Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND 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 the quarterly period ended March 31, 2009**

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

 

**CommissionFile Number 000-51281**

 

**TENNESSEECOMMERCE BANCORP, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **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’stelephone number, including area code)

 

**NotApplicable**

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

 

Indicate by check markwhether registrant (1) has filed reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x  No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).     Yes  o          No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of 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) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o  No  x

 

As of May 06, 2009there were 4,733,712 shares of common stock, $0.50 par value per share, issuedand outstanding.

 

 

 

----

Table of Contents

 

**TennesseeCommerce Bancorp, Inc.**

 

Table of Contents

 
| Part I  |   | Financial Information                                                                                                                |   |   |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|         |   |                                                                                                                                 |   |   |
| Item 1.      |   | Financial Statements                                                                                                                 |   |   |
|         |   |                                                                                                                                 |   |   |
|         |   | Consolidated  Balance Sheets at March 31, 2009 (unaudited) and December 31, 2008                                           |   | 3      |
|         |   |                                                                                                                                 |   |   |
|         |   | Consolidated  Statements of Income (unaudited) for the Three Months Ended March 31,  2009 and 2008                              |   | 4      |
|         |   |                                                                                                                                 |   |   |
|         |   | Consolidated Statements of Changes in Shareholders’  Equity (unaudited) for the Three Months Ended March 31, 2009 and 2008 |   | 5      |
|         |   |                                                                                                                                 |   |   |
|         |   | Consolidated Statements of Cash Flows (unaudited) for  the Three Months Ended March 31, 2009 and 2008                           |   | 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                                                                          |   | 25     |
|         |   |                                                                                                                                 |   |   |
| Item 4.      |   | Controls and  Procedures                                                                                                             |   | 27     |
|         |   |                                                                                                                                 |   |   |
| Part II |   | Other Information                                                                                                                    |   | 28     |
|         |   |                                                                                                                                 |   |   |
| Item 1A.     |   | Risk Factors                                                                                                                         |   | 28     |
|         |   |                                                                                                                                 |   |   |
| Item 6.      |   | Exhibits                                                                                                                             |   | 28     |
|         |   |                                                                                                                                 |   |   |
| Signatures   |   |                                                                                                                                 |   | 29     |

 

2

----

Table of Contents

 

**PART I: FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS.**

 

TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31,2009 (UNAUDITED) AND DECEMBER 31, 2008

 
| **(Dollars in thousands except share data)**                                                                                                                                                                   | ** ** | **2009**  | ** ** | **2008(1)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|
| **ASSETS**                                                                                                                                                                                                                              |       |      |       |        |       |
| Cash and due  from financial institutions                                                                                                                                                                                               |       | $         | 5,754      |        | $          | 5,260 |   |
| Federal funds  sold                                                                                                                                                                                                                     |       | 25        |       | 35,538      |       |
| Cash and cash  equivalents                                                                                                                                                                                                              |       | 5,779     |       | 40,798      |       |
|                                                                                                                                                                                                                                    |       |      |       |        |       |
| Securities  available for sale                                                                                                                                                                                                          |       | 100,013   |       | 101,290     |       |
|                                                                                                                                                                                                                                    |       |      |       |        |       |
| Loans                                                                                                                                                                                                                                   |       | 1,103,942 |       | 1,036,725   |       |
| Allowance for  loan losses                                                                                                                                                                                                              |       | (15,424   | )          | (13,454     | )          |
| Net loans                                                                                                                                                                                                                               |       | 1,088,518 |       | 1,023,271   |       |
|                                                                                                                                                                                                                                    |       |      |       |        |       |
| Premises and  equipment, net                                                                                                                                                                                                            |       | 2,230     |       | 2,330       |       |
| Accrued interest  receivable                                                                                                                                                                                                            |       | 8,689     |       | 8,115       |       |
| Restricted  equity securities                                                                                                                                                                                                           |       | 2,152     |       | 1,685       |       |
| Income tax  receivable                                                                                                                                                                                                                  |       | 5,832     |       | 4,430       |       |
| Other assets                                                                                                                                                                                                                            |       | 61,921    |       | 36,165      |       |
|                                                                                                                                                                                                                                    |       |      |       |        |       |
| Total assets                                                                                                                                                                                                                            |       | $         | 1,275,134  |        | $          | 1,218,084 |   |
|                                                                                                                                                                                                                                    |       |      |       |        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                          |       |      |       |        |       |
| Liabilities                                                                                                                                                                                                                             |       |      |       |        |       |
| Deposits                                                                                                                                                                                                                                |       |      |       |        |       |
| Noninterest-bearing                                                                                                                                                                                                                     |       | $         | 23,258     |        | $          | 24,217 |   |
| Interest-bearing                                                                                                                                                                                                                        |       | 1,072,049 |       | 1,044,926   |       |
| Total deposits                                                                                                                                                                                                                          |       | 1,095,307 |       | 1,069,143   |       |
|                                                                                                                                                                                                                                    |       |      |       |        |       |
| FHLB advances                                                                                                                                                                                                                           |       | 15,153    |       | —      |       |
| Federal funds  purchased                                                                                                                                                                                                                |       | 20,479    |       | —      |       |
| Accrued interest  payable                                                                                                                                                                                                               |       | 3,268     |       | 3,315       |       |
| Accrued dividend  payable                                                                                                                                                                                                               |       | 188       |       | —      |       |
| Short-term  borrowings                                                                                                                                                                                                                  |       | 10,000    |       | 10,000      |       |
| Accrued bonuses                                                                                                                                                                                                                         |       | —    |       | 917         |       |
| Deferred tax  liability                                                                                                                                                                                                                 |       | 8,404     |       | 8,695       |       |
| Other  liabilities                                                                                                                                                                                                                      |       | 1,095     |       | 1,069       |       |
| Long-term  subordinated debt                                                                                                                                                                                                            |       | 23,198    |       | 23,198      |       |
| Total  liabilities                                                                                                                                                                                                                      |       | 1,177,092 |       | 1,116,337   |       |
| Shareholders’  equity                                                                                                                                                                                                              |       |      |       |        |       |
| Preferred stock,  1,000,000 shares authorized; 30,000 shares of $0.50 par value Fixed Rate  Cumulative Perpetual, Series A issued and outstanding at March 31,  2009 and December 31, 2008, respectively                 |       | 15,000    |       | 15,000      |       |
| Common stock,  $0.50 par value; 10,000,000 shares authorized at March 31, 2009 and  December 31, 2008; 4,731,696 and 4,731,696 shares issued and outstanding  at March 31, 2009 and December 31, 2008, respectively |       | 2,366     |       | 2,366       |       |
| Common stock  warrant                                                                                                                                                                                                                   |       | 453       |       | 453         |       |
| Additional  paid-in capital                                                                                                                                                                                                             |       | 60,037    |       | 59,946      |       |
| Retained  earnings                                                                                                                                                                                                                      |       | 20,520    |       | 23,180      |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                 |       | (334      | )          | 802         |       |
| Total  shareholders’ equity                                                                                                                                                                                                        |       | 98,042    |       | 101,747     |       |
|                                                                                                                                                                                                                                    |       |      |       |        |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                                        |       | $         | 1,275,134  |        | $          | 1,218,084 |   |

 

----

(1) The balancesheet at December 31, 2008 has been derived from the audited consolidatedfinancial statements at that date but does not include all of the informationand notes required by generally accepted accounting principles for completefinancial statements.

 

See accompanying notes toconsolidated financial statements.

 

3

----

Table of Contents

 

TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDEDMARCH 31, 2009 AND 2008

(UNAUDITED)

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Dollars  in thousands, except share data)**       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Interest income                                      |       |                                             |       |   |   |
| Loans, including  fees                               |       | $                                                | 17,896     |   | $ | 16,382 |   |
| Securities                                           |       | 1,555                                            |       | 1,033 |   |
| Federal funds  sold                                  |       | 5                                                |       | 71 |   |
| Total interest  income                               |       | 19,456                                           |       | 17,486 |   |
|                                                 |       |                                             |       |   |   |
| Interest expense                                     |       |                                             |       |   |   |
| Deposits                                             |       | 9,129                                            |       | 9,744 |   |
| Other                                                |       | 487                                              |       | 280 |   |
| Total interest  expense                              |       | 9,616                                            |       | 10,024 |   |
|                                                 |       |                                             |       |   |   |
| Net interest  income                                 |       | 9,840                                            |       | 7,462 |   |
|                                                 |       |                                             |       |   |   |
| Provision for  loan losses                           |       | 8,514                                            |       | 1,600 |   |
|                                                 |       |                                             |       |   |   |
| Net interest  income after provision for loan losses |       | 1,326                                            |       | 5,862 |   |
|                                                 |       |                                             |       |   |   |
| Non-interest  income                                 |       |                                             |       |   |   |
| Service charges  on deposit accounts                 |       | 43                                               |       | 24 |   |
| Securities gains  (losses)                           |       | 418                                              |       | 30 |   |
| (Loss) gain on  sale of loans                        |       | (360                                             | )          | 566 |   |
| Other                                                |       | (74                                              | )          | (93 | ) |
| Total  non-interest income                           |       | 27                                               |       | 527 |   |
|                                                 |       |                                             |       |   |   |
| Non-interest  expense                                |       |                                             |       |   |   |
| Salaries and  employee benefits                      |       | 2,349                                            |       | 2,284 |   |
| Occupancy and  equipment                             |       | 410                                              |       | 360 |   |
| Data processing  fees                                |       | 304                                              |       | 285 |   |
| Professional fees                                    |       | 390                                              |       | 375 |   |
| Other                                                |       | 1,480                                            |       | 840 |   |
| Total  non-interest expense                          |       | 4,933                                            |       | 4,144 |   |
|                                                 |       |                                             |       |   |   |
| (Loss) income  before income taxes                   |       | (3,580                                           | )          | 2,245 |   |
|                                                 |       |                                             |       |   |   |
| Income tax  (benefit) expense                        |       | (1,364                                           | )          | 870 |   |
| Net (loss)  income                                   |       | (2,216                                           | )          | 1,375 |   |
| Preferred stock  dividends and accretion             |       | (444                                             | )          | — |   |
|                                                 |       |                                             |       |   |   |
| Net (loss)  income available to common shareholders  |       | $                                                | (2,660     | ) | $ | 1,375 |   |
|                                                 |       |                                             |       |   |   |
| Earnings per  share (EPS):                           |       |                                             |       |   |   |
| Basic EPS                                            |       | $                                                | (0.56      | ) | $ | 0.29 |   |
|                                                 |       |                                             |       |   |   |
| Diluted EPS                                          |       | (0.56                                            | )          | 0.28 |   |
|                                                 |       |                                             |       |   |   |
| Weighted average  shares outstanding:                |       |                                             |       |   |   |
| Basic                                                |       | 4,731,696                                        |       | 4,729,718 |   |
| Diluted                                              |       | 4,731,696                                        |       | 4,890,711 |   |
|                                                 |       |                                             |       |   |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

Table of Contents

 

TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY

THREE MONTHS ENDEDMARCH 31, 2009 AND 2008

(UNAUDITED)

 
| ** **                                                                                | ** ** | ** **    | ** ** | ** ** | ** ** | **Warrant to** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------|------------|------------|------------|---------------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | ** **    | ** ** | ** ** | ** ** | **Purchase**        | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**              | ** ** | **Total**              | ** ** |
| ** **                                                                                | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common**          | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | **Comprehensive**      | ** ** | **Shareholders’** | ** ** |
| **(Dollars in thousands except share data)**                     | ** ** | **Stock**     | ** ** | **Stock**  | ** ** | **Stock**           | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
|                                                                                      |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance at  December 31, 2007                                                        |       | $             | —     |       | $          | 2,362               |       | $              | —     |         | $          | 45,024                 |       | $                      | 15,426     |   | $ | 309 |   | $ | 63,121 |   |
| Comprehensive  income                                                                     |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Net income                                                                                |       | —        |       | —     |       | —              |       | —         |       | 1,375        |       | —                 |       | 1,375                  |       |
| Other  comprehensive income, net of income taxes                                          |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Unrealized gains  on securities available for sale during the period, net of income taxes |       | —        |       | —     |       | —              |       | —         |       | —       |       | 343                    |       | 343                    |       |
|                                                                                      |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Total  comprehensive income                                                               |       | —        |       | —     |       | —              |       | —         |       | —       |       | —                 |       | 1,718                  |       |
|                                                                                      |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Exercise of  stock options to purchase 43,350 common shares and related tax benefit       |       | —        |       | 4          |       | —              |       | 86             |       | —       |       | —                 |       | 90                     |       |
|                                                                                      |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance at  March 31, 2008                                                           |       | $             | —     |       | $          | 2,366               |       | $              | —     |         | $          | 45,110                 |       | $                      | 16,801     |   | $ | 652 |   | $ | 64,929 |   |
|                                                                                      |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance at  December 31, 2008                                                        |       | $             | 15,000     |       | $          | 2,366               |       | $              | 453        |         | $          | 59,946                 |       | $                      | 23,180     |   | $ | 802 |   | $ | 101,747 |   |
| Comprehensive  income                                                                     |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Net income                                                                                |       | —        |       | —     |       | —              |       | —         |       | (2,660       | )          | —                 |       | (2,660                 | )          |
| Unrealized gains  on securities available for sale during the period, net of income taxes |       | —        |       | —     |       | —              |       | —         |       | —       |       | (1,136                 | )          | (1,136                 | )          |
| Common stock  warrant accretion                                                           |       |          |       |       |       |                |       | 23             |       |         |       |                   |       | 23                     |       |
| Stock-based  compensation expense                                                         |       | —        |       | —     |       | —              |       | 68             |       | —       |       | —                 |       | 68                     |       |
|                                                                                      |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance at  March 31, 2009                                                           |       | $             | 15,000     |       | $          | 2,366               |       | $              | 453        |         | $          | 60,037                 |       | $                      | 20,520     |   | $ | (334 | ) | $ | 98,042 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

----

Table of Contents

 

TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDEDMARCH 31, 2009 AND 2008

(UNAUDITED)

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Dollars in thousands)**                                                        | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                              |       |                                             |       |   |   |
| **Cash  flows from operating activities**                                         |       |                                             |       |   |   |
| Net income                                                                        |       | $                                                | (2,216     | ) | $ | 1,375 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                                             |       |   |   |
| Depreciation                                                                      |       | 122                                              |       | 86 |   |
| Deferred loan  fees                                                               |       | 41                                               |       | (135 | ) |
| Provision for  loan losses                                                        |       | 8,514                                            |       | 1,600 |   |
| Stock-based  compensation expense                                                 |       | 68                                               |       | — |   |
| Deferred income  tax                                                              |       | —                                           |       | (210 | ) |
| Net amortization  of investment securities                                        |       | 22                                               |       | (36 | ) |
| Gain on sales of  securities                                                      |       | (418                                             | )          | (30 | ) |
| Change in:                                                                        |       |                                             |       |   |   |
| Accrued interest  receivable                                                      |       | (574                                             | )          | (459 | ) |
| Accrued interest  payable                                                         |       | (47                                              | )          | 381 |   |
| Other assets                                                                      |       | (2,613                                           | )          | (3,988 | ) |
| Other  liabilities                                                                |       | (502                                             | )          | 1,422 |   |
| Net cash  provided by operating activities                                        |       | (2,397                                           | )          | 6 |   |
|                                                                              |       |                                             |       |   |   |
| **Cash  flows from investing activities**                                         |       |                                             |       |   |   |
| Purchases of  securities available for sale                                       |       | (39,989                                          | )          | (23,947 | ) |
| Proceeds from  sales of securities available for sale                             |       | 19,428                                           |       | 12,292 |   |
| Proceeds from  maturities, prepayments and calls of securities available for sale |       | 20,402                                           |       | 13,979 |   |
| Net change in  loans                                                              |       | (73,802                                          | )          | (71,378 | ) |
| Purchase of BOLI  investment                                                      |       | (24,341                                          | )          | — |   |
| Purchases of  FHLB Stock                                                          |       | (467                                             | )          | (411 | ) |
| Net purchases of  premises and equipment                                          |       | (22                                              | )          | (107 | ) |
| Net cash used by  investing activities                                            |       | (98,791                                          | )          | (69,572 | ) |
|                                                                              |       |                                             |       |   |   |
| **Cash  flows from financing activities**                                         |       |                                             |       |   |   |
| Net change in  deposits                                                           |       | 26,164                                           |       | 46,496 |   |
| Net change in  federal funds purchased and repurchase agreements                  |       | 20,479                                           |       | 14,175 |   |
| Proceeds from  FHLB advances and other long-term debt                             |       | 15,153                                           |       | — |   |
| Preferred stock  dividends and accretion expense                                  |       | 444                                              |       | — |   |
| Proceeds from  exercise of common stock options                                   |       | —                                           |       | 38 |   |
| Excess tax  benefit from option exercises                                         |       | —                                           |       | 52 |   |
| Net cash  provided by financing activities                                        |       | 61,819                                           |       | 60,761 |   |
|                                                                              |       |                                             |       |   |   |
| **Net  change in cash and cash equivalents**                                      |       | (35,019                                          | )          | (8,805 | ) |
|                                                                              |       |                                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 40,798                                           |       | 14,809 |   |
|                                                                              |       |                                             |       |   |   |
| **Cash  and cash equivalents at end of period**                                   |       | $                                                | 5,779      |   | $ | 6,004 |   |
|                                                                              |       |                                             |       |   |   |
| **Supplemental  cash flow information:**                                          |       |                                             |       |   |   |
| Cash paid during  period for interest                                             |       | $                                                | 9,663      |   | $ | 9,643 |   |
| Cash paid during  period for income taxes                                         |       | 1,568                                            |       | 183 |   |

 

See accompanying notes toconsolidated financial statements.

 

6

----

Table of Contents

 

TENNESSEE COMMERCEBANCORP, INC.

 

Notes to ConsolidatedFinancial Statements (unaudited)

 

(Dollars in thousands,except per share data, throughout these Notes to Consolidated FinancialStatements (unaudited))

 

Note 1 — Basis ofPresentation

 

Tennessee Commerce Bancorp, Inc.(the “Corporation”) is the bank holding company for Tennessee Commerce Bank(the “Bank”).  In March 2005, the Corporation formed a wholly ownedsubsidiary, Tennessee Commerce Bank Statutory Trust I (the “Trust I”).  InJune 2008, the Corporation formed a wholly owned subsidiary, TennesseeCommerce Bank Statutory Trust II (the “Trust II”). In July 2008, thecorporation formed a wholly owned subsidiary, TCB Commercial Assets Services.As of March 31, 2009, the Bank, the Trust I, the Trust II and TCBCommercial Assets Services were the only subsidiaries of the Corporation. Theaccompanying consolidated financial statements include the accounts of theCorporation, the Bank and TCB Commercial Assets Services, Inc. The Trust Iand the Trust II are not consolidated in accordance with Financial AccountingStandards Board (“FASB”) Interpretation No. 46(R) (revised December 2003),“Consolidation of Variable Interest Entities.” Material intercompany accountsand transactions have been eliminated.

 

The unauditedconsolidated financial statements as of March 31, 2009 and for thethree-month periods ended March 31, 2009 and 2008 have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”),and in the opinion of management, include all adjustments, consisting of normalrecurring adjustments, to present fairly the information included therein. Theydo not include all the information and notes required by generally acceptedaccounting principles for complete financial statements. Operating results forthe three-month period ended March 31, 2009 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2009.For further information, refer to the consolidated financial statements andnotes thereto included in the Corporation’s Annual Report on Form 10-K forthe year ended December 31, 2008.

 

Note 2 — Earnings perShare of Common Stock

 

The factors used in theearnings per share computation follow:

 
| ** **                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Basic                                                                           |       |                                             |       |   |   |
| Net income  available to common shareholders                                    |       | $                                                | (2,660     | ) | $ | 1,375 |   |
|                                                                            |       |                                             |       |   |   |
| Weighted average  common shares outstanding                                     |       | 4,731,696                                        |       | 4,729,718 |   |
|                                                                            |       |                                             |       |   |   |
| Basic earnings  per common share                                                |       | $                                                | (0.56      | ) | $ | 0.29 |   |
|                                                                            |       |                                             |       |   |   |
| Diluted                                                                         |       |                                             |       |   |   |
| Net income  available to common shareholders                                    |       | $                                                | (2,660     | ) | $ | 1,375 |   |
|                                                                            |       |                                             |       |   |   |
| Weighted average  common shares outstanding for basic earnings per common share |       | 4,731,696                                        |       | 4,729,718 |   |
| Add: Dilutive  effects of assumed exercises of stock options (1)                |       | —                                           |       | 160,993 |   |
|                                                                            |       |                                             |       |   |   |
| Average shares  and dilutive potential common shares                            |       | 4,731,696                                        |       | 4,890,711 |   |
|                                                                            |       |                                             |       |   |   |
| Diluted earnings  per common share                                              |       | $                                                | (0.56      | ) | $ | 0.28 |   |

 

----

(1)                All of the warrant and options were excluded from thecalculation of diluted earnings per share in 2009 because they wereanti-dilutive.

 

7

----

Table of Contents

 

Note 3 — StockCompensation

 

On January 1, 2006,the Corporation adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),“Share-Based Payment” (“SFAS No. 123(R)”), which addresses the accountingfor share-based payment transactions in which a company receives employeeservices in exchange for equity instruments. SFAS No. 123(R) eliminatesthe ability to account for share-based compensation transactions, as theCorporation formerly did, using the intrinsic value method as prescribed byAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” and generally requires that such transactions be accounted forusing a fair-value-based method and recognized as expense in the accompanyingconsolidated statement of income.

 

The Corporation adoptedSFAS No. 123(R) using the modified prospective method which requiresthe application of the accounting standard as of January 1, 2006. Theaccompanying consolidated financial statements as of and for the periods ended March 31,2009 reflects the impact of adopting SFAS No. 123(R). In accordance withthe modified prospective method, the consolidated financial statements forprior periods have not been restated to reflect, and do not include, the impactof SFAS No. 123(R).

