Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended June 30, 2008**

 

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**CommissionFile Number 000-51281**

 

**TENNESSEE COMMERCE BANCORP, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Tennessee**                                                         | ** ** | **62-1815881**      |
|-----------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction                                          |       | (I.R.S. Employer    |
| of incorporation or  organization)                                    |       | Identification No.) |
|                                                                  |       |                |
| **381  Mallory Station Road, Suite 207****Franklin,  Tennessee** | ** ** | **37067**           |
| (Address of principal  executive offices)                             |       | (Zip Code)          |

 

**(615) 599-2274**

(Registrant’s telephone number, includingarea code)

 

**NotApplicable**

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

 

Indicateby check mark whether registrant (1) has filed reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  x  No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                      |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a smaller  reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

Yes  o  No  x

 

Asof August 06, 2008 there were 4,731,696 shares of common stock, $0.50 parvalue per share, issued and outstanding.

 

 

 

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Tableof Contents

 

**TennesseeCommerce Bancorp, Inc.**

 

Table of Contents

 
| Part I  | Financial Information                                                                                                                                           |   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                                                            |   |
| Item 1.      | Financial Statements                                                                                                                                            |   |
|         |                                                                                                                                                            |   |
|         | Consolidated  Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007                                                                       | 3      |
|         |                                                                                                                                                            |   |
|         | Consolidated  Statements of Income (unaudited) for the Six Months Ended June 30, 2008  and 2007 and for the Three Months Ended June 30, 2008 and 2007 | 4      |
|         |                                                                                                                                                            |   |
|         | Consolidated  Statements of Changes in Shareholders’ Equity (unaudited) for the Six Months  Ended June 30, 2008 and 2007                              | 5      |
|         |                                                                                                                                                            |   |
|         | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended June 30,  2008 and 2007                                                        | 6      |
|         |                                                                                                                                                            |   |
|         | Notes to Consolidated Financial Statements (unaudited)                                                                                                          | 7      |
|         |                                                                                                                                                            |   |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                     | 14     |
|         |                                                                                                                                                            |   |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                     | 27     |
|         |                                                                                                                                                            |   |
| Item 4.      | Controls and  Procedures                                                                                                                                        | 30     |
|         |                                                                                                                                                            |   |
| Part II | Other Information                                                                                                                                               | 31     |
|         |                                                                                                                                                            |   |
| Item 1A.     | Risk Factors                                                                                                                                                    | 31     |
|         |                                                                                                                                                            |   |
| Item 4.      | Submission of Matters to a Vote of Security  Holders                                                                                                            | 31     |
|         |                                                                                                                                                            |   |
| Item 6.      | Exhibits                                                                                                                                                        | 32     |
|         |                                                                                                                                                            |   |
| Signatures   |                                                                                                                                                            | 33     |

 

2

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**PART I:FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

TENNESSEE COMMERCE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2008 (UNAUDITED) ANDDECEMBER 31, 2007

 
| **(Dollars in thousands, except per share data)**                                                                                                                                                        | ** ** | **June 30,  2008** | ** ** | **December 31,  2007 (1)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                             |       |                    |       |                                 |       |
| Cash and due from financial institutions                                                                                                                                                                                               |       | $                       | 5,287      |                                 | $          | 5,236 |   |
| Federal funds sold                                                                                                                                                                                                                     |       | 909                     |       | 9,573                                |       |
| Cash and cash equivalents                                                                                                                                                                                                              |       | 6,196                   |       | 14,809                               |       |
| Securities available for sale                                                                                                                                                                                                          |       | 96,030                  |       | 73,753                               |       |
| Loans                                                                                                                                                                                                                                  |       | 938,636                 |       | 794,322                              |       |
| Allowance for loan losses                                                                                                                                                                                                              |       | (11,520                 | )          | (10,321                              | )          |
| Net loans                                                                                                                                                                                                                              |       | 927,116                 |       | 784,001                              |       |
|                                                                                                                                                                                                                                   |       |                    |       |                                 |       |
| Premises and equipment, net                                                                                                                                                                                                            |       | 1,453                   |       | 1,413                                |       |
| Accrued interest receivable                                                                                                                                                                                                            |       | 6,881                   |       | 5,901                                |       |
| Restricted equity securities                                                                                                                                                                                                           |       | 1,376                   |       | 938                                  |       |
| Deferred tax asset                                                                                                                                                                                                                     |       | 436                     |       | —                               |       |
| Income tax receivable                                                                                                                                                                                                                  |       | —                  |       | 1,886                                |       |
| Other assets                                                                                                                                                                                                                           |       | 26,497                  |       | 17,452                               |       |
|                                                                                                                                                                                                                                   |       |                    |       |                                 |       |
| Total assets                                                                                                                                                                                                                           |       | $                       | 1,065,985  |                                 | $          | 900,153 |   |
|                                                                                                                                                                                                                                   |       |                    |       |                                 |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                          |       |                    |       |                                 |       |
| Liabilities                                                                                                                                                                                                                            |       |                    |       |                                 |       |
| Deposits                                                                                                                                                                                                                               |       |                    |       |                                 |       |
| Non-interest bearing                                                                                                                                                                                                                   |       | $                       | 21,235     |                                 | $          | 27,427 |   |
| Interest-bearing                                                                                                                                                                                                                       |       | 934,013                 |       | 787,626                              |       |
| Total deposits                                                                                                                                                                                                                         |       | 955,248                 |       | 815,053                              |       |
|                                                                                                                                                                                                                                   |       |                    |       |                                 |       |
| Federal funds purchased                                                                                                                                                                                                                |       | 8,300                   |       | 2,000                                |       |
| Accrued interest payable                                                                                                                                                                                                               |       | 2,982                   |       | 2,292                                |       |
| Short-term borrowings                                                                                                                                                                                                                  |       | 9,500                   |       | 7,000                                |       |
| Accrued Bonuses                                                                                                                                                                                                                        |       | 499                     |       | 1,700                                |       |
| Long-term subordinated debt                                                                                                                                                                                                            |       | 23,198                  |       | 8,248                                |       |
| Deferred tax liabilities                                                                                                                                                                                                               |       | —                  |       | 139                                  |       |
| Other liabilities                                                                                                                                                                                                                      |       | 606                     |       | 600                                  |       |
| Total liabilities                                                                                                                                                                                                                      |       | 1,000,333               |       | 837,032                              |       |
| Shareholders’ equity                                                                                                                                                                                                              |       |                    |       |                                 |       |
| Preferred stock, no par value. 1,000,000  shares authorized; none issued                                                                                                                                                               |       | —                  |       | —                               |       |
| Common stock, $0.50 par value. 10,000,000  shares authorized at June 30, 2008 and December 31, 2007; 4,731,696  and 4,724,196 shares issued and outstanding at June 30, 2008 and  December 31, 2007, respectively. |       | 2,366                   |       | 2,362                                |       |
| Additional paid-in capital                                                                                                                                                                                                             |       | 45,150                  |       | 45,024                               |       |
| Retained earnings                                                                                                                                                                                                                      |       | 18,647                  |       | 15,426                               |       |
| Accumulated other comprehensive income/  loss                                                                                                                                                                                          |       | (511                    | )          | 309                                  |       |
| Total shareholders’ equity                                                                                                                                                                                                        |       | 65,652                  |       | 63,121                               |       |
|                                                                                                                                                                                                                                   |       |                    |       |                                 |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                                        |       | $                       | 1,065,985  |                                 | $          | 900,153 |   |

 

----

(1) Thebalance sheet at December 31, 2007 has been derived from the auditedconsolidated financial statements at that date but does not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.

 

Seeaccompanying notes to consolidated financial statements.

 

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TENNESSEE COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OFINCOME

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

THREE MONTHS ENDED JUNE 30, 2008 AND2007

(UNAUDITED)

 
| ** **                                                             | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands, except share data)** | ** ** | **2008**                                          | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest income                                                        |       |                                              |       |                                                |       |   |   |   |   |
| Loans, including fees                                                  |       | $                                                 | 33,597     |                                                | $          | 25,985 |   | $ | 17,215 |   | $ | 13,886 |   |
| Securities                                                             |       | 2,177                                             |       | 1,587                                               |       | 1,144 |   | 823 |   |
| Federal funds sold                                                     |       | 141                                               |       | 251                                                 |       | 70 |   | 143 |   |
| Total interest income                                                  |       | 35,915                                            |       | 27,823                                              |       | 18,429 |   | 14,852 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Interest expense                                                       |       |                                              |       |                                                |       |   |   |   |   |
| Deposits                                                               |       | 19,438                                            |       | 15,273                                              |       | 9,694 |   | 8,047 |   |
| Other                                                                  |       | 619                                               |       | 319                                                 |       | 339 |   | 159 |   |
| Total interest expense                                                 |       | 20,057                                            |       | 15,592                                              |       | 10,033 |   | 8,206 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Net interest income                                                    |       | 15,858                                            |       | 12,231                                              |       | 8,396 |   | 6,646 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Provision for loan losses                                              |       | 3,940                                             |       | 3,000                                               |       | 2,340 |   | 1,500 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Net interest income after provision for  loan losses                   |       | 11,918                                            |       | 9,231                                               |       | 6,056 |   | 5,146 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Non-interest income                                                    |       |                                              |       |                                                |       |   |   |   |   |
| Service charges on deposit accounts                                    |       | 49                                                |       | 69                                                  |       | 25 |   | 32 |   |
| Securities gains                                                       |       | 30                                                |       | 10                                                  |       | — |   | — |   |
| Gain on sale of loans                                                  |       | 1,418                                             |       | 1,280                                               |       | 852 |   | 463 |   |
| Other                                                                  |       | (167                                              | )          | 73                                                  |       | (74 | ) | 115 |   |
| Total non-interest income                                              |       | 1,330                                             |       | 1,432                                               |       | 803 |   | 610 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Non-interest expense                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Salaries and employee benefits                                         |       | 4,093                                             |       | 3,238                                               |       | 1,809 |   | 1,766 |   |
| Occupancy and equipment                                                |       | 722                                               |       | 512                                                 |       | 362 |   | 244 |   |
| Data processing fees                                                   |       | 534                                               |       | 505                                                 |       | 249 |   | 279 |   |
| Professional fees                                                      |       | 904                                               |       | 492                                                 |       | 529 |   | 254 |   |
| Other                                                                  |       | 1,741                                             |       | 965                                                 |       | 901 |   | 554 |   |
| Total non-interest expense                                             |       | 7,994                                             |       | 5,712                                               |       | 3,850 |   | 3,097 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Income before income taxes                                             |       | 5,254                                             |       | 4,951                                               |       | 3,009 |   | 2,659 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Income tax expense                                                     |       | 2,033                                             |       | 1,934                                               |       | 1,163 |   | 1,048 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Net income                                                             |       | $                                                 | 3,221      |                                                | $          | 3,017 |   | $ | 1,846 |   | $ | 1,611 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Earnings per share (EPS):                                              |       |                                              |       |                                                |       |   |   |   |   |
| Basic EPS                                                              |       | $                                                 | 0.68       |                                                | $          | 0.67 |   | $ | 0.39 |   | $ | 0.36 |   |
| Diluted EPS                                                            |       | 0.66                                              |       | 0.63                                                |       | 0.38 |   | 0.34 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Weighted average shares outstanding:                                   |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                                  |       | 4,730,707                                         |       | 4,517,133                                           |       | 4,731,696 |   | 4,502,985 |   |
| Diluted                                                                |       | 4,890,911                                         |       | 4,818,619                                           |       | 4,891,111 |   | 4,788,889 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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TENNESSEE COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

