is accumulated andcommunicated to the Corporation’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. The Corporation carried out an evaluation, underthe supervision and with the participation of its management, including itChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of its disclosure controls and procedures as of theend of the period covered by this report. Based on the evaluation of thesedisclosure controls and procedures, the Chief Executive Officer and ChiefFinancial Officer concluded that the Corporation’s disclosure controls andprocedures were effective.

 

B. Changesin Internal Controls and Procedures

 

There were nochanges in our internal controls over financial reporting during the quarterended March 31, 2005, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART II****: OTHER INFORMATION**

 

**ITEM 1****: LEGAL PROCEEDINGS**

 

None

 

**ITEM 2****: UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

A.           During March throughAugust in 2004, the Corporation sold 775,000 shares of its common stock ina public offering at a per share price of $11.00.  91,822 shares were sold at a per share priceof $11.00 during the three months ended March 2004. The proceeds were usedfor general corporate purposes. This offering was limited to residents of thestate of Tennessee, and the Corporation relied on the exemption provided by Section 3(a)(11)of the Securities Act of 1933, relating to securities issued only in the statewhere the issuer is located. No shares were sold in the three months ended March 31,2005.

 

23

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During June of2004, H. Lamar Cox, the Chief Financial Officer exercised the option topurchase 2,000 shares of common stock at an exercise price of $11.00 pershare.  This exercise of stock optionswas a transaction by the Corporation that did not involve a publicoffering.  The Corporation relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

During August of2004, Junie Nuestro, a former employee exercised the option to purchase 1,000shares of common stock at an exercise price of $7.00 per share.  This exercise of stock options was atransaction by the Corporation that did not involve a public offering.  The Corporation relied on the exemptionprovided by Section 4(2) of the Securities Act of 1933.

 

B.             None

 

C.             None

 

**ITEM 3****: DEFAULTS UPON SENIOR SECURITIES**

 

A.           None

 

B.             None

 

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

 

None

 

**ITEM 5****: OTHER INFORMATION**

 

A.           None

 

B.             None

 

**ITEM 6****: EXHIBITS**

 

Indexto Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                  |
|----------------------|------------|--------------------------------------------------------------------------------------------------|
|                 |       |                                                                                             |
| 2.1 *                |       | Articles of Share Exchange of Tennessee Commerce Bank and Tennessee  Commerce Bancorp, Inc. |
|                 |       |                                                                                             |
| 2.2 *                |       | Plan of Share Exchange of Tennessee Commerce Bank and Tennessee  Commerce Bancorp, Inc.     |
|                 |       |                                                                                             |
| 3.1*                 |       | Charter of Tennessee Commerce Bancorp, Inc.                                                 |
|                 |       |                                                                                             |
| 3.2 *                |       | Bylaws of Tennessee Commerce Bancorp, Inc.                                                  |
|                 |       |                                                                                             |
| 10.1 *               |       | Tennessee Commerce Bancorp, Inc. Stock Option Plan – Employees                         |

 

24

----

 
| 10.2 *  |   | Tennessee Commerce Bancorp, Inc. 1999 Stock Option Plan –  Directors                           |
|---------|--------|----------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                     |
| 10.3 *  |   | Tennessee Commerce Bancorp, Inc. 1999 Stock Option Plan –  Incorporators                       |
|    |   |                                                                                                     |
| 10.4 *  |   | Tennessee Commerce Bancorp, Inc. 2003 Stock Option Plan –  Directors                           |
|    |   |                                                                                                     |
| 10.5 *  |   | Tennessee Commerce Bancorp, Inc. 1999 Stock Option Agreement  with Arthur F. Helf                   |
|    |   |                                                                                                     |
| 10.6 *  |   | Tennessee Commerce Bancorp, Inc. 1999 Stock Option Agreement  with Michael R. Sapp                  |
|    |   |                                                                                                     |
| 10.7 *  |   | Tennessee Commerce Bancorp, Inc. 1999 Stock Option Agreement  with H. Lamar Cox                     |
|    |   |                                                                                                     |
| 10.8 *  |   | Employment Agreement between Tennessee Commerce Bancorp, Inc.  and Arthur F. Helf                   |
|    |   |                                                                                                     |
| 10.9 *  |   | Employment Agreement between Tennessee Commerce Bancorp, Inc.  and Michael R. Sapp                  |
|    |   |                                                                                                     |
| 10.10 * |   | Employment Agreement between Tennessee Commerce Bancorp, Inc.  and H. Lamar Cox                     |
|    |   |                                                                                                     |
| 11.1    |   | Computation of Per Share Earnings                                                                        |
|    |   |                                                                                                     |
| 31.1    |   | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |
|    |   |                                                                                                     |
| 31.2    |   | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |
|    |   |                                                                                                     |
| 32.1    |   | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |
|    |   |                                                                                                     |
| 32.2    |   | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |

 

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

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrantcaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                | Tennessee Commerce Bancorp, Inc. |               |
|---------------------|---------------------------------------|--------------------|
|                | (Registrant)                          |               |
|                |                                  |
| August 1, 2005 |                                  | /s/ Arthur F. Helf |   |
| (Date)              |                                  | Arthur F. Helf     |
|                | Chairman and Chief Executive Officer  |
|                |                                  |
| August 1, 2005 |                                  | /s/ H. Lamar Cox   |   |
| (Date)              |                                  | H. Lamar Cox       |
|                | Chief Financial Officer               |
|                     |                                       |                    |  |  |

 

26

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