 

Stock-based compensationexpense recognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Stock-basedcompensation expense recognized in the accompanying consolidated statements ofincome for the periods ended March 31, 2009 included any compensationexpense for stock-based payment awards vesting during the period based on thegrant date fair value estimated in accordance with SFAS No. 123(R). Asstock-based compensation expense recognized in the accompanying statement ofincome for the period ended March 31, 2009 is based on awards ultimatelyexpected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

 

For the three monthsended March 31, 2009, the Corporation granted options to purchase 150,000shares of Corporation common stock and there were 163,600 non-vested optionsoutstanding prior to that period. There was $68 stock-based expense recognizedfor the three months ended March 31, 2009.

 

8

----

Table of Contents

 

A summary of the activityin the Corporation’s stock-based compensation plan is as follows:

 
| ** **                                                                  | ** ** | **Number** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Contractual  Remaining  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value (1)** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------|------------|
| Stock-based  awards outstanding at December 31, 2008                   |       | 833,070    |       | $                                       | 13.49      |                                                                  |       |                                     |       |   |
| Options granted                                                             |       | 150,000    |       | 5.85                                    |       |                                                                  |       |                                     |       |
| Shares of  restricted stock granted                                         |       | —     |       | —                                  |       |                                                                  |       |                                     |       |
| Options  exercised                                                          |       | —     |       | —                                  |       |                                                                  |       |                                     |       |
| Options  forfeited or expired                                               |       | (17,250    | )          | 5.80                                    |       |                                                                  |       |                                     |       |
| Stock-based  awards outstanding at March 31, 2009                      |       | 965,820    |       | $                                       | 12.81      |                                                                  | 5.70       |                                     | $          | (4,955 | ) |
| Stock-based  awards outstanding and expected to vest at March 31, 2009 |       | 965,820    |       | $                                       | 12.81      |                                                                  | 5.70       |                                     | $          | (4,955 | ) |
| Options  exercisable at March 31, 2009                                 |       | 653,820    |       | $                                       | 11.71      |                                                                  | 4.08       |                                     | $          | (2,635 | ) |

 

----

(1)                The aggregate intrinsic value is calculated as thedifference between the exercise price of each option and the closing price pershare of Corporation common stock of $7.68 for the outstanding options topurchase 965,820 shares of Corporation common stock and exercisable options topurchase 653,820 shares of Corporation common stock at March 31, 2009.

 
| ** **                                                                             | ** ** | **Number** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|
| Shares of  restricted stock outstanding at December 31, 2008                      |       | 10,079     |       |
| Shares of  restricted stock granted                                                    |       | —     |       |
| Options  forfeited or expired                                                          |       | —     |       |
| Restricted  stock-based awards outstanding at March 31, 2009                      |       | 10,079     |       |
| Restricted  stock-based awards outstanding and expected to vest at March 31, 2009 |       | 10,079     |       |
| Restricted stock  exercisable at March 31, 2009                                   |       | 2,016      |       |

 

The estimated fair valuesare computed using the Black-Scholes option valuation model, using thefollowing weighted-average assumptions as of the grant date shown below:

 
| ** **               | ** ** | **2009** | ** ** | **2008**  | ** ** |
|--------------------------|------------|----------|------------|-----------|------------|
|                     |       |     |       |      |       |
| Risk-free  interest rate |       | 0.30     | %          | 3.27      | %          |
| Expected option  life    |       | 5 years  |       | 3.5 years |       |
| Dividend yield           |       | 0.0      | %          | 0.0       | %          |

 

The Corporation grantedoptions to purchase 150,000 shares of Corporation common stock in the firstquarter of 2009 and in the first quarter of 2008. The options granted in 2009had an estimated fair value of $2.28. The options granted in 2008 had anestimated fair value of $4.45. The options granted in 2007 had an estimatedfair value of $5.75. The options granted during 2005 were granted in July, August andNovember and had an estimated fair value of $3.96, $4.07 and $4.26,respectively. The weighted average fair value of options granted during theyear was $4.45 for 2008, $5.75 for 2007, $4.03 for 2005, $2.23 for 2004 and$2.29 for 2003. No options were granted in 2006.

 

9

----

Table of Contents

 

Note 4 — Federal HomeLoan Advances and Trust Preferred Securities

 

In October 2008, theBank was approved for funding advances in an aggregate amount of $30,000 withterms from one to 100 days from The Federal Home Loan Bank of Cincinnati (“FHLB”),based on a collateral standard. The Bank’s available advance is based on 150%of eligible one-to-four family loans as collateral. The Bank is also requiredto maintain a minimum required capital stock balance that is based upon itstotal assets.

 

In March 2005, theTrust I issued and sold 8,000 of its fixed/floating rate capital securities,with a liquidation amount of $1 per capital security, to First Tennessee BankNational Association. The securities pay a fixed rate of 6.73% payablequarterly for the first five years and a floating rate based on a three-monthLIBOR rate plus 1.98% thereafter. At the same time, the Corporation issued tothe Trust I $8,248 of fixed/floating rate junior subordinated deferrableinterest debentures due 2035. The Corporation guarantees the payment ofdistributions 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.

 

The debentures pay afixed rate of 6.73% payable quarterly for the first five years and a floatingrate based on a three-month LIBOR rate plus 1.98% thereafter. The distributionson the capital securities are accounted for as interest expense by theCorporation. Interest payments on the debentures and the correspondingdistributions on the capital securities may be deferred at any time at theelection of the Corporation for up to 20 consecutive quarterly periods (fiveyears). The capital securities and debentures are redeemable at any timecommencing after June 2010 at par. The Corporation reports as liabilitiesthe subordinated debentures issued by the Corporation and held by the Trust I.

 

In June 2008, theTrust II issued and sold 14,500 of its floating rate capital securities, with aliquidation amount of $1 per capital security, in a private placement. Thesecurities 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%). Atthe same time, the Corporation issued to the Trust II $14,950 of floating ratejunior subordinated deferrable interest debentures due 2038. The Corporationguarantees the payment of distributions and payments for redemptions orliquidation of the capital securities. The floating rate capital securitiesqualify as “Tier I Capital” for the Corporation under current regulatorydefinitions subject to certain limitations.

 

The debentures pay afloating rate per annum, reset quarterly, equal to the prime rate of interest publishedin*The Wall Street Journal* on thefirst business day of each distribution period plus 50 basis points (but in noevent greater than 8.0% or less than 5.75%). The distributions on the capitalsecurities are accounted for as interest expense by the Corporation. Interestpayments on the debentures and the corresponding distributions on the capitalsecurities may be deferred at any time at the election of the Corporation forup to 20 consecutive quarterly periods (five years). The capital securities anddebentures are redeemable at any time commencing after June 2013 at par.The Corporation reports as liabilities the subordinated debentures issued bythe Corporation and held by the Trust II.

 

Note 5 — New AccountingStandards

 

In April 2008, theFASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of theUseful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factorsan entity should consider in developing renewal or extension assumptions usedin determining the useful life of recognized intangible assets under FASBStatement No. 142, “Goodwill and Other Intangible Assets.” This newguidance applies prospectively to intangible assets that are acquiredindividually or with a group of other assets in business combinations and assetacquisitions. FSP 142-3 is effective for financial statements issued for fiscalyears and interim periods beginning after December 15, 2008. Earlyadoption is prohibited. The Corporation is currently evaluating the impact, ifany, that FSP 142-3 will have on its consolidated financial statements.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161 (“SFAS161”), “Disclosures about Derivative Instruments and Hedging Activities.” SFAS161 requires companies with derivative instruments to disclose information thatshould enable financial-statement users to understand how and why a companyuses derivative instruments, how derivative instruments and related hedgeditems are accounted for under FASB Statement No. 133, “Accounting forDerivative Instruments and Hedging Activities,” and how derivative instrumentsand related hedged items affect a company’s financial position, financialperformance and cash flows. SFAS 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008. The Corporation is currently evaluating the impact, if any, that SFAS 161will have on its consolidated financial statements.

 

10

----

Table of Contents

 

In December 2007,the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS141R clarifies the definitions of both a business combination and a business.All business combinations will be accounted for under the acquisition method(previously referred to as the purchase method). This standard defines theacquisition date as the only relevant date for recognition and measurement ofthe fair value of consideration paid. SFAS 141R requires the acquirer toexpense all acquisition related costs. SFAS 141R will also require acquiredloans to be recorded net of the allowance for loan losses on the date ofacquisition. SFAS 141R defines the measurement period as the time after theacquisition date during which the acquirer may make adjustments to the “provisional”amounts recognized at the acquisition date. This period cannot exceed one year,and any subsequent adjustments made to provisional amounts are doneretrospectively and restate prior period data. The provisions of this statementare effective for business combinations during fiscal years beginning after December 15,2008. The Corporation has not determined the impact that SFAS 141R will have onits financial position and results of operations and believes that suchdetermination will not be meaningful until the Corporation enters into abusiness combination.

 

Note 6 — Fair ValueMeasurement

 

The Bank has anestablished process for determining fair values, in accordance with SFAS No. 157.Fair value is based upon quoted market prices, where available. If listedprices or quotes are not available, fair value is based upon internallydeveloped models or processes that use primarily market-based orindependently-sourced market data, including interest rate yield curves, optionvolatilities and third party information. Valuation adjustments may be made toensure that financial instruments are recorded at fair value. These adjustmentsinclude amounts to reflect counterparty credit quality (for financial assetsreflected at fair value), the Bank’s creditworthiness (for financialliabilities reflected at fair value), liquidity and other unobservableparameters that are applied consistently over 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; and                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                 |
| · | 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 describedabove may produce a fair value calculation that may not be indicative of net realizablevalue or reflective of future fair values. Furthermore, while the Bank believesits valuation methods are appropriate and consistent with other marketparticipants, the use of different methodologies, or assumptions, to determinethe fair value of certain financial instruments could result in a differentestimate of fair value at the reporting date.

 

**ValuationHierarchy**

 

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 a description of the valuationmethodologies used for instruments measured at fair value, as well as thegeneral classification of such instruments pursuant to the valuation hierarchy.

 

11

----

Tableof Contents

 

**Assets**

 

*SecuritiesAvailable for Sale -* Available-for-sale securities arerecorded at fair value on a recurring basis.  Where quoted prices areavailable in an active market, securities are classified within level 1 of thevaluation hierarchy.  Level 1 securities include highly liquid governmentbonds, federal funds sold and certain other products.  Fair valuemeasurement is based upon quoted prices, if available.  If quoted pricesare not available, securities would generally be classified within level 2, andfair value would be determined by matrix pricing, which is a mathematicaltechnique widely used in the industry to value debt securities without relyingexclusively on quoted prices for the specific securities but relying on thesecurities’ relationship to other benchmark quoted securities. In certain caseswhere there is limited activity or less transparency around inputs to thevaluation, securities are classified within level 3 of the valuation hierarchy.For the three months ended March 31, 2009, the entire Bank’savailable-for-sale securities were valued using matrix pricing and wereclassified within level 2 of the valuation hierarchy.  At March 31,2009, the Bank had no securities classified within level 3.