 
| **(Dollars in thousands)**                                                | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
| Balance at December 31, 2006                                                   |       | $                 | 2,226      |                             | $          | 40,755                 |       | $                                                     | 8,530      |                                  | $          | (287 | ) | $ | 51,224 |   |
| Comprehensive income                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Net income                                                                          |       | —            |       | —                           |       | 3,017                  |       | —                                                |       | 3,017                                 |       |
| Other comprehensive income, net of income  taxes                                    |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Unrealized losses on securities available  for sale during the period               |       | —            |       | —                           |       | —                 |       | (492                                                  | )          | (492                                  | )          |
|                                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Total comprehensive income                                                          |       |              |       |                             |       |                   |       |                                                  |       | 2,525                                 |       |
|                                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Exercise of stock options to purchase  43,350 common shares and related tax benefit |       | 110               |       | 3,356                            |       | —                 |       | —                                                |       | 3,466                                 |       |
|                                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Balance at June  30, 2007                                                      |       | $                 | 2,336      |                             | $          | 44,111                 |       | $                                                     | 11,547     |                                  | $          | (779 | ) | $ | 57,215 |   |
|                                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Balance at December 31, 2007                                                   |       | $                 | 2,362      |                             | $          | 45,024                 |       | $                                                     | 15,426     |                                  | $          | 309 |   | $ | 63,121 |   |
| Comprehensive income                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Net income                                                                          |       | —            |       | —                           |       | 3,221                  |       | —                                                |       | 3,221                                 |       |
| Other comprehensive income, net of income  taxes                                    |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Unrealized losses on securities available  for sale during the period               |       | —            |       | —                           |       | —                 |       | (820                                                  | )          | (820                                  | )          |
|                                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Total comprehensive income                                                          |       |              |       |                             |       |                   |       |                                                  |       | 2,401                                 |       |
|                                                                                |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Stock-based compensation expense                                                    |       |              |       | 40                               |       |                   |       |                                                  |       | 40                                    |       |
| Exercise of stock options to purchase 7,500  common shares and related tax benefit  |       | 4                 |       | 86                               |       | —                 |       | —                                                |       | 90                                    |       |
| Balance at June  30, 2008                                                 |       | $                 | 2,366      |                             | $          | 45,150                 |       | $                                                     | 18,647     |                                  | $          | (511 | ) | $ | 65,652 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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TENNESSEE COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OFCASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

 
| ** **                                                                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Dollars in thousands)**                                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
|                                                                                        |       |                                          |       |   |   |
| **Cash flows from operating activities**                                                    |       |                                          |       |   |   |
| Net income                                                                                  |       | $                                             | 3,221      |   | $ | 3,017 |   |
| Adjustments to reconcile net income to net  cash provided by (used by) operating activities |       |                                          |       |   |   |
| Depreciation                                                                                |       | 175                                           |       | 167 |   |
| Deferred loan fees                                                                          |       | (242                                          | )          | (261 | ) |
| Stock based compensation expense                                                            |       | 40                                            |       | — |   |
| Provision for loan losses                                                                   |       | 3,940                                         |       | 3,000 |   |
| Deferred income tax                                                                         |       | (71                                           | )          | (924 | ) |
| Net amortization of investment securities                                                   |       | (38                                           | )          | 6 |   |
| Gain on sales of securities                                                                 |       | (30                                           | )          | (10 | ) |
| Change in:                                                                                  |       |                                          |       |   |   |
| Accrued interest receivable                                                                 |       | (980                                          | )          | (1,175 | ) |
| Accrued interest payable                                                                    |       | 690                                           |       | 12 |   |
| Other assets                                                                                |       | (6,709                                        | )          | (3,725 | ) |
| Other liabilities                                                                           |       | 1,305                                         |       | (947 | ) |
| Net cash provided by (used by) operating  activities                                        |       | 1,301                                         |       | (840 | ) |
|                                                                                        |       |                                          |       |   |   |
| **Cash flows from investing activities**                                                    |       |                                          |       |   |   |
| Purchases of securities available for sale                                                  |       | (57,300                                       | )          | (17,987 | ) |
| Proceeds from sales of securities available  for sale                                       |       | 12,271                                        |       | 11,275 |   |
| Proceeds from maturities, prepayments and  calls of securities available for sale           |       | 21,496                                        |       | 1,166 |   |
| Net change in loans                                                                         |       | (146,813                                      | )          | (108,090 | ) |
| Purchases of FHLB Stock                                                                     |       | (438                                          | )          | (305 | ) |
| Net purchases of premises and equipment                                                     |       | (215                                          | )          | (77 | ) |
| Net cash used by investing activities                                                       |       | (170,999                                      | )          | (114,018 | ) |
|                                                                                        |       |                                          |       |   |   |
| **Cash flows from financing activities**                                                    |       |                                          |       |   |   |
| Net change in deposits                                                                      |       | 140,195                                       |       | 122,818 |   |
| Net change in federal funds purchased and  repurchase agreements                            |       | 6,300                                         |       | — |   |
| Proceeds from long-term subordinated debt                                                   |       | 14,950                                        |       | — |   |
| Purchases of capital securities of  unconsolidated subsidiary                               |       | (450                                          | )          | — |   |
| Proceeds from exercise of common stock  options                                             |       | 38                                            |       | 1,714 |   |
| Excess tax benefit from option exercises                                                    |       | 52                                            |       | 1,752 |   |
| Net cash provided by financing activities                                                   |       | 161,085                                       |       | 126,284 |   |
|                                                                                        |       |                                          |       |   |   |
| **Net change in cash and cash equivalents**                                                 |       | (8,613                                        | )          | 11,426 |   |
|                                                                                        |       |                                          |       |   |   |
| Cash and cash equivalents at beginning of  period                                           |       | 14,809                                        |       | 13,997 |   |
|                                                                                        |       |                                          |       |   |   |
| **Cash and cash equivalents at end of period**                                              |       | $                                             | 6,196      |   | $ | 25,423 |   |
|                                                                                        |       |                                          |       |   |   |
| **Supplemental cash flow information:**                                                     |       |                                          |       |   |   |
| Cash paid during period for interest                                                        |       | $                                             | 19,367     |   | $ | 15,580 |   |
| Cash paid during period for income taxes                                                    |       | 199                                           |       | 2,685 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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TENNESSEECOMMERCE BANCORP, INC.

 

Notes to Consolidated Financial Statements(unaudited)

 

Note1 — Basis of Presentation

 

Tennessee Commerce Bancorp, Inc. (the “Corporation”) is the bankholding company for Tennessee Commerce Bank (the “Bank”).  In March 2005,the Corporation formed a wholly owned subsidiary, Tennessee Commerce BankStatutory Trust I (the “Trust I”).  In June 2008,the Corporation formed a wholly owned subsidiary, Tennessee Commerce BankStatutory Trust II (the “Trust II”). As of June 30, 2008, the Bank, theTrust I and the Trust II were the only subsidiaries of the Corporation. Theaccompanying consolidated financial statements include the accounts of theCorporation and the Bank. The Trust I and the Trust II are not consolidated inaccordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R)(revised December 2003), “Consolidation of Variable Interest Entities.”Material intercompany accounts and transactions have been eliminated.

 

The unaudited consolidated financial statements as of June 30,2008 and for the six- and three-month periods ended June 30, 2008 and 2007have been prepared in accordance with accounting principles generally acceptedin the United States of America and in accordance with the instructions to Form 10-Qand Article 10 of Regulation S-X as promulgated by the Securities andExchange Commission (“SEC”), and in the opinion of management, include all adjustments,consisting of normal recurring adjustments, to present fairly the informationincluded therein. They do not include all the information and notes required bygenerally accepted accounting principles for complete financial statements.Operating results for the six- and three-month periods ended June 30, 2008are not necessarily indicative of the results that may be expected for the yearending December 31, 2008. For further information, refer to theconsolidated financial statements and notes thereto included in the Corporation’sAnnual Report on Form 10-K for the year ended December 31, 2007.

 

Note2 — Earnings per Share of Common Stock

 

The factors used in the earnings per sharecomputation follow:

 
| ** **                                                                      | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **2008**                                      | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Basic                                                                           |       |                                          |       |                                            |       |   |   |   |   |
| Net income                                                                      |       | $                                             | 3,221      |                                            | $          | 3,017 |   | $ | 1,846 |   | $ | 1,611 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Weighted average common shares outstanding                                      |       | 4,730,707                                     |       | 4,517,133                                       |       | 4,731,696 |   | 4,502,985 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Basic earnings per common share                                                 |       | $                                             | 0.68       |                                            | $          | 0.67 |   | $ | 0.39 |   | $ | 0.36 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Diluted                                                                         |       |                                          |       |                                            |       |   |   |   |   |
| Net income                                                                      |       | $                                             | 3,221      |                                            | $          | 3,017 |   | $ | 1,846 |   | $ | 1,611 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Weighted average common shares outstanding  for basic earnings per common share |       | 4,730,707                                     |       | 4,517,133                                       |       | 4,731,696 |   | 4,502,985 |   |
| Add: Dilutive effects of assumed exercises  of stock options                    |       | 160,204                                       |       | 301,486                                         |       | 159,415 |   | 285,904 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Average shares and dilutive potential  common shares                            |       | 4,890,911                                     |       | 4,818,619                                       |       | 4,891,111 |   | 4,788,889 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Diluted earnings per common share                                               |       | $                                             | 0.66       |                                            | $          | 0.63 |   | $ | 0.38 |   | $ | 0.34 |   |

 

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Note3 — Stock-Based Compensation

 

On January 1, 2006, the Corporation adopted Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFASNo. 123(R)”), which addresses the accounting for share-based paymenttransactions in which a company receives employee services in exchange forequity instruments. SFAS No. 123(R) eliminates the ability to accountfor share-based compensation transactions, as the Corporation formerly did,using the intrinsic value method as prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and generallyrequires that such transactions be accounted for using a fair-value-basedmethod and recognized as expense in the accompanying consolidated statement ofincome.

 

The Corporation adopted SFAS No. 123(R) using the modifiedprospective method which requires the application of the accounting standard asof January 1, 2006. The accompanying consolidated financial statements asof and for the periods ending June 30, 2008 reflect the impact of adoptingSFAS No. 123(R). In accordance with the modified prospective method, theconsolidated financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS No. 123(R).

 

Stock-based compensation expense recognized during the period is basedon the value of the portion of stock-based payment awards that is ultimatelyexpected to vest. Stock-based compensation expense recognized in theaccompanying consolidated statements of income for the periods ending June 30,2008 included any compensation expense for stock-based payment awards vestingduring the period based on the grant date fair value estimated in accordancewith SFAS No. 123(R). As stock-based compensation expense recognized inthe accompanying statement of income for the period ending June 30, 2008is based on awards ultimately expected to vest, it has been reduced forestimated forfeitures. SFAS No. 123(R) requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates.

 

For the six months ended June 30, 2008, the Corporation grantedoptions to purchase 150,000 shares of Corporation common stock and 10,955restricted shares of Corporation common stock and there were 160,000 non-vestedoptions outstanding prior to that period with 40,000 forfeited. There wasapproximately $40,000 stock-based expense recognized for the six months ended June 30,2008.