 

*ServicingAssets -* All separately recognized servicing assets andservicing liabilities are initially measured at fair value. Subsequentmeasurement methods include the amortization method, whereby servicing assetsor servicing liabilities are amortized over the period of estimated netservicing income or net servicing loss, or the fair value method, wherebyservicing assets or servicing liabilities are measured at fair value at eachreporting date and changes in fair value are reported in earnings in the periodin which they occur. Because of the unique nature of the Bank’s servicingassets, quoted market prices may not be available. If no quoted market pricesare available, the amortization method is used. The Bank assesses servicingassets or servicing liabilities for impairment or increased obligation based onthe fair value at each reporting date.  At March 31,2009, the Bank had servicing assets measured at fair value on a recurringbasis classified within level 3 of the valuation hierarchy.

 

*Interest-OnlyStrips -* When the Bank sells loans to others, it may holdinterest-only strips, which is an interest that continues to be held by thetransferor in the securitized receivable. It may also obtain servicing assetsor assume servicing liabilities that are initially measured at fair value. Gainor loss on sale of the receivables depends in part on both (a) theprevious carrying amount of the financial assets involved in the transfer,allocated between the assets sold and the interests that continue to be held bythe transferor based on their relative fair value at the date of transfer, and (b) theproceeds received. To obtain fair values, quoted market prices are used ifavailable. However, quotes are generally not available for interests thatcontinue to be held by the transferor, so the Bank generally estimates fairvalue based on the future expected cash flows estimated using management’s bestestimates of the key assumptions — credit losses and discount ratescommensurate with the risks involved. At March 31, 2009, the Bank hadinterest-only strips measured at fair value on a recurring basis classifiedwithin level 3 of the valuation hierarchy.

 

*ImpairedLoans —* A loan is considered to be impaired when it isprobable the Bank will be unable to collect all principal and interest paymentsdue in accordance with the contractual terms of the loan agreement.Individually identified impaired loans are measured based on the present valueof expected payments using the loan’s original effective rate as the discountrate, the loan’s observable market price, or the fair value of the collateralif the loan is collateral dependent. If the recorded investment in the impairedloan exceeds the measure of fair value, a valuation allowance may beestablished as a component of the allowance for loan losses. At March 31,2009, the Bank had impaired loans measured on a nonrecurring basis classifiedwithin level 3 of the valuation hierarchy.

 

*OtherAssets**—*Included in other assets are certain assets carried at fair value, includingrepossessions and other real estate owned (“OREO”). The carrying amount isbased on an observable market price or appraisal value. The Bank reflects theseassets within level 3 of the valuation hierarchy. At March 31,2009, the Bank had repossessions and OREO measured at fair value on anonrecurring basis classified within level 3 of the valuation hierarchy. TheBank also includes bank owned life insurance (“BOLI”) within other assets,carried at a cash surrender value. At March 31, 2009, the Bank hadBOLI measured at fair value on a nonrecurring basis classified within level 3of the valuation hierarchy.

 

*Inventory**—* Repossessed assets are resoldat retail prices as soon as practicable.  If a repossession of the Bank isnot resold within the six month holding period allowed by Tennessee law, it ispurchased by a subsidiary of the Corporation. It is held as inventory andcarried at fair market value.  The sole purpose of the subsidiary is the resaleof assets reposed by the Bank. At March 31, 2009, the subsidiary hadinventory measured at fair value on a recurring basis classified within level 3of the valuation hierarchy.

 

**Liabilities**

 

*RecourseObligations* - The maximum extent of the Bank’s recourse obligationson loans transferred is 10% of the amount transferred adjusted for any earlypayoffs or terminations, based on the Bank’s payment history on loans of thetype transferred. At March 31, 2009, the Bank had recourseobligations measured at fair value on a recurring basis classified within level3 of the valuation hierarchy.

 

12

----

Table of Contents

 

The following tablepresents the financial instruments carried at fair value as of March 31,2009, by caption on the consolidated balance sheets and by SFAS No. 157valuation hierarchy (as described above):

 

**Assetsand liabilities measured at fair value on a recurring basis as of March 31,2009**

 
| ** **                           | ** ** | **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)**                                                                                          | ** ** |
| Securities  available for sale       |       | 100,013                                                                                    |       | —                                                                             |       | 100,013                                                                                                   |       | —                                                                                                      |       |
| Servicing assets                     |       | 196                                                                                        |       | —                                                                             |       | —                                                                                                    |       | 196                                                                                                         |       |
| Interest-only  strips                |       | 4,430                                                                                      |       | —                                                                             |       | —                                                                                                    |       | 4,430                                                                                                       |       |
| Other Assets                         |       | 24,341                                                                                     |       | —                                                                             |       | —                                                                                                    |       | 24,341                                                                                                      |       |
| **Total  assets at fair value**      |       | $                                                                                          | 128,980    |                                                                               | $          | —                                                                                                    |       | $                                                                                                           | 100,013    |   | $ | 28,967 |   |
|                                 |       |                                                                                       |       |                                                                               |       |                                                                                                      |       |                                                                                                        |       |
| Recourse  obligations                |       | 402                                                                                        |       | —                                                                             |       | —                                                                                                    |       | 402                                                                                                         |       |
| **Total  liabilities at fair value** |       | $                                                                                          | 402        |                                                                               | $          | —                                                                                                    |       | $                                                                                                           | —     |   | $ | 402 |   |

 

The Corporation may berequired, from time to time, to measure certain assets at fair value on anonrecurring basis in accordance with generally accepted accounting principles.These include assets that are measured at the lower of cost or market that wererecognized at fair value below the cost at the end of the period. The followingtable presents the financial instruments carried at fair value as of March 31,2009, by caption on the consolidated balance sheets and by SFAS No. 157valuation hierarchy (as described above):

 

**Assetsand liabilities measured at fair value on a nonrecurring basis as of March 31,2009**

 
| ** **                           | ** ** | **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)**                                                                                          | ** ** |
| Impaired loans                       |       | $                                                                                          | 24,342     |                                                                               | $          | —                                                                                                    |       | $                                                                                                           | —     |   | $ | 24,342 |   |
| Inventory                            |       | 5,550                                                                                      |       | —                                                                             |       | —                                                                                                    |       | 5,550                                                                                                       |       |
| Other Assets                         |       | 16,892                                                                                     |       | —                                                                             |       | —                                                                                                    |       | 16,892                                                                                                      |       |
|                                 |       |                                                                                       |       |                                                                               |       |                                                                                                      |       |                                                                                                        |       |
| **Total  assets at fair value**      |       | $                                                                                          | 46,676     |                                                                               | $          | —                                                                                                    |       | $                                                                                                           | —     |   | $ | 46,676 |   |
|                                 |       |                                                                                       |       |                                                                               |       |                                                                                                      |       |                                                                                                        |       |
| Liabilities                          |       | —                                                                                     |       | —                                                                             |       | —                                                                                                    |       | —                                                                                                      |       |
| **Total  liabilities at fair value** |       | $                                                                                          | —     |                                                                               | $          | —                                                                                                    |       | $                                                                                                           | —     |   | $ | — |   |

 

**Changesin level 3 fair value measurements**

 

The table below includesa roll-forward of the balance sheet amounts for the first quarter of 2009(including the change in fair value) for financial instruments classified bythe Bank within level 3 of the valuation hierarchy for assets and liabilitiesmeasured at fair value on a recurring basis. When a determination is made toclassify a financial instrument within level 3 of the valuation hierarchy, thedetermination is based upon the significance of the unobservable factors to theoverall fair value measurement. However, since level 3 financial instrumentstypically include, in addition to the unobservable or level 3 components,observable components (that is, components that are actively quoted and can bevalidated to external sources), the gains and losses in the table below includechanges in fair value due in part to observable factors that are part of the valuationmethodology.

 
| **Three months ended March 31, 2009**                                                                                         | ** ** | **Assets** | ** **  | **Liabilities** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
| Fair value, January  1, 2009                                                                                                                           |       | $          |  5,460 |            | $          |  444 |   |
| Total realized  and unrealized gains/losses included in income                                                                                         |       | (1,138     | )           | 36              |       |
| Purchases,  issuances and settlements, net                                                                                                             |       | 24,645     |        | (78             | )          |
| Transfers in  and/or out of level 3                                                                                                                    |       | —     |        | —          |       |
| Fair value,  March 31, 2009                                                                                                                       |       | $          | 28,967      |            | $          | 402 |   |
| Total unrealized  gains included in income related to financial assets and liabilities still on  the consolidated balance sheet at March 31, 2009 |       | $          | —      |            | $          | — |   |

 

13

----

Tableof Contents

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

**Forward-LookingStatements**

 

Certain statementscontained in this report may not be based on historical facts and are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements may be identified by reference toa future period or by the use of forward-looking terminology, such as “expect,”“anticipate,” “believe,” “estimate,” “foresee,” “may,” “might,” “will,” “intend,”“could,” “would,” “plan,” “target,” “forecast” or future or conditional verbtenses and variations or negatives of such terms. These forward-lookingstatements include, without limitation, those relating to our operatingresults, vesting of stock-based awards, recently adopted accounting standards,fair value measurements, allowance and provision for loan losses, business bankstrategy, management’s review of the loan portfolio, loan classifications, loancommitments, interest rate risk, earning assets, economic value of equitymodel, loan sale transactions, tax rates, liquidity, capital resources,inflation,  internal control over financial reporting, off-balance sheetarrangements and our future growth and profitability. We caution you not toplace undue reliance on the forward-looking statements contained in this reportbecause actual results could differ materially from those indicated in suchforward-looking statements as a result of a variety of factors. These factorsinclude, but are not limited to, changes in economic conditions, competitionfor loans, mortgages and other financial services and products, changes ininterest rates, concentrations within our loan portfolio, our ability tomaintain credit quality, the effectiveness of our risk monitoring systems,changes in consumer preferences, the ability of our borrowers to repay loans,the availability of and costs associated with maintaining and/or obtainingadequate and timely sources of liquidity, changes in our operating strategy,our ability to meet regulatory capital adequacy requirements, our ability tocollect amounts due under loan agreements and to attract deposits, our abilityto attract, train and retain qualified personnel, the geographic concentrationof our assets, our ability to operate and integrate new technology, our abilityto provide market competitive products and services, our ability to diversifyrevenue, our ability to fund growth with lower cost liabilities, laws andregulations affecting financial institutions in general and other factorsdetailed from time to time in our press releases and filings with theSecurities and Exchange Commission. We undertake no obligation to updatethese forward-looking statements to reflect the occurrence of changes orunanticipated events, circumstances or results that occur after the date ofthis report.

 

**Overview**

(Dollars in thousands,except per share data, throughout this Item 2, including tabular information)

 

The results ofoperations, before charges for preferred dividends, for the quarter ended March 31,2009 compared to the quarter ended March 31, 2008 reflected a 261.16%decrease in net income and a 264.29% decrease in diluted earnings per share.The decrease in earnings resulted partially from additional expensesattributable to the provision for loan losses. For the three months ended March 31, 2009, net loss was $2,660, adecrease of $4,012 or 291.78% compared to net income of $1,375 for the sameperiod in 2008. Diluted earnings per share decreased $0.84 per share or 300.00%for the three months ended March 31, 2009 compared to the same period in2008. The three months ended March 31, 2009 reflected a continuation ofour bank’s trend of asset growth, increasing by $57,050 or 4.68% from$1,218,084 at December 31, 2008 to $1,275,134 at March 31, 2009. Netloans increased by 6.38% or $65,247 from December 31, 2008 to March 31,2009, while total deposits increased by 2.45% or $26,164 during that sameperiod.