 

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A summary of the activity in the Corporation’s stock-based compensationplan is as follows:

 
| ** **                                                                 | ** ** | **Number** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Contractual  Remaining  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value (1)  (000’s)** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Stock-based awards outstanding at  December 31, 2007                  |       | 798,570    |       | $                                       | 13.14      |                                                                  |       |                                                   |       |   |
| Options granted                                                            |       | 150,000    |       | 22.15                                   |       |                                                                  |       |                                                   |       |
| Shares of restricted stock granted                                         |       | 10,955     |       | —                                  |       |                                                                  |       |                                                   |       |
| Options exercised                                                          |       | (7,500     | )          | 5.00                                    |       |                                                                  |       |                                                   |       |
| Options forfeited or expired                                               |       | (100,000   | )          | 23.58                                   |       |                                                                  |       |                                                   |       |
| Stock-based awards outstanding at  June 30, 2008                      |       | 852,025    |       | $                                       | 13.58      |                                                                  | 5.16       |                                                   | $          | 1,718 |   |
| Stock-based awards outstanding and expected  to vest at June 30, 2008 |       | 852,025    |       | $                                       | 13.58      |                                                                  | 5.16       |                                                   | $          | 1,718 |   |
| Options exercisable at June 30, 2008                                  |       | 621,070    |       | $                                       | 9.99       |                                                                  | 4.26       |                                                   | $          | 4,006 |   |

 

----

(1)  The aggregate intrinsic value is calculated as the difference between theexercise price of each option and the closing price per share of Corporationcommon stock of $16.55 for the 852,025 options outstanding and 621,070 optionsexercisable at June 30, 2008.

 

The estimated fair values are computed using the Black-Scholes optionvaluation model, using the following weighted-average assumptions as of thegrant date shown below:

 
| ** **              | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-------------------------|------------|-----------|------------|-----------|------------|
|                    |       |      |       |      |       |
| Risk-free interest rate |       | 3.27      | %          | 4.94      | %          |
| Expected option life    |       | 3.5 years |       | 3.5 years |       |
| Dividend yield          |       | 0.0       | %          | 0.0       | %          |

 

The Corporation granted options to purchase 150,000 shares ofCorporation common stock and 10,955 restricted shares of Corporation commonstock in the first six months of 2008. The options granted in 2008 had anestimated fair value of $4.45. The options granted in 2007 had an estimated fairvalue of $5.60. The weighted average fair value of options granted during theyear was $5.16 for 2008 and $5.60 for 2007.

 

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Note4 — Trust Preferred Securities

 

InMarch 2005, the Trust I issued and sold 8,000 of its fixed/floating ratecapital securities, with a liquidation amount of $1,000 per capital security,to First Tennessee Bank National Association. The securities pay a fixed rateof 6.73% payable quarterly for the first five years and a floating rate basedon a three-month LIBOR rate plus 1.98% thereafter. At the same time, theCorporation issued to the Trust I $8,248,000 of fixed/floating rate junior subordinateddeferrable interest debentures due 2035. The Corporation guarantees the paymentof distributions and payments for redemptions or liquidation of the capitalsecurities. The fixed/floating rate capital securities qualify as “Tier ICapital” for the Corporation under current regulatory definitions subject tocertain limitations.

 

Thedebentures pay a fixed rate of 6.73% payable quarterly for the first five yearsand a floating rate based on a three-month LIBOR rate plus 1.98% thereafter.The distributions on the capital securities are accounted for as interestexpense by the Corporation. Interest payments on the debentures and thecorresponding distributions on the capital securities may be deferred at anytime at the election of the Corporation for up to 20 consecutive quarterlyperiods (five years). The capital securities and debentures are redeemable atany time commencing after June 2010 at par. The Corporation reports asliabilities the subordinated debentures issued by the Corporation and held bythe Trust I.

 

InJune 2008, the Trust II issued and sold 14,500 of its floating ratecapital securities, with a liquidation amount of $1,000 per capital security,in a private placement. The securities pay a floating rate per annum, resetquarterly, equal to the prime rate of interest published in *The Wall Street Journal* on the firstbusiness day of each distribution period plus 50 basis points (but in no eventgreater than 8.0% or less than 5.75%). At the same time, the Corporation issuedto the Trust II $14.95 million of floating rate junior subordinated deferrableinterest debentures due 2038. The Corporation guarantees the payment ofdistributions and payments for redemptions or liquidation of the capitalsecurities. The floating rate capital securities qualify as “Tier I Capital”for the Corporation under current regulatory definitions subject to certainlimitations.

 

Thedebentures pay a floating rate per annum, reset quarterly, equal to the primerate of interest published in *The WallStreet Journal* on the first business day of each distribution periodplus 50 basis points (but in no event greater than 8.0% or less than 5.75%).The distributions on the capital securities are accounted for as interestexpense by the Corporation. Interest payments on the debentures and thecorresponding distributions on the capital securities may be deferred at anytime at the election of the Corporation for up to 20 consecutive quarterlyperiods (five years). The capital securities and debentures are redeemable atany time commencing after June 2013 at par. The Corporation reports asliabilities the subordinated debentures issued by the Corporation and held bythe Trust II.

 

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Note5 – New Accounting Standards

 

In September 2006, the FASB released Statement of FinancialAccounting Standards No. 157 (“SFAS No. 157”), “Fair ValueMeasurements.” This statement defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements.SFAS No. 157 clarifies the exchange price notion in the fair valuedefinition to mean the price that would be received to sell the asset or paidto transfer the liability (an exit price), not the price that would be paid toacquire the asset or received to assume the liability (an entry price). Thisstatement also clarifies that market participant assumptions should includeassumptions about risk, should include assumptions about the effect of arestriction on the sale or use of an asset and should reflect itsnonperformance risk (the risk that the obligation will not be fulfilled).Nonperformance risk should include the reporting entity’s credit risk. SFAS No. 157is effective for financial statements issued for fiscal years beginning after November 15,2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) FHS157-2, “Effective Date of FASB Statement No. 157,” which delays theeffective date of SFAS 157 for non-financial assets and non-financialliabilities that are recognized or disclosed in the financial statements on anon-recurring basis. The Corporation and the Bank both adopted SFAS No. 157on January 1, 2008 and management does not expect the adoption of thisstatement will have a material impact on the Corporation’s consolidatedfinancial statements.

 

In March 2006, the FASB issued Statement No. 156, “Accountingfor Servicing of Financial Assets-an amendment of FASB Statement No. 140.” This statement provides the following: (i) revised guidance on when aservicing asset and servicing liability should be recognized; (ii) requiresall separately recognized servicing assets and servicing liabilities to beinitially measured at fair value, if practicable; (iii) permits an entityto elect to measure servicing assets and servicing liabilities at fair valueeach reporting date and report changes in fair value in earnings in the periodin which the changes occur; (iv) upon initial adoption, permits a one-timereclassification of available-for-sale securities to trading securities forsecurities which are identified as off-setting the entity’s exposure to changesin the fair value of servicing assets or liabilities that a servicer elects tosubsequently measure at fair value; and (v) requires separate presentationof servicing assets and servicing liabilities subsequently measured at fairvalue in the statement of financial position and additional footnotedisclosures.  This standard is effective as of the beginning of an entity’sfirst fiscal year that begins after September 15, 2006 with the effects ofinitial adoption being reported as a cumulative-effect adjustment to retainedearnings.  Adoption of this statement has had no material impact on the Corporation’sconsolidated financial statements.

 

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Note6 — Fair Value Measurement

 

The Bank has an establishedprocess for determining fair values, in accordance with SFAS No. 157. Fairvalue is based upon quoted market prices, where available. If listed prices orquotes are not available, fair value is based upon internally developed modelsor processes that use primarily market-based or independently-sourced marketdata, including interest rate yield curves, option volatilities and third partyinformation. Valuation adjustments may be made to ensure that financialinstruments are recorded at fair value. These adjustments include amounts toreflect counterparty credit quality (for financial assets reflected at fairvalue), the Bank’s creditworthiness (for financial liabilities reflected atfair value), liquidity and other unobservable parameters that are applied consistentlyover time as follows:

 
| · | Credit valuation adjustments are necessary when  the market price (or parameter) is not indicative of the credit quality of  the counterparty.                                                                                                                                                                                                                                       |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                 |
| · | Debit valuation adjustments are necessary to  reflect the credit quality of the Bank in the valuation of liabilities  measured at fair value.                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                 |
| · | Liquidity valuation adjustments are necessary when  the Bank may not be able to observe a recent market price for a financial  instrument that trades in inactive (or less active) markets or to reflect the  cost of exiting larger- than-normal market-size risk positions.                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                 |
| · | Unobservable parameter valuation adjustments are  necessary when positions are valued using internally developed models that  use as their basis unobservable parameters – that is, parameters that must be  estimated and are, therefore, subject to management judgment to substantiate  the model valuation. These financial instruments are normally traded less  actively. |

 

The methods described abovemay produce a fair value calculation that may not be indicative of netrealizable value or reflective of future fair values. Furthermore, while theBank believes its valuation methods are appropriate and consistent with othermarket participants, the use of different methodologies, or assumptions, todetermine the fair value of certain financial instruments could result in adifferent estimate of fair value at the reporting date.

 

**Valuation Hierarchy**

 

SFAS No.157 establishes athree-level valuation hierarchy for disclosure of fair value measurements. Thevaluation hierarchy is based upon the transparency of inputs to the valuationof an asset or liability as of the measurement date. The three levels aredefined as follows:

 
| · | Level 1 – inputs to the valuation methodology are  quoted prices (unadjusted) for identical assets or liabilities in active  markets.                                                                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                     |
| · | Level 2 – inputs to the valuation methodology  include quoted prices for similar assets and liabilities in active markets,  and inputs that are observable for the asset or liability, either directly or  indirectly, for substantially the full term of the financial instrument. |
|   |                                                                                                                                                                                                                                                                                     |
| · | Level 3 – inputs to the valuation methodology are  unobservable and significant to the fair value measurement.                                                                                                                                                                      |

 

A financial instrument’scategorization within the valuation hierarchy is based upon the lowest level ofinput that is significant to the fair value measurement.  Below is adescription of the valuation methodologies used for instruments measured atfair value, as well as the general classification of such instruments pursuantto the valuation hierarchy.

 

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**Assets**

 

*Securities-*Available-for-salesecurities are recorded at fair value on a recurring basis.  Where quotedprices are available in an active market, securities are classified withinlevel 1 of the valuation hierarchy.  Level 1 securities include highlyliquid government bonds, federal funds sold and certain other products. Fair value measurement is based upon quoted prices, if available.  Ifquoted prices are not available, securities would generally be classifiedwithin level 2, and fair value would be determined by matrix pricing, which isa mathematical technique widely used in the industry to value debt securitieswithout relying exclusively on quoted prices for the specific securities butrather by relying on the securities’ relationship to other benchmark quotedsecurities. In certain cases where there is limited activity or lesstransparency around inputs to the valuation, securities are classified withinlevel 3 of the valuation hierarchy. For the six months ended June 30,2008, the entire Bank’s available-for-sale securities were valued using matrixpricing and were classified within level 2 of the valuation hierarchy.  AtJune 30, 2008, the Bank had no securities classified within level 3.

 

**Liabilities**

 

*Liabilities* –At June 30, 2008,  the Bank had no liabilities measured at fairvalue on a recurring basis classified within the valuation hierarchy.

 

The following table presentsthe financial instruments carried at fair value as of June 30, 2008, bycaption on the consolidated balance sheets and by SFAS No. 157 valuationhierarchy (as described above) (dollars in thousands):

 

**Assets andliabilities measured at fair value on a recurring basis as of June 30,2008**

 
| ** **                          | ** ** | **Total  carrying  value in the  consolidated  balance** | ** ** | **Quoted  market  prices in an  active  market** | ** ** | **Internal  models with  significant  observable  market  parameters** | ** ** | **Internal  models with  significant   unobservable  market  parameters** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **sheet**                                                          | ** ** | **(Level 1)**                                         | ** ** | **(Level 2)**                                                          | ** ** | **(Level 3)**                                                                  | ** ** |
| Federal funds sold                  |       | 909                                                                |       | 909                                                        |       | —                                                                      |       | —                                                                              |       |
| Securities available for sale       |       | 96,030                                                             |       | —                                                     |       | 96,030                                                                      |       | —                                                                              |       |
| **Total assets at fair value**      |       | $                                                                  | 96,939     |                                                       | $          | 909                                                                         |       | $                                                                                   | 96,030     |   | $ | — |   |
|                                |       |                                                               |       |                                                       |       |                                                                        |       |                                                                                |       |
| Liabilities                         |       | —                                                             |       | —                                                     |       | —                                                                      |       | —                                                                              |       |
| **Total liabilities at fair value** |       | $                                                                  | —     |                                                       | $          | —                                                                      |       | $                                                                                   | —     |   | $ | — |   |

 

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

 

**Forward-Looking Statements**

 

Certain statements contained in this report may not be based onhistorical facts and are “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statementsmay be identified by reference to a future period or by the use offorward-looking terminology, such as “expect,” “anticipate,” “believe,” “estimate,”“foresee,” “may,” “might,” “will,” “intend,” “could,” “would,” “plan,” “forecast”or future or conditional verb tenses and variations or negatives of suchterms. These forward-looking statements include, without limitation, thoserelating to our operating results, vesting of stock-based awards, recentlyadopted accounting standards, fair value measurements, allowance for loanlosses, business bank strategy, management’s review of the loan portfolio, loanclassifications, loan commitments, interest rate risk, economic value of equitymodel, loan sale transactions, tax rates, non-accrual loans, liquidity, internalcontrol over financial reporting and our future growth and profitability. Wecaution you not to place undue reliance on the forward-looking statementscontained in this report because actual results could differ materially fromthose indicated in such forward-looking statements as a result of a variety offactors. These factors include, but are not limited to, changes in economicconditions, competition for loans, mortgages and other financial services andproducts, changes in interest rates, concentrations within our loan portfolio,our ability to maintain credit quality, the effectiveness of our riskmonitoring systems, changes in consumer preferences, the ability of ourborrowers to repay loans, the availability of and costs associated with maintainingand/or obtaining adequate and timely sources of liquidity, changes in ouroperating strategy, our ability to meet regulatory capital adequacyrequirements, our ability to collect amounts due under loan agreements and toattract deposits, our ability to attract, train and retain qualified personnel,the geographic concentration of our assets, our ability to operate andintegrate new technology, our ability to provide market competitive productsand services, our ability to diversify revenue, our ability to fund growth withlower cost liabilities, laws and regulations affecting financial institutionsin general and other factors detailed from time to time in our press releasesand filings with the Securities and Exchange Commission. We undertake noobligation to update these forward-looking statements to reflect the occurrenceof changes or unanticipated events, circumstances or results that occur afterthe date of this report.

 

**Overview**

(Dollarsin thousands, except per share data, throughout this Item 2)

 

The results of operations for the quarter ended June 30, 2008compared to the quarter ended June 30, 2007 reflected a 14.59% increase innet income and an 11.76% increase in diluted earnings per share. The increasein earnings resulted primarily from a 26.33% increase in net interest incomebecause of higher average loan balances. Increased net interest income waspartially offset by increases in non-interest expense. For the three monthsended June 30, 2008, net income was $1,846, an increase of $235 or 14.59%compared to net income of $1,611 for the same period in 2007. Diluted earningsper share increased $0.04 per share or 11.76% for the three months ended June 30,2008 compared to the same period in 2007. The six months ended June 30,2008 reflected a continuation of our bank’s trend of rapid asset growth,increasing by $165,832 or 18.42% from $900,153 at December 31, 2007 to$1,065,985 at June 30, 2008. Net loans increased by 18.25% or $143,115from December 31, 2007 to June 30, 2008, while total depositsincreased by 17.20% or $140,195 during that same period.

 

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**Corporation Overview**

 

Tennessee Commerce Bancorp, Inc.,headquartered in Franklin, Tennessee, is the bank holding company for TennesseeCommerce Bank (the “Bank”).  Organized in January 2000, TennesseeCommerce Bank has a focused strategy that serves the banking needs of small tomedium-sized businesses, entrepreneurs and professionals in the Nashvillemetropolitan statistical area, or the Nashville MSA, as well as the fundingneeds of certain national and regional equipment vendors and financial servicescompanies.  We call this strategy our “business bank” strategy. Weprimarily conduct business from a single location in the Cool Springscommercial area of Franklin, Tennessee, 15 miles south of Nashville. Wealso operate three loan production offices-one in Birmingham, Alabama, and twonew offices in Minneapolis, Minnesota and Atlanta, Georgia, both of which weopened in April and May 2008, respectively. Each of the two newoffices is staffed with one senior lending officer.

 

We offer a full range ofcompetitive retail and commercial banking services to local customers in theNashville MSA.  Our deposit services include a broad offering of checkingaccounts, savings accounts, money market investment accounts, certificates ofdeposits and retirement accounts.  Lending services include consumerinstallment loans, various types of mortgage loans, personal lines of credit,home equity loans, credit cards, real estate construction loans, commercialloans to small and medium-sized businesses and professionals, and letters ofcredit. We issue VISA credit cards and are a merchant depository for cardholderdrafts under VISA credit cards.  We also offer check cards and debitcards.  We offer our local customers free courier services, access tothird-party automated teller machines, or ATMs, and state-of-the-art electronicbanking. We have trust powers but do not have a trust department.

 

**Our Business Strategy**

 

We execute our business bankstrategy by combining the personal service and appeal of a community bankinginstitution with the sophistication of a larger bank.  We believe thisstrategy distinguishes us from our competitors in efforts to attract loans anddeposits of local small to medium-sized businesses and national and regionalequipment vendors and financial services companies.  Further, the rapidgrowth within the Nashville MSA, along with several bank mergers andacquisitions, has left many business owners without significant bankingrelationships. We seek to take advantage of this opportunity.

 

We do not compete based onthe traditional definition of “convenience” and currently have no plans todevelop a comprehensive branch bank network.  For us, convenience iscreated by technology and by a free courier service for local customers whichtransports deposits directly from the business location to the bank.  Weconduct business primarily from a single banking office with no teller line,drive-through window or extended banking hours.  We compete by providingresponsive and personalized service to meet customer needs.  We providefree electronic banking and cash management tools and on-site training forbusiness customers.  We compete for consumer business by providingsuperior products, attractive deposit rates, and free internet banking servicesand access to a third-party regional ATM network.

 

The business bank strategyis highlighted by differences between the financial statements of our bank andmore traditional financial institutions. The business bank model creates a highdegree of leverage.  By avoiding the investment and maintenance costs of atypical branch network, we are able to maintain earning assets at a higherlevel than peer institutions.  Management targets a minimum earning assetratio of 97%, compared to the average of 90% to 95% for all FDIC-insured banksat the end of the first quarter of 2008. At June 30, 2008, we had anearning asset ratio of 96.07%.

 

The business bank model isalso highly efficient.  We primarily target the non-retail (service,manufacturing and professional) sector of the commercial market, which ischaracterized by lower levels of transactions and processing costs.  Thecommercial customer mix and the strategic outsourcing of non-customerfunctions, such as data processing, information technology and internal audit,allow us to operate with a small, highly-trained staff.  Managementtargets a minimum asset per employee ratio of $10,000 compared to the averageratio of approximately $3,380 assets per employee for Middle Tennessee banks atthe end of the first quarter of 2008. At June 30, 2008, our assets peremployee were $14,210.

 

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In addition to our NashvilleMSA focus, we have developed expertise in indirect lending that allows us toaccess a national market. Our indirect lending transactions are fixed-ratemonthly installment loans originated through a third-party equipment vendor orfinancial services company. Our national market lending is divided into twoprograms based on loan size. In the first program, through an establishednetwork of vendors and financial service companies, we have opportunities tofinance business asset secured loan transactions nationally for middle-marketand investment grade companies. In the second program, a different network ofvendors and financial service companies located in Tennessee, Alabama, Georgia,California and Michigan partner with us in financing smaller transactions(generally $150 or less per transaction). Both national market programs providegeographic and collateral diversity for our portfolio.

 

 **Comparison of Operating Results for the Three MonthsEnded June 30, 2008 and June 30, 2007**

 

**Net Income** - Net income for the three months ended June 30,2008 was $1,846, an increase of $235 or 14.59% compared to net income of $1,611for the three months ended June 30, 2007.  The increase isattributable to a $193 increase in non-interest income from $610 for the threemonths ended June 30, 2007 to $803 for the same period in 2008. Weexperienced an increase of $753 in operating expense which was the result ofour overall growth, including a $142 increase in FDIC assessment at June 30,2008 compared to the same date in 2007, as well as an increase in personnel andgeneral operating expenses because of our growth.

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| **(Dollars in thousands)**          | ** ** | **2008**                                        | ** ** | **2007**   | ** ** | **% Change** | ** ** |
|                                          |       |                                            |       |       |       |   |   |
| Interest income                               |       | $                                               | 18,429     |       | $          | 14,852 |   | 24.08 | % |
| Interest expense                              |       | 10,033                                          |       | 8,206      |       | 22.26 |   |
| Net interest income                           |       | 8,396                                           |       | 6,646      |       | 26.33 |   |
| Provision for loan losses                     |       | 2,340                                           |       | 1,500      |       | 56.00 |   |
| Net interest after provision for loan  losses |       | 6,056                                           |       | 5,146      |       | 17.68 |   |
| Non-interest income                           |       | 803                                             |       | 610        |       | 31.64 |   |
| Non-interest expense                          |       | 3,850                                           |       | 3,097      |       | 24.31 |   |
| Net income before taxes                       |       | 3,009                                           |       | 2,659      |       | 13.16 |   |
| Income tax expense                            |       | 1,163                                           |       | 1,048      |       | 10.97 |   |
| Net income                                    |       | $                                               | 1,846      |       | $          | 1,611 |   | 14.59 | % |

 

**Provision for Loan Losses** - The provision for loan losses for thethree months ended June 30, 2008 was $2,340, an increase of $840, or56.00%, above the provision of $1,500 expensed in the same period in2007.  This increase was primarily a result of the increase in loanvolume. At June 30, 2008, the loan loss reserve of $11,520 was 1.23% ofgross loans of $938,636.

 

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**Non-interest Income** - Non-interest income increased by 31.64% or$193, from $610 in the quarter ended June 30, 2007 to $803 for the sameperiod in 2008. The increase was primarily a result of higher gains on loansales.  The gain on loan sales was $852 and $463 for the three-monthperiods ended June 30, 2008 and 2007, respectively.

 

We earned $12 in mortgage origination fees during the three monthsended June 30, 2008 compared to $25 earned during the same period in 2007,a decrease of $13 or 52.00%, primarily as a result of a slower market.  We recognized no gain or loss on the sale ofsecurities in the three months ended June 30, 2008 and the same period in2007.

 

We earned $852 on loan sale transactions in the three months ended June 30,2008, an 84.02% increase compared to $463 during the same period in 2007. Thisincrease was primarily as a result of timing differences. Management willcontinue to consider loan sale transactions if the opportunity for a reasonablereturn is available.

 

**Non-interest Expense** - Non-interest expense for the three monthsended June 30, 2008 was $3,850, an increase of $753 or 24.31%, over the$3,097 expensed in the same period in 2007.  Approximately 36.52% of theincrease was a result of increases in FDIC insurance.