 

14

----

Tableof Contents

 

**CorporationOverview**

 

Tennessee CommerceBancorp, Inc., headquartered in Franklin, Tennessee, is the bank holdingcompany for Tennessee Commerce Bank (the “Bank”).  Organized in January 2000,Tennessee Commerce Bank has a focused strategy that serves the banking needs ofsmall to medium-sized businesses, entrepreneurs and professionals in theNashville metropolitan statistical area, or the Nashville MSA, as well as thefunding needs of certain national and regional equipment vendors and financialservices companies.  We call this strategy our “business bank” strategy.We primarily conduct business from a single location in the Cool Springscommercial area of Franklin, Tennessee, 15 miles south of Nashville.  Wealso operate three loan production offices - in Birmingham, Alabama,Minneapolis, Minnesota and Atlanta, Georgia.

 

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.

 

**OurBusiness Strategy**

 

We execute our businessbank strategy by combining the personal service and appeal of a communitybanking institution with the sophistication of a larger bank.  We believethis strategy distinguishes us from our competitors in efforts to attract loansand deposits of local small to medium-sized businesses and national andregional equipment vendors and financial services companies.  Further, therapid growth within the Nashville MSA has left many business owners withoutsignificant banking relationships. We seek to take advantage of thisopportunity.

 

We do not compete basedon the 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, free internet banking services andaccess to a third-party regional ATM network.

 

The business bankstrategy is highlighted by differences between the financial statements of ourbank and more traditional financial institutions. The business bank modelcreates a high degree of leverage.  By avoiding the investment andmaintenance costs of a typical branch network, we are able to maintain earningassets at a higher level than peer institutions.  Management targets aminimum earning asset ratio of 95%**.** At March 31,2009, we had an earning asset ratio of 94.10%.

 

The business bank modelis also 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 $3,643 assets per employee for Tennessee banks at theend of the fourth quarter of 2008. At March 31, 2009, our assets peremployee were $15,002.

 

In addition to ourNashville MSA focus, we have developed expertise in indirect lending thatallows us to access a national market. Our indirect lending transactions arefixed-rate monthly installment loans originated through a third-party equipmentvendor or financial services company. Our national market lending is dividedinto two programs based on loan size. In the first program, through anestablished network of vendors and financial services companies, we haveopportunities to finance business asset secured loan transactions nationallyfor middle-market and investment grade companies. In the second program, adifferent network of vendors and financial services companies located inTennessee, Alabama, Georgia, California**,**Minnesota andMichigan partner with us in financing smaller transactions (generally $150 orless per transaction). Both national market programs provide geographic andcollateral diversity for our portfolio.

 

15

----

Tableof Contents

 

**Comparisonof Operating Results for the Three Months Ended March 31, 2009 and March 31,2008**

 

**NetIncome** - Net loss for the three months ended March 31,2009 was $2,660, a decrease of $4,030 or 293.45% compared to net income of$1,375 for the three months ended March 31, 2008.  The decrease isattributable to a 19.04% increase in non-interest expense from $4,144 for thethree months ended March 31, 2008 to $4,933 for the same period in 2009,as well as an increase in the provision for loan losses of 432.13% from $1,600for the three months ended March 31, 2008 to $8,514 for the same period in2009.  We experienced an increase of $789in operating expense which was the result of our overall growth, including a$145 increase in FDIC assessment at March 31, 2009 compared to the samedate in 2008, as well as an additional accrual expense for the FDIC one-timeassessment fee of $275 to be paid in the third quarter of 2009.****Further, during the quarter ending March 31, 2009, wemade a dividend payment to the U.S. Department of Treasury in an amount equalto $444 with respect to shares of our Fixed Rate Cumulative Perpetual PreferredStock, Series A.

 
| ** **                                    | ** ** | **Three Months Ended   March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2009**                                               | ** ** | **2008**   | ** ** | **% Change** | ** ** |
|                                          |       |                                                   |       |       |       |   |   |
| Interest income                               |       | $                                                      | 19,456     |       | $          | 17,486 |   | 11.27 | % |
| Interest expense                              |       | 9,616                                                  |       | 10,024     |       | (4.07 | ) |
| Net interest  income                          |       | 9,840                                                  |       | 7,462      |       | 31.87 |   |
| Provision for  loan losses                    |       | 8,514                                                  |       | 1,600      |       | 432.13 |   |
| Net interest  after provision for loan losses |       | 1,326                                                  |       | 5,862      |       | (77.38 | ) |
| Non-interest  income                          |       | 27                                                     |       | 527        |       | (94.88 | ) |
| Non-interest  expense                         |       | 4,933                                                  |       | 4,144      |       | 19.04 |   |
| Net income  before taxes                      |       | (3,580                                                 | )          | 2,245      |       | (259.47 | ) |
| Income tax  expense                           |       | (1,364                                                 | )          | 870        |       | (256.78 | ) |
| Net income                                    |       | (2,616                                                 | )          | 1,375      |       | (261.16 | ) |
| Preferred  dividends and discount accretion   |       | (444                                                   | )          | —     |       | — |   |
| Net income  available to common shareholders  |       | $                                                      | (2,660     | )          | $          | 1,375 |   | (293.45 | )% |

 

**Provisionfor Loan Losses** - The provision for loan losses for the threemonths ended March 31, 2009 was $8,514, an increase of $6,914, or432.13%, above the provision of $1,600 expensed in the same period in2008.  This increase was primarily a result of normal charge-offs and$2,700 in write-downs of other real estate to appraised values**.**At March 31, 2009, the loan loss reserve of $15,424was 1.40% of gross loans of $1,103,942.

 

**Non-interestIncome** - Non-interest income decreased by 94.88% or $500,from $527 in the quarter ended March 31, 2008 to $27 for the same periodin 2009. The decrease was primarily a result of lower gains on loansales.  The net loss on loan sales was $360 and $566 for the three-monthperiods ended March 31, 2009 and 2008, respectively.

 

We earned $14 in mortgageorigination fees during the three months ended March 31, 2009 compared to$12 earned during the same period in 2008, an increase of $2 or 1.67%.  Werecognized $418 on the sale of securities in the three months ended March 31,2009 compared with $30 for the same period in 2008.

 

We lost $360 on loan saletransactions in the three months ended March 31, 2009, a 163.60% decreasecompared to $566 earned during the same period in 2008. This decrease wasprimarily as a result of timing differences as well as regulatory and economicuncertainties. Management will continue to consider loan sale transactions ifthe opportunity for a reasonable return is available.

 

**Non-interestExpense** - Non-interest expense for the three months endedMarch 31, 2009 was $4,933, an increase of $789 or 19.04%, over the $4,144expensed in the same period in 2008.  Approximately 40.56% of the increasewas a result of increases in FDIC assessments. At March 31, 2009, the Bank had 85 full-time employees comparedwith 64 full-time employees at March 31, 2008. Approximately 8.23% of theincrease in non-interest expense was attributable to the increased number offull-time employees.

 

16

----

Table of Contents

 

**NetInterest Income** - Net interest income for the threemonths ended March 31, 2009 was $9,840 compared to $7,462 for the sameperiod in 2008, a gain of $2,378 or 31.87%.  The increase in net interestincome was largely attributable to strong loan growth.  The average netloan balance increased by 27.44% or $226,548 from $825,528 for the three monthsended March 31, 2008 to $1,052,076 for the same period in 2009. Loangrowth was accompanied by an increase in average interest bearing deposits from$827,232 for the three months ended March 31, 2008 to $1,054,630 for thesame period in 2009, an increase of $227,398 or 27.49%.

 

The following tableoutlines the components of net interest income for the three-month periodsended March 31, 2009 and 2008 and identifies the impact of changes involume and rate:

 
| ** **                    | ** ** | **March 31, 2009 change from   March 31, 2008 due to:** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Volume**                                                                                           | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                                                                                 |       |   |   |   |   |
| Interest income               |       |                                                                                                 |       |   |   |   |   |
| Loans                         |       | $                                                                                                    | 4,073      |   | $ | (2,559 | ) | $ | 1,514 |   |
| Securities  (taxable) (1)     |       | 518                                                                                                  |       | 4 |   | 522 |   |
| Federal funds  sold           |       | 15                                                                                                   |       | (81 | ) | (66 | ) |
| Total interest  income        |       | 4,606                                                                                                |       | (2,636 | ) | 1,970 |   |
|                          |       |                                                                                                 |       |   |   |   |   |
| Interest expense              |       |                                                                                                 |       |   |   |   |   |
| Deposits (other  than demand) |       | 2,317                                                                                                |       | (2,932 | ) | (615 | ) |
| Federal funds  purchased      |       | 43                                                                                                   |       | (38 | ) | 5 |   |
| Subordinated  debt            |       | 248                                                                                                  |       | (46 | ) | 202 |   |
| Total interest  expense       |       | 2,608                                                                                                |       | (3,016 | ) | (408 | ) |
|                          |       |                                                                                                 |       |   |   |   |   |
| Net interest  income          |       | $                                                                                                    | 1,998      |   | $ | 380 |   | $ | 2,378 |   |

 

----

(1)          Unrealized (loss) gainof $(94) and $715 is excluded from yield calculation for the three months endedMarch 31, 2009 and 2008, respectively.

 

**NetInterest Margin** - The net interest margin increased from3.30% for the three months ended March 31, 2008 to 3.39% for the sameperiod in 2009 because of a lower average yield from the loan portfolio thatwas offset by a larger decrease in our cost for deposits.  Interest incomeincreased by $1,970 or 11.27%, from $17,486 during the three months ended March 31,2008 to $19,456 during the same period in 2009. The increase was primarily aresult of increased loan volume.  Average earning assets increased from$909,622 in the three months ended March 31, 2008 to $1,176,360 in thesame period in 2009, an increase of $266,738 or 29.32%.  The increase inearning assets was primarily a result of loan growth. Average loan balancesincreased by $226,548 or 27.44% for the quarter ending March 31, 2009,from the same quarter in 2008.  The average yield on earning assetsdecreased from 7.74% in the three months ended March 31, 2008 to 6.71% inthe same period in 2009. 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 March 31,2008 and March 31, 2009, the Federal Reserve Open Market Committee, orFOMC, lowered the federal funds rate by 200 basis points.

 

**InterestExpense** — Interest expense decreased from $10,024 in thethree months ended March 31, 2008 to $9,616 in the three months ended March 31,2009. While average interest earning liabilities increased by $261,572 or30.90%, the cost of funds decreased from 4.62% in the three months ended March 31,2008 to 3.45% during the same three months in 2009, resulting in the $408, or4.07%, decrease in interest expense.

 

**IncomeTaxes** - Our effective tax rate for the three months endedMarch 31, 2009 was 38.10% compared to 38.75% for the three months ended March 31,2008. Management anticipates that tax rates in future periods will approximatethe rates paid in 2008.