 

**Net Interest Margin******- The net interest margin decreased from3.89% for the three months ended June 30, 2007 to 3.44% for the sameperiod in 2008 because of a lower average yield from the loan portfolio thatwas not fully offset by a decrease in our cost for deposits.  Interestincome increased by $3,577 or 24.08%, from $14,852 during the three monthsended June 30, 2007 to $18,429 during the same period in 2008. Theincrease was primarily a result of increased loan volume.  Average earningassets increased from $684,531 in the three months ended June 30, 2007 to$983,332 in the same period in 2008, an increase of $298,801 or 43.65%. The increase in earning assets was primarily a result of loan growth. Averageloan balances increased by $274,263 or 44.77% for the three months ending June 30,2008, from the same period in 2007.  The average yield on earning assetsdecreased from 8.70% in the three months ended June 30, 2007 to 7.54% inthe same period in 2008. The decrease in the cost of funds, as a percentage ofaverage balances was primarily a result of decreases in short-term interestrates paid on deposits that support our loan growth. Between June 30, 2007and June 30, 2008, the Federal Reserve Open Market Committee, or FOMC,lowered the federal funds rate by 325 basis points.

 

**Interest Expense** – Interest expense increased from $8,206 inthe three months ended June 30, 2007 to $10,033 in the three months ended June 30,2008. The $1,827, or 22.26%, increase in expense was a result of increasesin the volume of deposits partially offset by a decrease in the cost of funds.Average interest earning liabilities increased by $296,630 or 47.18%.  Thecost of funds decreased from 5.24% in the three months ended June 30, 2007to 4.36% during the same three months in 2008, a decrease of 88 basis points.

 

**Income Taxes** - Our effective tax rate for the threemonths ended June 30, 2008 was 38.65% compared to 39.41% for the threemonths ended June 30, 2007. Management anticipates that tax rates infuture periods will approximate the rates paid in 2008.

 

**Efficiency Ratio** - Our efficiency ratio for the three monthsending June 30, 2008 and 2007 was 41.85% and 42.68%, respectively, adecrease of 83 basis points. The following table reflects the calculation ofthe efficiency ratio:

 
| ** **                           | ** ** | **Three Months Ended   June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
| Non-interest expense                 |       | $                                                     | 3,850      |   | $ | 3,097 |   |
|                                 |       |                                                  |       |   |   |
| Net interest income                  |       | 8,396                                                 |       | 6,646 |   |
| Non-interest income                  |       | 803                                                   |       | 610 |   |
| Total Revenues                       |       | $                                                     | 9,199      |   | $ | 7,256 |   |
|                                 |       |                                                  |       |   |   |
| Efficiency Ratio                     |       | 41.85                                                 | %          | 42.68 | % |

 

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 **Comparison of Operating Results for the Six MonthsEnded June 30, 2008 and June 30, 2007**

 

**Net Income** - Net income for the six months ended June 30,2008 was $3,221, an increase of $204 or 6.76% compared to net income of $3,017for the six months ended June 30, 2007.  The increase is attributableto a 29.08% increase in interest income from $27,823 for the six months ended June 30,2007 to $35,915 for the same period in 2008. We experienced an increase of$2,282 in operating expense which was the result of our overall growth,including a $283 increase in FDIC assessment at June 30, 2008 compared tothe same date in 2007, as well as an increase in personnel and generaloperating expenses because of our growth.

 
| ** **                                    | ** ** | **Six Months Ended   June 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| **(Dollars in thousands)**          | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **% Change** | ** ** |
|                                          |       |                                                |       |       |       |   |   |
| Interest income                               |       | $                                                   | 35,915     |       | $          | 27,823 |   | 29.08 | % |
| Interest expense                              |       | 20,057                                              |       | 15,592     |       | 28.64 |   |
| Net interest income                           |       | 15,858                                              |       | 12,231     |       | 29.65 |   |
| Provision for loan losses                     |       | 3,940                                               |       | 3,000      |       | 31.33 |   |
| Net interest after provision for loan  losses |       | 11,918                                              |       | 9,231      |       | 29.11 |   |
| Non-interest income                           |       | 1,330                                               |       | 1,432      |       | (7.12 | ) |
| Non-interest expense                          |       | 7,994                                               |       | 5,712      |       | 39.95 |   |
| Net income before taxes                       |       | 5,254                                               |       | 4,951      |       | 6.12 |   |
| Income tax expense                            |       | 2,033                                               |       | 1,934      |       | 5.12 |   |
| Net income                                    |       | $                                                   | 3,221      |       | $          | 3,017 |   | 6.76 | % |

 

**Provision for Loan Losses** - The provision for loan losses for the sixmonths ended June 30, 2008 was $3,940, an increase of $940, or31.33%, above the provision of $3,000 expensed in the same period in2007.  This increase was primarily a result of the increase in loanvolume. At June 30, 2008, the loan loss reserve of $11,520 was 1.23% ofgross loans of $938,636.

 

**Non-interest Income** - Non-interest income decreased by 7.12% or$102, from $1,432 in the six months ended June 30, 2007 to $1,330 for thesame period in 2008. The decrease was primarily a result ofrepossessions.  The gain on loan sales was $1,418 and $1,280 for thesix-month periods ended June 30, 2008 and 2007, respectively.

 

We earned $24 in mortgage origination fees during the six months ended June 30,2008 compared to $49 earned during the same period in 2007, a decrease of $25or 51.02%, primarily as a result of a slower market.  We recognized $30 onthe sale of securities in the six months ended June 30, 2008 compared with$10 for the same period in 2007, primarily as a result of the restructuring ofportfolios in response to the current economic situation.

 

We earned $1,418 on loan sale transactions in the six months ended June 30,2008, a 10.78% increase compared to $1,280 during the same period in 2007. Thisincrease was primarily a result of timing differences. Management will continueto consider loan sale transactions if the opportunity for a reasonable returnis available.

 

**Non-interest Expense** - Non-interest expense for the six monthsended June 30, 2008 was $7,994, an increase of $2,282 or 39.95%, over the$5,712 expensed in the same period in 2007.  Approximately 37.47% of theincrease was a result of increases in personnel. At June 30, 2008, theBank had 75 full-time employees compared with 60 employees at June 30,2007.

 

**Net Interest Margin******- The net interest margin decreased from3.76% for the six months ended June 30, 2007 to 3.37% for the same periodin 2008 because of a lower average yield from the loan portfolio that was notfully offset by a decrease in our cost for deposits.  Interest incomeincreased by $8,092 or 29.08%, from $27,823 during the six months ended June 30,2007 to $35,915 during the same period in 2008. The increase was primarily aresult of increased loan volume.  Average earning assets increased from$655,285 in the six months ended June 30, 2007 to $946,492 in the sameperiod in 2008, an increase of $291,207 or 44.44%.  The increase inearning assets was primarily a result of loan growth. Average loan balancesincreased by $269,682 or 45.98% for the six months ending June 30, 2008,from the same period in 2007.  The average yield on earning assetsdecreased from 8.55% in the six months ended June 30, 2007 to 7.64% in thesame period in 2008. The decrease in the cost of funds, as a percentage ofaverage balances was primarily a result of decreases in short-term interestrates paid on deposits that support our loan growth. Between June 30, 2007and June 30, 2008, the Federal Reserve Open Market Committee, or FOMC,lowered the federal funds rate by 325 basis points.

 

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**Interest Expense** – Interest expense increased from $15,592 inthe six months ended June 30, 2007 to $20,057 in the six months ended June 30,2008. The $4,465, or 28.64%, increase in expense was a result of increasesin the volume of deposits partially offset by a decrease in the cost of funds.Average interest earning liabilities increased by $286,163 or 47.71%.  Thecost of funds decreased from 5.24% in the six months ended June 30, 2007to 4.55% during the same six months in 2008, a decrease of 69 basis points.

 

**Income Taxes** – Our effective tax rate for the six monthsended June 30, 2008 was 38.69% compared to 39.06% for the six months endedJune 30, 2007. Management anticipates that tax rates in future periodswill approximate the rates paid in 2008.

 

**Efficiency Ratio** – Our efficiency ratio for the six monthsending June 30, 2008 and 2007 was 46.51% and 41.81%, respectively, anincrease of 470 basis points. The following table reflects the calculation ofthe efficiency ratio:

 
| ** **                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| Non-interest expense                 |       | $                                             | 7,994      |   | $ | 5,712 |   |
|                                 |       |                                          |       |   |   |
| Net interest income                  |       | 15,858                                        |       | 12,231 |   |
| Non-interest income                  |       | 1,330                                         |       | 1,432 |   |
| Total Revenues                       |       | $                                             | 17,188     |   | $ | 13,663 |   |
|                                 |       |                                          |       |   |   |
| Efficiency Ratio                     |       | 46.51                                         | %          | 41.81 | % |

 

**Net Interest Income** – Net interest income for the six monthsended June 30, 2008 was $15,858 compared to $12,231 for the same period in2007, a gain of $3,627 or 29.65%.  The increase in net interest income waslargely attributable to strong loan growth.  The average net loan balancefor the six months ended June 30, 2008 increased by 45.98% or $269,682from $586,501 for that period in 2007 to $856,183 for the same period in 2008.Loan growth was accompanied by an increase in average interest-bearing depositsfrom $590,119 for the six months ended June 30, 2007, to $862,419 for thesame period in 2008, an increase of $272,300 or 46.14%.

 

The following table outlines the components of net interest income forthe six-month periods ended June 30, 2008 and 2007 and identifies theimpact of changes in volume and rate:

 
| ** **                           | ** ** | **June 30, 2008 change from  June 30, 2007 due to:** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Volume**                                                                                   | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                                 |       |                                                                                         |       |   |   |   |   |
| Interest income                      |       |                                                                                         |       |   |   |   |   |
| Loans                                |       | $                                                                                            | 10,854     |   | $ | (3,242 | ) | $ | 7,612 |   |
| Securities (taxable) (1)             |       | 556                                                                                          |       | 34 |   | 590 |   |
| Federal funds sold                   |       | 39                                                                                           |       | (149 | ) | (110 | ) |
| Total interest income                |       | 11,449                                                                                       |       | (3,357 | ) | 8,092 |   |
|                                 |       |                                                                                         |       |   |   |   |   |
| Interest expense                     |       |                                                                                         |       |   |   |   |   |
| Deposits (other than demand)         |       | 6,336                                                                                        |       | (2,171 | ) | 4,165 |   |
| Federal funds purchased              |       | 78                                                                                           |       | (28 | ) | 50 |   |
| Subordinated debt                    |       | 281                                                                                          |       | (31 | ) | 250 |   |
| Total interest expense               |       | 6,695                                                                                        |       | (2,230 | ) | 4,465 |   |
|                                 |       |                                                                                         |       |   |   |   |   |
| Net interest income                  |       | $                                                                                            | 4,754      |   | $ | (1,127 | ) | $ | 3,627 |   |

 

----

(1)  Unrealizedgain of $661 and $579 is excluded from yield calculation for the six monthsended June 30, 2008 and 2007, respectively.

 

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*Average Balance Sheets, Net Interest Income, and Changes inInterest Income and Interest Expense*

 

Thetable below shows the average daily balances of each principal category of ourassets, liabilities and shareholders’ equity, and an analysis of net interestincome, and the change in interest income and interest expense segregated intoamounts attributable to changes in volume and changes in rates for thesix-month periods ended June 30, 2008 and 2007. The table is presented ona tax equivalent basis, as applicable.

 
| ** **                                      | ** ** | **Six Months Ended June 30,  2008** | ** ** | **Six Months Ended June 30,  2007** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                      | ** ** | **Average**                                             | ** ** | ** **                                              | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**            | ** ** | **Balance**                                             | ** ** | **Interest**                                            | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                      |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest earning assets                         |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Securities (taxable) (1)                        |       | $                                                       | 79,270     |                                                    | $          | 2,177 |   | 5.57 | % | $ | 59,423 |   | $ | 1,587 |   | 5.33 | % |
| Loans (2) (3)                              |       | 856,183                                                 |       | 33,597                                                  |       | 7.89 | % | 586,501 |   | 25,985 |   | 8.93 | % |
| Federal funds sold                              |       | 11,039                                                  |       | 141                                                     |       | 2.57 | % | 9,361 |   | 251 |   | 5.41 | % |
| Total interest earning assets                   |       | 946,492                                                 |       | 35,915                                                  |       | 7.64 | % | 655,285 |   | 27,823 |   | 8.55 | % |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Non-interest earning assets                     |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                         |       | 3,448                                                   |       |                                                    |       |   |   | 5,529 |   |   |   |   |   |
| Net fixed assets and equipment                  |       | 1,458                                                   |       |                                                    |       |   |   | 1,593 |   |   |   |   |   |
| Accrued interest and other assets               |       | 27,200                                                  |       |                                                    |       |   |   | 14,183 |   |   |   |   |   |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                                       | 978,598    |                                                    |       |   |   |   | $ | 676,590 |   |   |   |   |   |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                    |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Deposits (other than demand)                    |       | $                                                       | 862,419    |                                                    | $          | 19,438 |   | 4.53 | % | $ | 590,119 |   | $ | 15,273 |   | 5.22 | % |
| Federal funds purchased                         |       | 6,084                                                   |       | 91                                                      |       | 3.01 | % | 1,430 |   | 41 |   | 5.78 | % |
| Subordinated debt                               |       | 17,457                                                  |       | 528                                                     |       | 6.08 | % | 8,248 |   | 278 |   | 6.80 | % |
| Total interest-bearing liabilities              |       | 885,960                                                 |       | 20,057                                                  |       | 4.55 | % | 599,797 |   | 15,592 |   | 5.24 | % |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Non-interest bearing liabilities                |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Non-interest bearing demand deposits            |       | 24,143                                                  |       |                                                    |       |   |   | 19,957 |   |   |   |   |   |
| Other liabilities                               |       | 3,922                                                   |       |                                                    |       |   |   | 3,159 |   |   |   |   |   |
| Shareholders’ equity                       |       | 64,573                                                  |       |                                                    |       |   |   | 53,677 |   |   |   |   |   |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                                       | 978,598    |                                                    |       |   |   |   | $ | 676,590 |   |   |   |   |   |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net interest spread                             |       | 3.09                                                    | %          |                                                    |       |   |   | 3.31 | % |   |   |   |   |
|                                            |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net interest margin                             |       | 3.37                                                    | %          |                                                    |       |   |   | 3.76 | % |   |   |   |   |

 

----

| (1) | Unrealized  losses of $661 and $579 are excluded from yield calculation for the six  months ended June 30, 2008 and 2007, respectively.                                                       |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Non-accrual  loans are included in average loan balances, and loan fees of $2,070 and  $1,928 are included in interest income for the six months ended June 30,  2008 and 2007, respectively. |
| (3) | Loans  are presented net of allowance for loan loss.                                                                                                                                               |

 

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**Comparison of Financial Condition at June 30, 2008 and December 31,2007**

 

**Assets****–**Totalassets at June 30, 2008 were $1,065,985, an increase of $165,832, or18.42%, over total assets of $900,153 at December 31, 2007. Loan growthwas the primary reason for the increase.  At June 30, 2008, net loansequaled $927,116, up $143,115, or 18.25%, over the December 31, 2007 totalnet loans of $784,001. The cash and cash equivalents balance decreased by$8,613 between December 31, 2007 and June 30, 2008, as funds wereused to fund loans made in the first two quarters of 2008.

 

Our business bank model of operation generally results in a higherlevel of earning assets than our peer banks.  Earning assets are definedas assets that earn interest income and include short-term investments, theinvestment portfolio and net loans.  We generally maintain a higher levelof earning assets than our peer banks because fewer assets are allocated tofacilities, cash and “due from” bank accounts used for transactionprocessing.  Earning assets at June 30, 2008 were $1,024,055 or96.07% of total assets of $1,065,985.  Earning assets at December 31,2007 were $867,327, or 96.35% of total assets of $900,153.

 

**Loans** – We had total net loans of $927,116 at June 30, 2008. Thefollowing table sets forth the composition of our loan portfolio at June 30,2008 and December 31, 2007:

 
| **(Dollars in thousands)**   | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real estate                            |       |                    |       |                        |       |
| Construction                           |       | $                       | 152,075    |                        | $          | 112,405 |   |
| 1 to 4 family residential              |       | 34,165                  |       | 33,560                      |       |
| Other                                  |       | 153,770                 |       | 143,973                     |       |
| Commercial, financial and agricultural |       | 556,056                 |       | 477,666                     |       |
| Consumer                               |       | 3,375                   |       | 3,966                       |       |
| Other                                  |       | 39,195                  |       | 22,752                      |       |
|                                   |       |                    |       |                        |       |
| Total loans                            |       | 938,636                 |       | 794,322                     |       |
| Less: allowance for loan losses        |       | (11,520                 | )          | (10,321                     | )          |
|                                   |       |                    |       |                        |       |
| Net loans                              |       | $                       | 927,116    |                        | $          | 784,001 |   |

 

Thefollowing table sets forth the percentage composition of our loan portfolio bytype at June 30, 2008 and December 31, 2007:

 
| ** **                             | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real estate:                           |       |                    |       |                        |       |
| Construction                           |       | 16.20                   | %          | 14.15                       | %          |
| 1 to 4 family residential              |       | 3.64                    |       | 4.22                        |       |
| Other                                  |       | 16.38                   |       | 18.13                       |       |
| Commercial, financial and agricultural |       | 59.24                   |       | 60.14                       |       |
| Consumer                               |       | 0.36                    |       | 0.50                        |       |
| Other                                  |       | 4.18                    |       | 2.86                        |       |
|                                   |       |                    |       |                        |       |
| Total                                  |       | 100.00                  | %          | 100.00                      | %          |

 

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The following table sets forth the composition of our commercial loanportfolio by source at June 30, 2008 and December 31, 2007:

 
| ** **                           | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Amount**              | ** ** | **%**                       | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                 |       |                    |       |                        |       |   |   |   |   |
| Direct funding                       |       | $                       | 208,795    |                        | 37.55      | % | $ | 193,943 |   | 40.60 | % |
| Indirect funding:                    |       |                    |       |                        |       |   |   |   |   |
| Large                                |       | 161,942                 |       | 29.12                       |       | 130,583 |   | 27.34 |   |
| Small                                |       | 185,319                 |       | 33.33                       |       | 153,140 |   | 32.06 |   |
| Total                                |       | $                       | 556,056    |                        | 100.00     | % | $ | 477,666 |   | 100.00 | % |

 

Management periodically reviews our loan portfolio, particularlynon-accrual and renegotiated loans.  The review may result in a determinationthat a loan should be placed on a non-accrual status for income recognition.When a loan is classified as non-accrual, any unpaid interest is reversedagainst current income.  Interest is included in income thereafter only tothe extent received in cash.  The loan remains in a non-accrualclassification until such time as the loan is brought current, when it may bereturned to accrual classification.

 

The following table presents information regarding non-accrual, pastdue and restructured loans at June 30, 2008 and December 31, 2007:

 
| **(Dollars in thousands)**                                                                    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Non-accrual loans:                                                                                      |       |                    |       |                        |       |
| Number                                                                                                  |       | 115                     |       | 130                         |       |
| Amount                                                                                                  |       | $                       | 5,566      |                        | $          | 6,465 |   |
|                                                                                                    |       |                    |       |                        |       |
| Accruing loans which are contractually past  due 90 days or more as to principal and interest payments: |       |                    |       |                        |       |
| Number                                                                                                  |       | 59                      |       | 44                          |       |
| Amount                                                                                                  |       | $                       | 3,245      |                        | $          | 1,992 |   |
|                                                                                                    |       |                    |       |                        |       |
| Loans defined as “troubled debt  restructurings”:                                             |       |                    |       |                        |       |
| Number                                                                                                  |       | 9                       |       | 1                           |       |
| Amount                                                                                                  |       | $                       | 3,633      |                        | $          | 148 |   |

 

As of June 30, 2008 and December 31, 2007, there were no loansclassified for regulatory purposes as doubtful or substandard that are notdisclosed in the above table, which (i) represent or result from trends oruncertainties which management reasonably expects will materially impact futureoperating results, liquidity or capital resources, or (ii) representmaterial credits about which management is aware of any information that causesmanagement to have serious doubts as to the ability of such borrowers to complywith the loan repayment terms. During the six months ended June 30, 2008,non-performing loans increased as a result of the restructuring of threecredits in a total amount of $3,500.

 

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**Allowance for Loan Losses** – The maintenance of an adequate allowancefor loan losses, or ALL, is one of the fundamental concepts of risk managementfor every financial institution. Management is responsible for ensuring thatcontrols are in place to ensure the adequacy of the loan loss reserve inaccordance with generally accepted accounting principles, our stated policiesand procedures, and regulatory guidance.

 

It is management’s intent to maintain an ALL that is adequate to absorbcurrent and estimated losses which are inherent in a loan portfolio.  Thehistorical loss ratio (net charge-offs as a percentage of average loans) was0.32% for the six months ended June 30, 2008, and 0.23% for the six monthsended June 30, 2007. The ALL as a percentage of the outstanding loans atthe end of the period was 1.23% at June 30, 2008, and 1.32% at June 30,2007.

 

An analysis of our allowance for loan loss and net charge-offs isfurnished in the following table for the six months ended June 30, 2008and the same period ended June 30, 2007:

 
| **(Dollars in thousands)**              | ** ** | **June 30,  2008** | ** ** | **June 30,  2007** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Allowance for loan losses at beginning of  period |       | $                       | 10,321     |                    | $          | 6,968 |   |
| Charge-offs:                                      |       |                    |       |                    |       |
| Real estate:                                      |       |                    |       |                    |       |
| Construction                                      |       | 150                     |       | —                  |       |
| 1 to 4 family residential                         |       | —                  |       | —                  |       |
| Other                                             |       | —                  |       | —                  |       |
| Commercial, financial and agricultural            |       | 2,548                   |       | 1,516                   |       |
| Consumer                                          |       | 77                      |       | 11                      |       |
| Total Charge-offs                                 |       | 2,775                   |       | 1,527                   |       |
|                                              |       |                    |       |                    |       |
| Recoveries:                                       |       |                    |       |                    |       |
| Real estate:                                      |       |                    |       |                    |       |
| Construction                                      |       | —                  |       | —                  |       |
| 1 to 4 family residential                         |       | —                  |       | —                  |       |
| Other                                             |       | —                  |       | —                  |       |
| Commercial, financial and agricultural            |       | 33                      |       | 178                     |       |
| Consumer                                          |       | 1                       |       | —                  |       |
| Total Recoveries                                  |       | 34                      |       | 178                     |       |
|                                              |       |                    |       |                    |       |
| Net Charge-offs                                   |       | 2,741                   |       | 1,349                   |       |
|                                              |       |                    |       |                    |       |
| Provision for loans charged to expense            |       | 3,940                   |       | 3,000                   |       |
| Allowance for loan losses at end of period        |       | $                       | 11,520     |                    | $          | 8,619 |   |

 
| ** **                                                                                        | ** ** | **June 30,  2008** | ** ** | **June 30,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net charge-offs as a percentage of average  total loans outstanding during the period             |       | 0.32                    | %          | 0.23                    | %          |
|                                                                                              |       |                    |       |                    |       |
| Ending allowance for loan losses as a  percentage of total loans outstanding at end of the period |       | 1.23                    | %          | 1.32                    | %          |

 

The allowance for loan losses is established by charges to operationsbased on management’s evaluation of the loan portfolio, past due loanexperience, collateral values, current economic conditions and other factorsconsidered necessary to maintain the allowance at an adequate level.