 

**EfficiencyRatio** - Our efficiency ratio, the ratio of non-interestexpense to total revenues, for the three months ending March 31, 2009 and2008 was 49.99% and 51.87%, respectively, a decrease of 188 basis points. Thefollowing table reflects the calculation of the efficiency ratio:

 
| ** **            | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------------|------------|--------------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                               | ** ** | **2008** | ** ** |
| Non-interest  expense |       | $                                                      | 4,933      |   | $ | 4,144 |   |
|                  |       |                                                   |       |   |   |
| Net interest  income  |       | 9,840                                                  |       | 7,462 |   |
| Non-interest  income  |       | 27                                                     |       | 527 |   |
| Total Revenues        |       | $                                                      | 9,867      |   | $ | 7,989 |   |
|                  |       |                                                   |       |   |   |
| Efficiency Ratio      |       | 49.99                                                  | %          | 51.87 | % |

 

17

----

Table of Contents

 

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

 

The table below shows theaverage daily balances of each principal category of our assets, liabilitiesand shareholders’ equity, and an analysis of net interest income, and thechange in interest income and interest expense segregated into amountsattributable to changes in volume and changes in rates for the three-monthperiods ended March 31, 2009 and 2008. The table is presented on a taxequivalent basis, as applicable.

 
| ** **                                       | ** ** | **Three Months Ended March 31,   2009** | ** ** | **Three Months Ended March 31,   2008** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                                      | ** ** | ** **                                                       | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Balance**                                                      | ** ** | **Interest**                                                     | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Interest earning  assets                         |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Securities  (taxable) (1)                        |       | $                                                                | 114,115    |                                                             | $          | 1,555 |   | 5.52 | % | $ | 76,070 |   | $ | 1,033 |   | 5.51 | % |
| Loans  (2) (3)                              |       | 1,052,076                                                        |       | 17,896                                                           |       | 6.90 | % | 825,558 |   | 16,382 |   | 7.98 | % |
| Federal funds  sold                              |       | 10,169                                                           |       | 5                                                                |       | 0.20 | % | 8,024 |   | 71 |   | 3.56 | % |
| Total interest  earning assets                   |       | 1,176,360                                                        |       | 19,456                                                           |       | 6.71 | % | 909,652 |   | 17,486 |   | 7.74 | % |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Non-interest  earning assets                     |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                         |       | 5,973                                                            |       |                                                             |       |   |   | 4,412 |   |   |   |   |   |
| Net fixed assets  and equipment                  |       | 2,290                                                            |       |                                                             |       |   |   | 1,454 |   |   |   |   |   |
| Accrued interest  and other assets               |       | 56,874                                                           |       |                                                             |       |   |   | 24,056 |   |   |   |   |   |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Total assets                                     |       | $                                                                | 1,241,497  |                                                             |       |   |   |   | $ | 939,574 |   |   |   |   |   |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Deposits (other  than demand)                    |       | $                                                                | 1,054,630  |                                                             | $          | 9,129 |   | 3.51 | % | $ | 827,232 |   | $ | 9,744 |   | 4.74 | % |
| Federal funds  purchased                         |       | 20,328                                                           |       | 35                                                               |       | 0.70 | % | 3,939 |   | 30 |   | 3.06 | % |
| Subordinated  debt                               |       | 33,198                                                           |       | 452                                                              |       | 5.52 | % | 15,413 |   | 250 |   | 6.52 | % |
| Total interest  bearing liabilities              |       | 1,108,156                                                        |       | 9,616                                                            |       | 3.52 | % | 846,584 |   | 10,024 |   | 4.76 | % |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing demand deposits            |       | 21,748                                                           |       |                                                             |       |   |   | 25,755 |   |   |   |   |   |
| Other  liabilities                               |       | 11,319                                                           |       |                                                             |       |   |   | 3,269 |   |   |   |   |   |
| Shareholders’  equity                       |       | 100,274                                                          |       |                                                             |       |   |   | 63,966 |   |   |   |   |   |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                                | 1,241,497  |                                                             |       |   |   |   | $ | 939,574 |   |   |   |   |   |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Net Interest  Spread                             |       | 3.19                                                             | %          |                                                             |       |   |   | 2.98 | % |   |   |   |   |
|                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Net Interest  Margin                             |       | 3.39                                                             | %          |                                                             |       |   |   | 3.30 | % |   |   |   |   |

 

----

(1)                      Unrealized(loss) gain of $(94) and $715 is excluded from yield calculation for the threemonths ended March 31, 2009 and 2008, respectively.

 

(2)                      Non-accrualloans are included in average loan balances and loan fees of $1,974 and $816are included in interest income for the three months ended March 31, 2009and 2008, respectively.

 

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

 

18

----

Table of Contents

 

**Comparisonof Financial Condition at March 31, 2009 and December 31, 2008**

 

**Assets-** Total assets at March 31, 2009 were $1,275,134, an increase of$57,050, or 4.68%, over total assets of $1,218,084 at December 31, 2008.Loan growth was the primary reason for the increase, offset by a decrease incash and cash equivalents. At March 31, 2009, net loans equaled$1,088,518, up $65,247, or 6.38%, over the December 31, 2008 total netloans of $1,023,271. The cash and cash equivalents balance decreased by $35,019between December 31, 2008 and March 31, 2009, as funds were used tofund loans made in the first quarter of 2008.

 

Our business bank modelof operation generally results in a higher level of earning assets than ourpeer banks.****Earning assets are defined asassets 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 March 31, 2009 were $1,188,556 or93.21% of total assets of $1,275,134.  Earning assets at December 31,2008 were $1,160,099, or 95.24% of total assets of $1,218,084.

 

**Loans**- We had total net loans of $1,088,518 at March 31, 2009. The followingtable sets forth the composition of our loan portfolio at March 31, 2009and December 31, 2008:

 
| ** **                              | ** ** | **March 31,   2009** | ** ** | **December 31,   2008** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Real estate                             |       |                           |       |                              |       |
| Construction                            |       | $                              | 202,034    |                              | $          | 181,638 |   |
| 1 to 4 family  residential              |       | 38,257                         |       | 37,822                            |       |
| Other                                   |       | 172,771                        |       | 171,150                           |       |
| Commercial,  financial and agricultural |       | 635,943                        |       | 589,518                           |       |
| Consumer                                |       | 3,628                          |       | 3,572                             |       |
| Other                                   |       | 51,309                         |       | 53,025                            |       |
|                                    |       |                           |       |                              |       |
| Total loans                             |       | 1,103,942                      |       | 1,036,725                         |       |
| Less: allowance  for loan losses        |       | (15,424                        | )          | (13,454                           | )          |
|                                    |       |                           |       |                              |       |
| Net loans                               |       | $                              | 1,088,518  |                              | $          | 1,023,271 |   |

 

The following table setsforth the percentage composition of our loan portfolio by type at March 31,2009 and December 31, 2008:

 
| ** **                              | ** ** | **March 31,   2009** | ** ** | **December 31,   2008** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Real estate:                            |       |                           |       |                              |       |
| Construction                            |       | 18.30                          | %          | 17.52                             | %          |
| 1 to 4 family  residential              |       | 3.46                           |       | 3.65                              |       |
| Other                                   |       | 15.65                          |       | 16.51                             |       |
| Commercial,  financial and agricultural |       | 57.61                          |       | 56.86                             |       |
| Consumer                                |       | 0.33                           |       | 0.34                              |       |
| Other                                   |       | 4.65                           |       | 5.12                              |       |
|                                    |       |                           |       |                              |       |
| Total                                   |       | 100.00                         | %          | 100.00                            | %          |

 

19

----

Table of Contents

 

The following table setsforth the composition of our commercial loan portfolio by source at March 31,2009 and December 31, 2008:

 
| ** **         | ** ** | **March 31,   2009** | ** ** | **December 31,   2008** | ** ** |
|--------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **Amount**                     | ** ** | **%**                             | ** ** | **Amount** | ** ** | **%** | ** ** |
|               |       |                           |       |                              |       |   |   |   |   |
| Direct funding     |       | $                              | 304,539    |                              | 47.89      | % | $ | 267,542 |   | 45.38 | % |
| Indirect  funding: |       |                           |       |                              |       |   |   |   |   |
| Large              |       | 153,756                        |       | 24.18                             |       | 148,538 |   | 25.20 |   |
| Small              |       | 177,648                        |       | 27.93                             |       | 173,438 |   | 29.42 |   |
| Total              |       | $                              | 635,943    |                              | 100.00     | % | $ | 589,518 |   | 100.00 | % |

 

Management periodicallyreviews our loan portfolio, particularly non-accrual and renegotiatedloans.  The review may result in a determination that a loan should beplaced on a non-accrual status for income recognition. When a loan isclassified as non-accrual, any unpaid interest is reversed against currentincome.  Interest is included in income thereafter only to the extentreceived in cash.  The loan remains in a non-accrual classification untilsuch time as the loan is brought current, when it may be returned to accrualclassification.

 

The following tablepresents information regarding non-accrual, past due and restructured loans at March 31,2009 and December 31, 2008:

 
| ** **                                                                                               | ** ** | **March 31,   2009** | ** ** | **December 31,   2008** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Non-accrual  loans:                                                                                      |       |                           |       |                              |       |
| Number                                                                                                   |       | 202                            |       | 186                               |       |
| Amount                                                                                                   |       | $                              | 24,342     |                              | $          | 11,603 |   |
|                                                                                                     |       |                           |       |                              |       |
| Accruing loans  which are contractually past due 90 days or more as to principal and interest  payments: |       |                           |       |                              |       |
| Number                                                                                                   |       | 39                             |       | 51                                |       |
| Amount                                                                                                   |       | $                              | 9,605      |                              | $          | 18,788 |   |
|                                                                                                     |       |                           |       |                              |       |
| Loans defined as  “troubled debt restructurings”:                                              |       |                           |       |                              |       |
| Number                                                                                                   |       | 1                              |       | 3                                 |       |
| Amount                                                                                                   |       | $                              | 124        |                              | $          | 668 |   |

 

As of March 31, 2009and December 31, 2008, there were no loans classified for regulatorypurposes as doubtful or substandard that are not disclosed in the above table,which (i) represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity or capital resources, or (ii) represent material credits aboutwhich management is aware of any information that causes management to haveserious doubts as to the ability of such borrowers to comply with the loanrepayment terms. During the three months ended March 31, 2009,non-performing loans decreased as a result of the restructuring of only onecredit in a total amount of $124.

 

20

----

Table of Contents

 

**Allowancefor Loan Losses**- The maintenance of an adequate allowance for loan losses, or ALL, is one ofthe fundamental concepts of risk management for every financial institution.Management is responsible for ensuring that controls are in place to ensure theadequacy of the loan loss reserve in accordance with generally acceptedaccounting principles, our stated policies and procedures, and regulatoryguidance.

 

It is management’s intentto maintain an ALL that is adequate to absorb current and estimated losseswhich are inherent in a loan portfolio.  The historical loss ratio (netcharge-offs as a percentage of average loans) was 0.61% for the three monthsended March 31, 2009 and 0.11% for the three months ended March 31,2008. The ALL as a percentage of the outstanding loans at the end of the periodwas 1.40% at March 31, 2009 and 1.28% at March 31, 2008.