 

**Securities** – The securities portfolio at June 30,2008 was $96,030 compared to $73,753 at December 31, 2007.  We viewthe securities portfolio as a source of income and liquidity.  Thesecurities portfolio was 9.01% of total assets at June 30, 2008 and 8.19%of total assets at December 31, 2007.

 

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

 

**Deposits** – Total deposits at June 30, 2008 were $955,248, up $140,195 or17.20% over the December 31, 2007 total deposits of $815,053. Totalaverage deposits during the six months ending June 30, 2008, were$886,562, an increase of $276,486, or 45.32% over the total average deposits of$610,076 during the six months ending June 30, 2007. Average non-interestbearing deposits increased by $4,186, or 20.98%, from $19,957 in the six monthsending June 30, 2007, to $24,143 in the six months ending June 30,2008.

 

The following table sets forth average deposit balances for the sixmonths ended June 30, 2008 and 2007 and the average rates paid on thosebalances:

 
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **(Dollars in thousands)** | ** ** | **Average  Balance**                              | ** ** | **Average  Rate  Paid (1)** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid (1)** | ** ** |
| Types of Deposits:                   |       |                                              |       |   |   |   |   |   |   |
| Non-interest-bearing demand deposits |       | $                                                 | 24,143     |   | — | % | $ | 19,957 |   | — | % |
| Interest-bearing demand deposits     |       | 7,100                                             |       | 1.00 |   | 6,316 |   | 3.85 |   |
| Money market accounts                |       | 74,833                                            |       | 2.38 |   | 114,915 |   | 5.21 |   |
| Savings accounts                     |       | 6,379                                             |       | 2.69 |   | 7,777 |   | 2.70 |   |
| IRA accounts                         |       | 23,212                                            |       | 4.97 |   | 13,221 |   | 5.18 |   |
| Purchased time deposits              |       | 398,029                                           |       | 4.82 |   | 224,472 |   | 5.25 |   |
| Time deposits                        |       | 352,866                                           |       | 4.74 |   | 223,418 |   | 5.32 |   |
| Total deposits                       |       | $                                                 | 886,562    |   |   |   | $ | 610,076 |   |   |   |

 

----

(1)    Rate is annualized

 

**Short-Term Debt** – We have a $10,000 line of credit withFirst Tennessee Bank, National Association. The outstanding principal balanceon this line of credit at June 30, 2008 was $9,500, and this line ofcredit expires on October 1, 2008.

 

**Subordinated Debt** – In March 2005, we formed a financingsubsidiary, Tennessee Commerce Statutory Trust I, a Delaware statutory trust,or the Trust I. In March 2005, the Trust I issued and sold 8,000 of theTrust I’s fixed/floating rate capital securities, with a liquidation amount of$1 per capital security, to First Tennessee Bank, National Association. At thesame time, we issued to Trust I $8,248 of fixed/floating rate juniorsubordinated deferrable interest debentures due 2035. The debentures pay a6.73% fixed rate payable quarterly for the first five years and a floating ratebased on a three-month LIBOR rate plus a margin thereafter.

 

InApril 2008, we formed a financing subsidiary, Tennessee Commerce StatutoryTrust II, a Delaware statutory trust, or the Trust II. In June 2008, theTrust II issued and sold 14,500 of the Trust II’s floating rate capitalsecurities, with a liquidation amount of $1 per capital security, in a privateplacement. At the same time, we issued to Trust II $14,950 of floating ratejunior subordinated deferrable interest debentures due 2038. The debentures paya floating rate per annum, reset quarterly, equal to the prime rate of interestpublished in *The Wall Street Journal*on the first business day of each distribution period plus 50 basis points (butin no event greater than 8.0% or less than 5.75%).

 

Inaccordance with FASB Interpretation No. 46 (revised December 2003) “Consolidationof Variable Interest Entities,” neither the Trust I nor the Trust II isconsolidated. We report as liabilities the subordinated debentures issued by usand held by the Trust I and Trust II.

 

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**Off-Balance Sheet Arrangements**

 

We are a party to financial instruments with off-balance sheet risk inthe normal course of business to meet the financing needs of our customers. At June 30,2008, we had unfunded loan commitments outstanding of $154,104 and standbyletters of credit and financial guarantees of $12,916. Those instruments involve,to varying degrees, elements of credit risk in excess of the amount recognizedin the balance sheet.  The contract or notional amounts of thoseinstruments reflect the extent of our involvement in those particular financialinstruments. We use the same credit policies in making commitments andconditional obligations as we do for on-balance sheet instruments.

 

Because these commitments generally have fixed expiration dates andmany will expire without being drawn upon, the total commitment level does notnecessarily represent future cash requirements. If needed, we can liquidatefederal funds sold or securities available for sale or borrow and purchasefederal funds from other financial institutions, where we have availablefederal fund lines at June 30, 2008 totaling $33,700.

 

# **Liquidity/ CapitalResources**

# ** **

**Liquidity** – Of primary importance to depositors, creditors and regulators is theability to have readily available funds sufficient to repay fully maturingliabilities.  We are subject to general FDIC guidelines, which do notrequire a minimum level of liquidity. Liquidity requirements can be met throughshort-term borrowings or the disposition of short-term assets which aregenerally matched to correspond to the maturity of liabilities. Management believesour liquidity ratios meet the general FDIC guidelines and we have assets andborrowing capacity to provide adequate liquidity. Management does not know ofany trends or demands that are reasonably likely to result in our liquidityincreasing or decreasing in any material manner.

 

**Capital Resources****–**Our objective is to maintain a level ofcapitalization that is sufficient to take advantage of profitable growthopportunities while meeting regulatory requirements.****To continue to grow, we must increase capital by generatingearnings, issuing equities, borrowing funds or a combination of thoseactivities. In June 2008, the Trust II issued and sold $14,500 of capitalsecurities in a private placement.

 

The Federal Reserve Board has adopted capital guidelines governing theactivities of bank holding companies.  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 bankholding companies are required to maintain capital to support, on arisk-adjusted basis, certain off-balance sheet activities such as loancommitments.

 

The capital guidelines classify capital into two tiers, referred to asTier I and Tier II. Under risk-based capital requirements, totalcapital consists of Tier I capital which is generally common shareholders’equity less goodwill and Tier II capital which is primarily a portion of theallowance for loan losses and certain preferred stock and qualifying debtinstruments. In determining risk-based capital requirements, assets areassigned risk-weights of 0% to 100%, depending primarily on the regulatoryassigned levels of credit risk associated with such assets. Off-balance sheetitems are considered in the calculation of risk-adjusted assets throughconversion factors established by the regulators. The framework for calculatingrisk-based capital requires banks and bank holding companies to meet the regulatoryminimums of 4% Tier I and 8% total risk-based capital. In 1990, regulatorsadded a leverage computation to the capital requirements, comparing Tier Icapital to total average assets less goodwill.

 

The Federal Deposit Insurance Corporation Improvement Act of 1991established five capital categories for banks and bank holding companies. Thebank regulators adopted regulations defining these five capital categories in September 1992.Under these regulations, each bank is classified into one of the five categoriesbased on its level of risk-based capital as measured by Tier I capital,total risk-based capital, Tier I leverage ratios and its supervisoryratings.

 

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At June 30, 2008 and December 31, 2007, the Bank’s and ourrisk-based capital ratios and the minimums for capital adequacy and to beconsidered well-capitalized under the Federal Reserve Board’s prompt correctiveaction guidelines were as follows:

 
| ** **                                               | ** ** | ** **        | ** ** | ** **            | ** ** | ** **           | ** ** | **Minimum to**    | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                               | ** ** | ** **        | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **be considered** | ** ** |
| ** **                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **well-**              | ** ** |
| ** **                                               | ** ** | **2008**          | ** ** | **2007**              | ** ** | **adequacy**         | ** ** | **capitalized**        | ** ** |
|                                                     |       |              |       |                  |       |                 |       |                   |       |
| Tier 1 leverage ratio                                    |       |              |       |                  |       |                 |       |                   |       |
| Tennessee Commerce Bank                                  |       | 8.83              | %          | 8.75                  | %          | 4.00                 | %          | 5.00                   | %          |
| Tennessee Commerce Bancorp, Inc.                    |       | 8.71              | %          | 8.09                  | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |              |       |                  |       |                 |       |                   |       |
| Tier 1 “core” capital to risk-weighted  assets |       |              |       |                  |       |                 |       |                   |       |
| Tennessee Commerce Bank                                  |       | 9.14              | %          | 9.26                  | %          | 4.00                 | %          | 6.00                   | %          |
| Tennessee Commerce Bancorp, Inc.                    |       | 9.01              | %          | 8.55                  | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |              |       |                  |       |                 |       |                   |       |
| Total capital to risk-weighted assets                    |       |              |       |                  |       |                 |       |                   |       |
| Tennessee Commerce Bank                                  |       | 10.31             | %          | 10.51                 | %          | 8.00                 | %          | 10.00                  | %          |
| Tennessee Commerce Bancorp, Inc.                    |       | 10.18             | %          | 9.80                  | %          | 8.00                 | %          | n/a                    |       |

 

Based solely on our analysis of federal banking regulatory categories,on June 30, 2008 and December 31, 2007, we and the Bank were withinthe “well capitalized” categories 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 andresulting from inflation. The impact of inflation on operations of the Bank isreflected in increased operating costs. Unlike most industrial companies,almost all of the assets and liabilities of the Bank are monetary in nature. Asa result, interest rates have a more significant impact on the Bank’sperformance than the effects of general levels of inflation. Interest rates donot necessarily move in the same direction or in the same magnitude as theprice of goods and services.

 

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**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Like all financial institutions, we are subject to market risk fromchanges in interest rates. Interest rate risk is inherent in the balance sheetbecause of the mismatch between the maturities of rate sensitive assets andrate sensitive liabilities. If rates are rising, and the level of ratesensitive liabilities exceeds the level of rate sensitive assets, the netinterest margin will be negatively impacted. Conversely, if rates are falling,and the level of rate sensitive liabilities is greater than the level of ratesensitive assets, the impact on the net interest margin will be favorable.Managing interest rate risk is further complicated by the fact that all ratesdo not change at the same pace, in other words, short-term rates may be risingwhile longer term rates remain stable. In addition, different types of ratesensitive assets and rate sensitive liabilities react differently to changes inrates.

 

To manage interest rate risk, we must take a position on the expectedfuture trend of interest rates. Rates may rise, fall or remain the same. TheBank’s asset liability committee develops its view of future rate trends andstrives to manage rate risk within a targeted range by monitoring economicindicators, examining the views of economists and other experts, andunderstanding the current status of our balance sheet. Our annual budgetreflects the anticipated rate environment for the next twelve months. The assetliability committee conducts a quarterly analysis of the rate sensitivityposition and reports its results to the Bank’s board of directors.

 

The asset liability committee uses a computer model to analyze thematurities of rate sensitive assets and liabilities. The model measures the “gap”which is defined as the difference between the dollar amount of rate sensitiveassets repricing during a period and the volume of rate sensitive liabilitiesrepricing during the same period. Gap is also expressed as the ratio of ratesensitive assets divided by rate sensitive liabilities. If the ratio is greaterthan one, the dollar value of assets exceeds the dollar value of liabilities,and the balance sheet is “asset sensitive.” Conversely, if the value ofliabilities exceeds the value of assets, the ratio is less than one and thebalance sheet is “liability sensitive.” Our internal policy requires managementto maintain the gap within a range of 0.75 to 1.25.