 

An analysis of ourallowance for loan loss and net charge-offs is furnished in the following tablefor the three months ended March 31, 2009 and the same period ended March 31,2008:

 
| ** **                                        | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Allowance for  loan losses at beginning of period |       | $                        | 13,454     |                     | $          | 10,321 |   |
| Charge-offs:                                      |       |                     |       |                     |       |
| Real estate:                                      |       |                     |       |                     |       |
| Construction                                      |       | 2,218                    |       | 150                      |       |
| 1 to 4 family  residential                        |       | 346                      |       | —                   |       |
| Other                                             |       | 202                      |       | —                   |       |
| Commercial,  financial and agricultural           |       | 3,897                    |       | 742                      |       |
| Consumer                                          |       | 7                        |       | 17                       |       |
| Total  Charge-offs                                |       | 6,670                    |       | 909                      |       |
|                                              |       |                     |       |                     |       |
| Recoveries:                                       |       |                     |       |                     |       |
| Real estate:                                      |       |                     |       |                     |       |
| Construction                                      |       | —                   |       | —                   |       |
| 1 to 4 family  residential                        |       | —                   |       | —                   |       |
| Other                                             |       | —                   |       | —                   |       |
| Commercial,  financial and agricultural           |       | 126                      |       | 22                       |       |
| Consumer                                          |       | —                   |       | —                   |       |
| Total Recoveries                                  |       | 126                      |       | 22                       |       |
|                                              |       |                     |       |                     |       |
| Net Charge-offs                                   |       | 6,544                    |       | 887                      |       |
|                                              |       |                     |       |                     |       |
| Provision for  loans charged to expense           |       | 8,514                    |       | 1,600                    |       |
| Allowance for  loan losses at end of period       |       | $                        | 15,424     |                     | $          | 11,034 |   |

 
| ** **                                                                                         | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Net charge-offs  as a percentage of average total loans outstanding during the period              |       | 0.61                     | %          | 0.11                     | %          |
|                                                                                               |       |                     |       |                     |       |
| Ending allowance  for loan losses as a percentage of total loans outstanding at end of the  period |       | 1.40                     | %          | 1.28                     | %          |

 

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

 

21

----

Table of Contents

 

**Securities** - The securities portfolio at March 31,2009 was $100,013 compared to $101,290 at December 31, 2008.  We viewthe securities portfolio as a source of income and liquidity.  Thesecurities portfolio was 7.84% of total assets at March 31, 2009 and 8.32%of total assets at December 31, 2008.

 

**Liabilities****-** We depend on a growing deposit base tofund loan 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 isgenerally less than rates paid in the local market. Wholesale deposits arecategorized as “Purchased time deposits” on the detail of deposits shown in thetable below.

 

**Depositsand Funding** —Total deposits at March 31, 2009 were $1,095,307, up $26,164 or 2.45% overthe December 31, 2008 total deposits of $1,069,143. Total averagedeposits during the three months ended March 31, 2009 were $1,076,378, anincrease of $223,391, or 26.19% over the total average deposits of $852,987during the three months ended March 31, 2008. Average non-interest bearingdeposits decreased by $4,007, or 15.56%, from $25,755 in the three months endedMarch 31, 2008, to $21,748 in the three months ended March 31, 2009.

 

Utilizing a combinationof funding sources from the pledging of investment securities and the FederalHome Loan Bank (FHLB), this funding portfolio has a weighted average maturityof one month and a weighted average rate of 0.26%. This strategy was primarilyexecuted to reduce overnight liquidity risk and to mitigate interest ratesensitivity on the balance sheet. At March 31, 2009, the maximum availableadvance was $17,654 with an outstanding principle balance of $15,153. At December 31,2008, there was no outstanding principle balance. At March 31, 2009, thetotal capital stock balance was 2,152 shares with a value of $2,152.

 

The following table setsforth average deposit balances for the three months ended March 31, 2009and 2008 and the average rates paid on those balances:

 
| ** **                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **Average  Balance**                                 | ** ** | **Average  Rate  Paid (1)** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid (1)** | ** ** |
| Types of  Deposits:                   |       |                                                 |       |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                                    | 21,747     |   | — | % | $ | 25,755 |   | — | % |
| Interest-bearing  demand deposits     |       | 6,890                                                |       | 0.15 |   | 6,991 |   | 1.33 |   |
| Money market  accounts                |       | 47,681                                               |       | 0.72 |   | 86,381 |   | 2.57 |   |
| Savings accounts                      |       | 9,621                                                |       | 2.55 |   | 6,012 |   | 2.69 |   |
| IRA accounts                          |       | 33,032                                               |       | 4.15 |   | 22,856 |   | 5.13 |   |
| Purchased time  deposits              |       | 525,810                                              |       | 3.96 |   | 362,832 |   | 5.09 |   |
| Time deposits                         |       | 431,597                                              |       | 3.29 |   | 342,160 |   | 4.99 |   |
| Total deposits                        |       | $                                                    | 1,076,378  |   |   |   | $ | 852,987 |   |   |   |

 

----

(1)               Rate is annualized

 

**Short-TermDebt** — Wehave a $15,000 line of credit with First Tennessee Bank, National Association.The outstanding principal balance on this line of credit at March 31, 2009was $10,000, and this line of credit was paid on the maturity date of April 30,2009. A $10,000 line of credit with a qualified investor replaced the FirstTennessee Bank line of credit.

 

**SubordinatedDebt** - In March 2005,we formed a financing subsidiary, Tennessee Commerce Statutory Trust I, aDelaware statutory trust, or the Trust I. In March 2005, the Trust Iissued and sold 8,000 of the Trust I’s fixed/floating rate capital securities,with a liquidation amount of $1 per capital security, to First Tennessee Bank,National Association. At the same time, we issued to Trust I $8,248 offixed/floating rate junior subordinated deferrable interest debentures due2035. The debentures pay a 6.73% fixed rate payable quarterly for the firstfive years and a floating rate based on a three-month LIBOR rate plus a marginthereafter.

 

In April 2008, weformed a financing subsidiary, Tennessee Commerce Statutory Trust II, aDelaware statutory trust, or the Trust II. In June 2008, the Trust IIissued and sold 14,500 of the Trust II’s floating rate capital securities, witha liquidation amount of $1 per capital security, in a private placement. At thesame time, we issued to Trust II $14,950 of floating rate junior subordinateddeferrable interest debentures due 2038. The debentures pay a floating rate perannum, reset quarterly, equal to the prime rate of interest published in*  The WallStreet 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%).

 

In accordance with FASBInterpretation No. 46 (revised December 2003) “Consolidation ofVariable 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.

 

22

----

Table of Contents

 

**Off-BalanceSheet Arrangements**

 

We are a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of our customers. At March 31, 2009,we had unfunded loan commitments outstanding of $155,591 and standby lettersof credit and financial guarantees of $10,691. Those instruments involve, tovarying degrees, elements of credit risk in excess of the amount recognized inthe balance sheet.  The contract or notional amounts of those instrumentsreflect the extent of our involvement in those particular financialinstruments. We use the same credit policies in making commitments andconditional obligations as we do for on-balance sheet instruments.

 

Because these commitmentsgenerally have fixed expiration dates and many will expire without being drawnupon, the total commitment level does not necessarily represent future cashrequirements. If needed, we can liquidate federal funds sold or securitiesavailable for sale or borrow and purchase federal funds from other financialinstitutions, where we have available federal fund lines at March 31, 2009totaling $68,853.

 

**Liquidity/Capital Resources**

 

**Liquidity** - Of primary importance to depositors,creditors and regulators is the ability to have readily available funds sufficientto repay fully maturing liabilities.  We are subject to general FDICguidelines, which do not require a minimum level of liquidity. Liquidityrequirements can be met through short-term borrowings or the disposition ofshort-term assets which are generally matched to correspond to the maturity ofliabilities. Management believes our liquidity ratios meet the general FDICguidelines and we have identified multiple sources to provide adequateliquidity. Management does not know of any trends or demands that arereasonably likely to result in our liquidity increasing or decreasing in amaterial manner.

 

**CapitalResources****-**Our objective is to maintain a level of capitalization that is sufficient totake advantage of profitable growth opportunities while meeting regulatoryrequirements. To continue to grow, we must increase capital by generatingearnings, issuing equities, borrowing funds or a combination of thoseactivities.

 

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

 

The capital guidelinesclassify capital into two tiers, referred to as Tier I and Tier II.Under risk-based capital requirements, total capital consists of Tier Icapital which is generally common shareholders’ equity less goodwill and TierII capital which is primarily a portion of the allowance for loan losses andcertain preferred stock and qualifying debt instruments. In determiningrisk-based capital requirements, assets are assigned risk-weights of 0% to100%, depending primarily on the regulatory assigned levels of credit riskassociated with such assets. Off-balance sheet items are considered in thecalculation of risk-adjusted assets through conversion factors established bythe regulators. The framework for calculating risk-based capital requires banksand bank holding companies to meet the regulatory minimums of 4% Tier Iand 8% total risk-based capital. In 1990, regulators added a leveragecomputation to the capital requirements, comparing Tier I capital to totalaverage assets less goodwill.

 

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

 

23

----

Table of Contents

 

At March 31, 2009and December 31, 2008, the Bank’s and our risk-based capital ratios andthe minimums for capital adequacy were considered well-capitalized under theFederal Reserve Board’s prompt corrective action guidelines were as follows:

 
| ** **                                               | ** ** | ** **         | ** ** | ** **            | ** ** | ** **           | ** ** | **Minimum to**    | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                               | ** ** | ** **         | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **be considered** | ** ** |
| ** **                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **well-**              | ** ** |
| ** **                                               | ** ** | **2009**           | ** ** | **2008**              | ** ** | **adequacy**         | ** ** | **capitalized**        | ** ** |
|                                                     |       |               |       |                  |       |                 |       |                   |       |
| Tier 1 leverage  ratio                                   |       |               |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 8.98               | %          | 9.26                  | %          | 4.00                 | %          | 5.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 9.76               | %          | 10.62                 | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |               |       |                  |       |                 |       |                   |       |
| Tier 1 “core”  capital to risk-weighted assets |       |               |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 9.36               | %          | 9.79                  | %          | 4.00                 | %          | 6.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 10.16              | %          | 11.20                 | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |               |       |                  |       |                 |       |                   |       |
| Total capital to  risk-weighted assets                   |       |               |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 10.61              | %          | 11.01                 | %          | 8.00                 | %          | 10.00                  | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 11.40              | %          | 12.42                 | %          | 8.00                 | %          | n/a                    |       |

 

Based solely on ouranalysis of federal banking regulatory categories, on March 31, 2009 and December 31,2008, we the Bank were within the “well capitalized” categories under theregulations.

 

**Impactof Inflation and Changing Prices** - The financial statements and related financial datapresented herein have been prepared in accordance with U.S. generally acceptedaccounting principles which require the measurement of financial position andoperating results in terms of historical dollars without considering thechanges in the relative purchasing power of money over time and resulting frominflation. The impact of inflation on operations of the Bank is reflected inincreased operating costs. Unlike most industrial companies, almost all of theassets and liabilities of the Bank are monetary in nature. As a result,interest rates have a more significant impact on the Bank’s performance thanthe effects of general levels of inflation. Interest rates do not necessarilymove in the same direction or in the same magnitude as the price of goods andservices.

 

24

----

Table of Contents

** **

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Like all financialinstitutions, we are subject to market risk from changes in interest rates.Interest rate risk is inherent in the balance sheet because of the mismatchbetween the maturities of rate sensitive assets and rate sensitive liabilities.If rates are rising, and the level of rate sensitive liabilities exceeds thelevel of rate sensitive assets, the net interest margin will be negativelyimpacted. Conversely, if rates are falling, and the level of rate sensitiveliabilities is greater than the level of rate sensitive assets, the impact onthe net interest margin will be favorable. Managing interest rate risk isfurther complicated by the fact that all rates do not change at the same pace,in other words, short-term rates may be rising while longer term rates remainstable. In addition, different types of rate sensitive assets and ratesensitive liabilities react differently to changes in rates.

 

To manage interest raterisk, we must take a position on the expected future trend of interest rates.Rates may rise, fall or remain the same. The Bank’s asset liability committeedevelops its view of future rate trends and strives to manage rate risk withina targeted range by monitoring economic indicators, examining the views ofeconomists and other experts, and understanding the current status of ourbalance sheet. Our annual budget reflects the anticipated rate environment forthe next twelve months. The asset liability committee conducts a quarterlyanalysis of the rate sensitivity position and reports its results to the Bank’sboard of directors.

 

The asset liabilitycommittee uses a computer model to analyze the maturities of rate sensitiveassets and liabilities. The model measures the “gap” which is defined as thedifference between the dollar amount of rate sensitive assets re-pricing duringa period and the volume of rate sensitive liabilities re-pricing during thesame period. Gap is also expressed as the ratio of rate sensitive assetsdivided by rate sensitive liabilities. If the ratio is greater than one, thedollar value of assets exceeds the dollar value of liabilities, and the balancesheet is “asset sensitive.” Conversely, if the value of liabilities exceeds thevalue of assets, the ratio is less than one and the balance sheet is “liabilitysensitive.” Our internal policy requires management to maintain the gap withina range of 0.75 to 1.25.

 

The model measuresscheduled maturities in periods of three months, four to 12 months, one to fiveyears and over five years. The chart below illustrates our rate sensitiveposition at March 31, 2009. Management uses the one-year gap as theappropriate time period for setting strategy.

 

25

----

Table of Contents

 

Rate Sensitivity GapAnalysis

(Dollars in thousands)

 
| ** **                                                       | ** ** | ** **   | ** ** | **1-3**    | ** ** | **4-12**   | ** ** | **1-5**   | ** ** | **Over**         | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|-----------|------------|------------------|------------|------------|------------|
| ** **                                                       | ** ** | **Floating** | ** ** | **Months** | ** ** | **Months** | ** ** | **Years** | ** ** | **5 years** | ** ** | **Total**  | ** ** |
| **Maturities  :**                                                |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest  Earnings Assets                                        |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Federal funds  sold                                              |       | $            | 25         |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 25 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |             |       |       |       |
| U.S. government  agencies                                        |       | —       |       | 45,813     |       | —     |       | 252       |       | 53,717           |       | 99,783     |       |
| Mortgage-backed  and corporate debt securities                   |       | —       |       | 24         |       | 72         |       | 135       |       | —           |       | 230        |       |
| Total securities                                                 |       | —       |       | 45,837     |       | 72         |       | 387       |       | 53,718           |       | 100,014    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total loans                                                      |       | 283,477      |       | 147,027    |       | 288,541    |       | 327,099   |       | 111,515          |       | 1,203,979  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total interest  earning assets                                   |       | 283,502      |       | 192,864    |       | 288,613    |       | 327,486   |       | 182,669          |       | 1,275,133  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other assets                                                     |       | —       |       | —     |       | —     |       | —    |       | 71,154           |       | 71,154     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total assets                                                     |       | $            | 283,502    |       | $          | 192,864    |       | $         | 288,613    |             | $          | 327,486    |       | $ | 182,669 |   | $ | 1,275,133 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest Bearing  Liabilities                                    |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest  checking                                               |       | $            | 3,126      |       | $          | —     |       | $         | —     |             | $          | 4,688      |       | $ | — |   | $ | 7,814 |   |
| Money market and  savings                                        |       | 31,777       |       | —     |       | —     |       | 28,179    |       | —           |       | 59,956     |       |
| Time deposits                                                    |       | —       |       | 293,374    |       | 558,098    |       | 152,807   |       | —           |       | 1,004,279  |       |
| Total deposits                                                   |       | 34,903       |       | 293,374    |       | 558,098    |       | 185,674   |       | —           |       | 1,072,049  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Federal funds  purchased                                         |       | 20,479       |       | —     |       | 15,153     |       | —    |       | —           |       | 35,632     |       |
| Short term  borrowings                                           |       | —       |       | —     |       | 10,000     |       | —    |       | —           |       | 10,000     |       |
| Subordinated  long-term debt                                     |       | —       |       | —     |       | —     |       | —    |       | 23,198           |       | 23,198     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total interest  bearing liabilities                              |       | 55,382       |       | 293,374    |       | 583,251    |       | 185,674   |       | 23,198           |       | 1,140,879  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 36,212           |       | 36,212     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Shareholders’  equity                                       |       | —       |       | —     |       | —     |       | —    |       | 98,042           |       | 98,042     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  liabilities and shareholders’ equity                 |       | $            | 55,382     |       | $          | 293,374    |       | $         | 583,251    |             | $          | 185,674    |       | $ | 157,452 |   | $ | 1,275,133 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate sensitive  gap by period                                    |       | $            | 228,120    |       | $          | (100,510   | )          | $         | (294,638   | )                | $          | 141,812    |       | $ | 88,317 |   |   |   |
| Cumulative Gap                                                   |       |         |       | $          | 127,610    |       | $          | (167,028  | )          | $                | (25,216    | )          | $          | 63,101 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Cumulative gap  as a percentage of total assets                  |       |         |       | 10.01      | %          | (13.10     | )%         | (1.98     | )%         | 4.95             | %          |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate sensitive  assets / rate sensitive liabilities (cumulative) |       | 5.12         |       | 1.37       |       | 0.82       |       | 0.98      |       | 1.06             |       |       |       |

 

26

----

Table of Contents

 

From March 31, 2008to March 31, 2009, the FOMC decreased interest rates by 200 basis points.Management has positioned the balance sheet to be essentially neutral for assetand liability sensitivity. At March 31, 2009, our one-year gap was 0.82.

 

The interest rate riskmodel that defines the gap position also performs a “rate shock” test of thebalance sheet using an earnings simulation model and an economic value ofequity model. The rate shock test measures the impact on the net interestmargin and the economic value of equity of an immediate shift in interest ratesin either direction.

 

Our earnings simulationmodel measures the impact of changes in interest rates on net interest income.To limit interest rate risk, we have a guideline for our earnings at risk whichsets a limit on the variance of net interest income to less than a5% percent decline for a 100-basis point change up or down in rates frommanagement’s flat interest rate forecast over the next twelve months. At March 31,2009, we were in compliance with this guideline.

 

Our economic value ofequity model measures the extent that estimated economic values of our assets,liabilities and off-balance sheet items will change as a result of interestrate changes. To help limit interest rate risk, we have a guideline statingthat for an instantaneous 100-basis point increase or decrease in interestrates, the economic value of equity will not decrease by more than 10% from thebase case. At March 31, 2009, we were in compliance with this guideline.

 

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

 

**ITEM4. CONTROLS AND PROCEDURES.**

 

Evaluation of DisclosureControls and Procedures

 

We maintain disclosurecontrols and procedures, as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, 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 Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. We carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures as of theend of the period covered by this report. Based on the evaluation of thesedisclosure controls and procedures, the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective to allow timely decisions regarding disclosure in the reports that wefile or submit to the Securities and Exchange Commission under the ExchangeAct.

 

Internal Control OverFinancial Reporting

 

There were no changes inour internal control over financial reporting during the quarter ended March 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

27

----

Table of Contents

 

**PART II: OTHER INFORMATION**

 

**ITEM1A. RISK FACTORS.**

 

There were no materialchanges to our risk factors included in Part I, Item 1A of our AnnualReport on  Form 10-K for the year ended December 31, 2008, asfiled with the Securities and Exchange Commission on March 16, 2009.

 

**ITEM6. 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                  |       |            | Articles of Amendment  to the Charter, as amended, of Tennessee Commerce Bancorp, Inc.(3) |
| 3.4                  |       |            | Bylaws of Tennessee  Commerce Bancorp, Inc.(1) |
| 3.5                  |       |            | Amendment to Bylaws of  Tennessee Commerce Bancorp, Inc.(4) |
| 4.1                  |       |            | Shareholders’  Agreement(1) |
| 4.2                  |       |            | Form of Stock  Certificate(5) |
| 4.3                  |       |            | Indenture, dated as of  June 20, 2008, between Tennessee Commerce Bancorp, Inc. and  Wilmington Trust Company, as trustee(6) |
| 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(7) |
| 4.5                  |       |            | Guarantee Agreement,  dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.  and Wilmington Trust Company(6) |
| 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 |

 

----

| (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  March 16, 2009, 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  December 23, 2008, and incorporated herein by reference.                                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| (4)    |   | 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.                                              |
|   |   |                                                                                                                                                                                                                                                                                 |
| (5)    |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                 |
| (6)    |   | 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.                                                      |
|   |   |                                                                                                                                                                                                                                                                                 |
| (7)    |   | 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.                                                    |

 

28

----

Table of Contents

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|              | Tennessee Commerce  Bancorp, Inc. |
|-------------------|----------------------------------------|
|              | (Registrant)                           |
|              |                                   |
|              |                                   |
| May 11, 2009 |                                   | /s/ Frank Perez |
| (Date)            | Frank Perez                            |
|              | Chief Financial Officer                |
|              |                                   |
|                   |                                        |  |

 

29

----

Table of Contents

 

**INDEX OFEXHIBITS**

 
| **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                  |       |            | Articles of Amendment  to the Charter, as amended, of Tennessee Commerce Bancorp, Inc.(3) |
| 3.4                  |       |            | Bylaws of Tennessee  Commerce Bancorp, Inc.(1) |
| 3.5                  |       |            | Amendment to Bylaws of  Tennessee Commerce Bancorp, Inc.(4) |
| 4.1                  |       |            | Shareholders’  Agreement(1) |
| 4.2                  |       |            | Form of Stock  Certificate(5) |
| 4.3                  |       |            | Indenture, dated as of  June 20, 2008, between Tennessee Commerce Bancorp, Inc. and  Wilmington Trust Company, as trustee(6) |
| 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(7) |
| 4.5                  |       |            | Guarantee Agreement,  dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.  and Wilmington Trust Company(6) |
| 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 |

 

----

| (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  March 16, 2009, 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 December 23,  2008, and incorporated herein by reference.                                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| (4)    |   | 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.                                              |
|   |   |                                                                                                                                                                                                                                                                                 |
| (5)    |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                 |
| (6)    |   | 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.                                                      |
|   |   |                                                                                                                                                                                                                                                                                 |
| (7)    |   | 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.                                                    |

 

----