 

The model measures scheduled maturities in periods of three months,four to 12 months, one to five years and over five years. The chart belowillustrates our rate sensitive position at June 30, 2008. Management usesthe one-year gap as the appropriate time period for setting strategy.

 

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RateSensitivity 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                                               |       | $            | 909        |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 909 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |             |       |       |       |
| U.S. government agencies                                         |       | —       |       | 47,384     |       | 504        |       | 1,222     |       | 46,600           |       | 95,710     |       |
| Mortgage-backed securities                                       |       | —       |       | 23         |       | 72         |       | 146       |       | 79               |       | 320        |       |
| Total securities                                                 |       | —       |       | 47,407     |       | 576        |       | 1,368     |       | 46,679           |       | 96,030     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total loans                                                      |       | 247,420      |       | 109,116    |       | 237,967    |       | 311,173   |       | 32,960           |       | 938,636    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total interest-earning assets                                    |       | 248,329      |       | 156,523    |       | 238,543    |       | 312,541   |       | 76,639           |       | 1,035,575  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other assets                                                     |       | —       |       | —     |       | —     |       | —    |       | 30,410           |       | 30,410     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total assets                                                     |       | $            | 248,329    |       | $          | 156,523    |       | $         | 238,543    |             | $          | 312,541    |       | $ | 110,049 |   | $ | 1,065,985 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest-bearing liabilities                                     |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest checking                                                |       | $            | 3,091      |       | $          | —     |       | $         | —     |             | $          | 2,970      |       | $ | — |   | $ | 6,061 |   |
| Money market and savings                                         |       | 39,855       |       | —     |       | —     |       | 27,696    |       | —           |       | 67,551     |       |
| Time deposits                                                    |       | —       |       | 195,344    |       | 505,512    |       | 159,545   |       | —           |       | 860,401    |       |
| Total deposits                                                   |       | 42,946       |       | 195,344    |       | 505,512    |       | 190,211   |       | —           |       | 934,013    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Federal funds purchased                                          |       | 8,300        |       | —     |       | —     |       | —    |       | —           |       | 8,300      |       |
| Short-term debt                                                  |       | —       |       | 9,500      |       | —     |       | —    |       | —           |       | 9,500      |       |
| Subordinated debt                                                |       | —       |       | —     |       | —     |       | —    |       | 23,198           |       | 23,198     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total interest-bearing liabilities                               |       | 51,246       |       | 204,844    |       | 505,512    |       | 190,211   |       | 23,198           |       | 975,011    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other liabilities                                                |       | —       |       | —     |       | —     |       | —    |       | 25,322           |       | 25,322     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Shareholders’ equity                                        |       | —       |       | —     |       | —     |       | —    |       | 65,652           |       | 65,652     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total liabilities and shareholders’ equity                  |       | $            | 51,246     |       | $          | 204,844    |       | $         | 505,512    |             | $          | 190,211    |       | $ | 114,172 |   | $ | 1,065,985 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate sensitive gap by period                                     |       | $            | 197,083    |       | $          | (48,321    | )          | $         | (266,969   | )                | $          | 122,330    |       | $ | 56,441 |   |   |   |
| Cumulative gap                                                   |       |         |       | $          | 148,762    |       | $          | (118,207  | )          | $                | 4,123      |       | $          | 60,564 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Cumulative gap as a percentage of total  assets                  |       |         |       | 13.96      | %          | (11.09     | )%         | 0.39      | %          | 5.68             | %          |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate sensitive assets / rate sensitive  liabilities (cumulative) |       | 4.85         |       | 1.58       |       | 0.84       |       | 1.00      |       | 1.06             |       |       |       |

 

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From June 30, 2007 to June 30, 2008, the FOMC decreasedinterest rates by 325 basis points. Management has positioned the balance sheetto be essentially neutral for asset and liability sensitivity. At June 30,2008, our one-year gap was 0.84.

 

The interest rate risk model that defines the gap position alsoperforms a “rate shock” test of the balance sheet using an earnings simulationmodel and an economic value of equity model. The rate shock test measures theimpact on the net interest margin and the economic value of equity of animmediate shift in interest rates in either direction.

 

Our earnings simulation model measures the impact of changes ininterest rates on net interest income. To limit interest rate risk, we have aguideline for our earnings at risk which sets a limit on the variance of netinterest income to less than a 5% percent decline for a 100-basis pointchange up or down in rates from management’s flat interest rate forecast overthe next twelve months. At June 30, 2008, we were in compliance with thisguideline.

 

Our economic value of equity model measures the extent that estimatedeconomic values of our assets, liabilities and off-balance sheet items willchange as a result of interest rate changes. To help limit interest rate risk,we have a guideline stating that for an instantaneous 100-basis point increaseor decrease in interest rates, the economic value of equity will not decreaseby more than 10% from the base case. At June 30, 2008, we were incompliance with this guideline.

 

The above analysis may not on its own be an entirely accurate indicatorof how net interest income or net interest margin will be affected by changesin interest rates. Income associated with interest-earning assets and costsassociated with interest-bearing liabilities may not be affected uniformly bychanges in interest rates. In addition, the magnitude and duration of changesin interest rates may have a significant impact on net interest income.Interest rates on certain types of assets and liabilities fluctuate in advanceof changes in general market rates, while interest rates on other types may lagbehind changes in general market rates. The asset liability committee developsits view of future rate trends by monitoring economic indicators, examining theviews of economists and other experts, and understanding the current status ofour balance sheet and conducts a quarterly analysis of the rate sensitivityposition. The results of the analysis are reported to the Bank’s board ofdirectors.

 

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**ITEM 4. CONTROLS AND PROCEDURES.**

 

Evaluationof Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”),that are designed to ensure that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and acting Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure. We carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and acting Chief Financial Officer, ofthe effectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report. Based on theevaluation of these disclosure controls and procedures, the Chief ExecutiveOfficer and acting Chief Financial Officer concluded that our disclosurecontrols and procedures are effective to allow timely decisions regardingdisclosure in the reports that we file or submit to the Securities and ExchangeCommission under the Exchange Act.

 

InternalControl Over Financial Reporting

 

Therewere no changes in our internal control over financial reporting during thequarter ended June 30, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II:OTHER INFORMATION**

 

**ITEM 1A. RISK FACTORS.**

 

There were no material changes to our risk factors included in Part I,Item 1A of our Annual Report on Form 10-K for the year ended December 31,2007, as filed with the Securities and Exchange Commission on April 18,2008.

 

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS.**

 

The annual meeting ofshareholders (the “Annual Meeting”) of Tennessee Commerce Bancorp, Inc.(the “Corporation”) was held June 24, 2008.  The following proposals were considered byshareholders at the Annual Meeting:

 

Proposal1 – Election of Class IIDirectors

 

Thefollowing directors were elected to serve as Class II directors untiltheir respective successors are elected and qualified

 
| ** **        | ** ** | **Votes** | ** ** | ** **   | ** ** |
|-------------------|------------|-----------|------------|--------------|------------|
| ** **        | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstained** | ** ** |
| Paul W. Dierksen  |       | 3,371,288 |       | 30,550       |       | — |   |
| Dennis L. Grimaud |       | 3,371,288 |       | 30,550       |       | — |   |
| Michael R. Sapp   |       | 3,341,486 |       | 60,352       |       | — |   |

 

Thefollowing directors continued in office following the Annual Meeting and theywill serve until the annual meeting of shareholders in the years indicated oruntil their respective successors are elected and qualified:

 
| ** **              | ** ** | **Term  Expires** | ** ** |
|-------------------------|------------|-------------------|------------|
| H. Lamar Cox            |       | 2010              |       |
| Arthur F. Helf          |       | 2009              |       |
| William W. McInnes      |       | 2009              |       |
| Thomas R. Miller        |       | 2010              |       |
| Darrel E. Reifschneider |       | 2010              |       |
| Paul A. Thomas          |       | 2009              |       |

 

Proposal 2 – Ratification of the appointment ofKraftCPA’s, PLLC as the Corporation’s independent accountants and auditors forthe fiscal year 2008

 
| ** ** | ** ** | **Votes**   | ** ** | **Broker**  | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 3,369,948  |       | 28,890      |       | 3,000       |       | — |   |

 

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**ITEM 6. EXHIBITS.**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                 |
| 3.1                  |       | Charter  of Tennessee Commerce Bancorp, Inc., as amended(1)                                                                                                                                                                                                                     |
| 3.2                  |       | Articles  of Amendment to the Charter of Tennessee Commerce Bancorp, Inc.(2)                                                                                                                                                                                                    |
| 3.3                  |       | Bylaws  of Tennessee Commerce Bancorp, Inc.(1)                                                                                                                                                                                                                                  |
| 3.4                  |       | Amendment  to Bylaws of Tennessee Commerce Bancorp, Inc.(3)                                                                                                                                                                                                                     |
| 4.1                  |       | Shareholders’  Agreement(1)                                                                                                                                                                                                                                                     |
| 4.2                  |       | Form of  Stock Certificate(4)                                                                                                                                                                                                                                                   |
| 4.3                  |       | Indenture,  dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.  and Wilmington Trust Company, as trustee(5)                                                                                                                                               |
| 4.4                  |       | Amended  and Restated Declaration of Trust, dated as of June 20, 2008, among Tennessee  Commerce Bancorp, Inc. , as sponsor, Wilmington Trust Company, as  institutional and Delaware trustee, and Arthur F. Helf, H. Lamar Cox and  Michael R. Sapp, as administrators(6) |
| 4.5                  |       | Guarantee  Agreement, dated as of June 20, 2008, between Tennessee Commerce  Bancorp, Inc. and Wilmington Trust Company(5)                                                                                                                                                 |
| 31.1                 |       | Certification  of Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                   |
| 31.2                 |       | Certification  of Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                   |
| 32.1                 |       | Certification  of Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                   |
| 32.2                 |       | Certification  of Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                   |

 

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| (1)    |   | Previously  filed as an exhibit to Tennessee Commerce Bancorp, Inc.’s Registration  Statement on Form 10, as filed with the Securities and Exchange  Commission on April 29, 2005, and incorporated herein by reference.                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| (2)    |   | Previously  filed as an exhibit to Tennessee Commerce Bancorp, Inc.’s Annual Report  on Form 10-K, as filed with the Securities and Exchange Commission on  April 18, 2008, and incorporated herein by reference.                                                |
|   |   |                                                                                                                                                                                                                                                                                 |
| (3)    |   | Previously  filed as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report  on Form 8-K, as filed with the Securities and Exchange Commission on  February 5, 2008, and incorporated herein by reference.                                              |
|   |   |                                                                                                                                                                                                                                                                                 |
| (4)    |   | Previously  filed as an exhibit to Tennessee Commerce Bancorp, Inc.’s Registration  Statement on Form S-8, as filed with the Securities and Exchange  Commission on December 31, 2007 (Registration No. 333-148415), and  incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                 |
| (5)    |   | Previously  filed as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report  on Form-8-K, as filed with the Securities and Exchange Commission on  June 23, 2008, and incorporated herein by reference.                                                      |
|   |   |                                                                                                                                                                                                                                                                                 |
| (6)    |   | Previously  filed as an exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report  on Form-8-K/A, as filed with the Securities and Exchange Commission on  June 30, 2008, and incorporated herein by reference.                                                    |

 

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Tableof Contents

 

SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                  | Tennessee  Commerce             |
|-----------------------|---------------------------------|
|                  | Bancorp, Inc.              |
|                  | (Registrant)                    |
|                  |                            |
|                  |                            |
| August 11,  2008 |                            | /s/  H. Lamar Cox |
| (Date)                |                            | H.  Lamar Cox |
|                  | Acting  Chief Financial Officer |

 

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